Is there a recession on the horizon?
Evidence suggests that a typical period of economic recovery and expansion last anywhere from 12 months to 10 years. It has now been a decade since the last economic contraction, explaining partly why the “R-word” has been on the minds of Canadians since last year.
In fact, many economic indicators point to the tail end of an expansion. Consumer spending and the housing market are softer, despite strong growth in employment and labour income. Both business investment and exports continue to fall short of expectations, and car sales declined in 2018, for the first time since the recession in 2009.
Additionally, the yield curve in Canada and the U.S. — a way to measure bond investors’ feelings about risk in the short and long-term, is signalling to investors that they should start to worry about the near future.
Are we heading towards a recession in 2019? Financial institutions and the Bank of Canada have slashed their growth forecast for 2019 citing low oil prices, higher interest rates, U.S. protectionism and international retaliation — especially with China, and a potentially messy U.K. exit from the European Union.
Canada’s economy stagnated in the last quarter of 2018, expanding at an annualized pace of only 0.4 percent; the slowdown was sharper and more broadly based than forecasted. A growing number of economists are predicting a mild recession in the second half of 2019. Whether they are right or wrong is not of importance.
The key is to not overreact considering that recession talk and predictions can become a self-fulfilling prophecy. That is, being overly concerned about a recession could actually create one.
While an economic recession forecast may appear benign, it is in fact serious. If everyone apprehends a downturn in the economy, they will take the necessary precautions to prepare themselves.
Consumers concerned about their jobs will simply spend less and save more. Businesses will invest with parsimony, banks will lend more cautiously and investors will retrench. Therefore, economic activity slows. In other words, when consumers and businesses start spending less, it sets the conditions to spark a recession.
That is not to say the risks aren’t real. Certainly, our economy is facing challenges. Every recession starts with the softening of the data, but so does every weak patch in the economy.
It is important to not take actions that would exacerbate these risks. Monetary policy has tightened in the last two years, higher interest rates are weighing on households spending, lower commodity prices and global trade tensions are creating headwinds to growth. These factors are not expected to push us into a recession but to rather cool economic activity that has buoyed over the last few years.
Furthermore, even taking into account the effect of these challenges, other indicators are depicting a much healthier picture. Unemployment is at a historic low. The economy recorded solid employment growth in the first two months of 2019 and inflation remains under control.
The Bank of Canada is preaching patience by pushing the break on interest rate hikes and further assessing the impact of rising interest rates on the economy.
That being said, none of us have a crystal ball to determine whether the economy is going into a recession or not. However, the decisions we make today, when headwinds appear on the horizon, can accelerate the materialization of a recession.
It is essential that Canadians do not panic in reaction to the negative news about the economy. Businesses should not delay investment decisions in the face of a riskier economic environment. They should continue to build for the future. In this era of uncertainty and pessimism about the state of the economy, it is equally critical for the government to take the appropriate measures to support growth, investment and innovation.
Our GDP almost came to a halt for the last three months of 2018, which should prompt the government to stimulate the economy by fostering a competitive business environment.
