Crushing inflation, sharp rise in interest rates, energy crisis against a backdrop of geopolitical tensions… The world economy is going through turbulence. Can we hope for a little respite in the coming months or should we rather sexpect a contraction of the economy, while the scenario of a recession is more and more evoked? Here is a little guide to better understand what is on the horizon.
What is a recession, and are we going through one?
“Currently, we do not have all the parameters to say if we are in recession. Let’s say the predictions [selon lesquels] it could happen are strong, but it’s not easy,” immediately adds Joëlle Noreau, senior economist at Desjardins Group.
Usually, and very simplistically, a recession is characterized by two consecutive quarters of decline in gross domestic product (GDP). “But there are a host of other parameters that come into play,” explains Mme Noreau.
In Canada, it is the CD Howe Institute, responsible for determining Canadian economic cycles, which decides whether the country is in recession or not. Stéfane Marion, chief economist at the National Bank, who sits on this committee, reminds us that a recession is characterized in particular by a general decline in economic activity in all sectors, and that it is also accompanied by major job losses. “Are we in a recession right now? No. Is there a growing possibility of a recession? Absolutely. But it still has to be confirmed by significant layoffs on the job market, and we are not there yet, ”he pleads.
“We can play on semantics, wondering if we are in recession or not, but what seems inevitable is that we are heading towards anemic economic growth in the coming months,” said the expert.
Does the labor shortage protect against layoffs?
The current situation is special, agree to say the experts. “In all honesty, there is no calibrated economic model for the kind of cycle we are currently experiencing,” emphasizes Stéfane Marion.
Normally, in a recession, companies have to let go of employees to maintain their turnover while economic activity slows down. However, currently, the shortage of labor could force employers to think twice, because it will be more difficult to recruit workers once the economic strength is restored, believes Joëlle Noreau.
Also, the “natural” departures of certain employees who retire could prevent companies from having to reduce their workforce, believes Mr. Marion.
“The last time there was a real recession in Canada, in 2008, there were 180,000 Canadians a year leaving their jobs to retire. Today it is 300,000 Canadians. In Quebec, we have gone from 40,000 Quebecers in 2008 to 70,000 in 2022, which represents an increase of 75%! The demographics are completely different, which therefore allows companies to reduce their workforce by freezing hiring rather than by making massive layoffs”, argues the chief economist of the National Bank, who underlines that this prospect would also have a “much less harmful” effect on household disposable income.
What are the causes of the economic slowdown?
Earlier this week, the United Nations warned that the monetary policies of developed countries could push the world into a global recession and prolonged stagnation.
However, central banks have no real choice but to raise interest rates to curb inflation, recalls Joëlle Noreau. “There aren’t a thousand ways to do it. Consumer and business demand must be limited. And the way to do that is to show interest rates. The goal of central banks is not to cause a recession! Their objective is to reduce inflation to more sustainable levels, closer to what we know in normal times. Except that the recession could be a collateral effect, ”she concedes.
But the rapid and muscular rise in interest rates applied by central banks to curb inflation is not the only element contributing to the slowdown of the economy…
Notably, pandemic-related supply chain disruptions are still being felt. “In the United States, there are 3 percentage points of inflation that are attributed to supply chain problems that are not quite resolved,” illustrates Mr. Marion.
The energy crisis, triggered by the invasion of Ukraine by Russia, is also weighing on world production, and more particularly on that of Europe.
But in this context, given that Canada is an energy exporter, its economy could benefit from a “potential for resilience that should not be overlooked”, believes Mr. Marion. “There is also a good part of European industrial production which is not economically profitable because of the rise in energy prices. This means that part of its production capacity could be moved to North America,” he adds.
What should investors expect?
On the stock market, fears of an economic slowdown and the strong tightening of monetary policies have already resulted in a bear market for several months. “Since its peak reached last December, the SP500 has fallen by 20%”, illustrates Ruben Antoine, portfolio manager and financial adviser at Tulett, Matthews & Associates.
“However, historically, returns following a sharp market drop have tended to be very positive,” he says. “Even if the stock market is greatly influenced by the economy, it should be noted that their evolution does not necessarily occur in tandem. The stock market cycle, although unpredictable, tends to be ahead of [au cycle] economic,” explains Mr. Antoine.
“Because the stock market is a forward-looking indicator, i.e. it tends to react in advance to expected events, such as a possible recession, reshuffling your portfolio during a stock market downturn means making changes at the worst possible time. , and potentially miss out on good returns from a market rally,” argues the financial adviser.