Fear
The aggressive measures taken by central banks around the world to rein in inflation make a recession almost inevitable.
Inflation is too much demand for supply, which creates too much scarcity and causes prices to soar. To curb it, central banks do not have 36 solutions: they must reduce demand by making money rarer, and therefore more “expensive”.
Their main tool is to increase the key rate, the rate at which they lend money to the banks. In turn, banks charge higher interest from businesses and individuals.
Result: less investment and consumption, therefore less overheating. The objective is to bring price increases back to around 2%, the Bank of Canada’s target.
The country’s key rate thus went from 0.50% in March to 4.25% on December 7th. With such a large and rapid rise, the swing of the pendulum makes a recession almost inevitable, say most experts.
The positive angle
Few people welcome a recession, but economists see it as a necessary evil under the circumstances, and most believe it will do moderate damage.
“If there is good news, it is that a recession hits fewer people than galloping inflation,” said senator and economist Clément Gignac, who sits on the public finance and banking committees. Inflation affects everyone, especially the poorest. Retirees, for example: they are more affected if their pension plan is not indexed. If you are unemployed or on the CNESSST, it’s the same thing… A recession is unfortunate, but it’s worse than letting inflation go. »
If the recession is confirmed, it will undoubtedly hurt much less than the last ones, adds Miville Tremblay, senior fellow at the CD Howe Institute and former principal representative of the Bank of Canada in Quebec. Because of the labor shortage they have just experienced, companies will keep more staff in anticipation of the recovery, believes Miville Tremblay. “They will be inclined to put a few fewer employees out,” he says.
As the phenomenon is global, it will undoubtedly affect Canadian exports. The manufacturing sector will be among the first to suffer, along with construction and car sales, according to Clément Gignac. But the rest of the economy will weather the shock rather well, he hopes.
In Quebec, with a government that intervenes a lot, we should do much better, especially since we are not undergoing an energy shock, as in Europe.
Clément Gignac, senator and economist
On the other side of the Atlantic, the economy is approaching the slowdown in the midst of soaring electricity and natural gas prices, boosted by the sanctions against Russia.
But above all, the recession should make it possible to subdue the rise in prices, and to let the most vulnerable members of society breathe. “We will undoubtedly have a return to much lower inflation, as we usually see,” judge Clément Gignac.
Succeeding in moderating the rise in the cost of living without falling into the other excess is, however, a meticulous balancing act.
“It’s far from obvious,” said Miville Tremblay. The risk of error is to tighten too hard and risk a deeper recession, or else not to tighten hard enough, and to see inflation pick up again. »
At a time when proponents of degrowth are increasingly making their voices heard, could the recession also make it possible to reduce the pollution produced by our economy?
Maybe… but negligible.
“It’s temporary, a recession, says Clément Gignac. Long-term growth, which affects biodiversity, is more influenced by demography. »
Much larger upheavals would be needed to bring about a “degrowth” that would reduce pollution, he said.
“If supply were constrained, if states fell into a ‘deglobalization’ of the economy, that would have a real effect on nature. »
In short, the recession allows us to hope for the relief of the poorest struggling with the rise in prices… but the proponents of degrowth must not dream in color.