A soft landing for the global economy after the post-pandemic frenzy is now less likely, due to persistent inflation that is pushing all central banks to aggressively raise interest rates, says the vice president and Chief Economist of Desjardins in its most recent forecasts.
Posted at 7:00 a.m.
“All the ingredients are there to cause a recession in the United Kingdom and Europe, but also in Canada and the United States,” said Jimmy Jean. The surprise is that there are still some who think it can be avoided. »
In Canada first
Because household debt is among the highest in the world, the economy is more vulnerable to interest rate increases, said the chief economist of Desjardins. The impact of monetary tightening is already being felt in the real estate sector, and the unemployment rate has started to rise.
“After real estate and construction, the impact is yet to come in other economic sectors, such as consumption,” he predicts, because it takes several months before monetary policy affects the whole economy. ‘economy.
In the United States, the real estate sector is less vulnerable to rate increases due, in particular, to the possibility of taking out 30-year mortgages. But the U.S. economy is not immune to a recession, Jimmy Jean now believes, especially since the Federal Reserve indicated that rates will have to rise above 4% and the economy will have to suffer to beat inflation. tougher than she had expected.
A recession without unemployment?
Given the labor shortages, it is possible that we will see a decrease in job vacancies rather than an increase in the unemployment rate. Companies that have difficulty recruiting may hesitate before making layoffs. The result would be a recession that would not necessarily be accompanied by a significant increase in the number of unemployed. “It would be a first, but it’s possible in theory,” says the economist. You will have to see it to believe it. »
If this hypothesis is true, the recession could be shorter and shallower. “Companies won’t want to shed their workforce or want to rehire it more quickly,” he says. A recession is temporary, it usually lasts a few quarters and the good weather eventually returns. »
Less difficult in Quebec
The recession scenario will not unfold the same way from one province to another, according to Desjardins. Because of the very heavy weight of real estate in its economy, British Columbia will suffer more, predicts its chief economist. Ontario, because of the importance of real estate and the weight of its financial sector, will also be more affected. At the other end of the spectrum, the oil-producing provinces of Alberta, Saskatchewan and Newfoundland and Labrador will fare better.
Quebec will be somewhere in between. “The next few quarters will be more difficult in Quebec, but it will be worse elsewhere in Canada,” summarizes Jimmy Jean.
What will help the Quebec economy is household savings which, even though they have started to decline, remain high. In the second quarter, the Québec household savings rate was 10.2%, compared to 6.2% in Canada.
In Quebec, as elsewhere in the world, there is strong pressure on governments to help families cope with rising costs. Be careful, says the economist, certain measures, such as tax cuts, can fuel inflation and make the task of central banks more difficult.
The government of the United Kingdom, which has just granted significant tax relief to British taxpayers strangled by inflation of almost 10%, is the example not to follow, according to him.
“Moderation tastes much better when it comes to moving forward with these measures,” he says.
A break at 3.75%
Desjardins believes interest rate hikes are coming to an end in Canada. The Bank of Canada will raise interest rates to 3.75% and then pause.
The Bank of Canada was very aggressive in raising rates, after believing that inflation was a transitory phenomenon. “She could have started the process earlier, but she still started her monetary tightening before the Federal Reserve, observes Jimmy Jean. It has been aggressive so far, but in the end the Fed is likely to go further and the Bank of England may even go above 6%. »
Central banks have succeeded in convincing financial markets that they will have the upper hand on inflation, he points out. “It’s mission accomplished. We now have to convince households and businesses. There is still a perception that rising interest rates cause inflation. The Bank of Canada is making communication efforts to demystify these questions, which is a good thing. »
The Bank of Canada’s mandate is to fight inflation, not avoid a recession, he said. “She doesn’t want to cause a recession, but if a recession is a must to successfully bring inflation back to its 2% target, she’s ready to live with it. “.