Jordan: Today’s episode about why there might be a recession coming might scare you a little bit. And then you might get worried, which means you might change your behaviour and then that makes it more likely we’ll have a recession. And then more people will start talking about it. And then…
News Clip: Recent yield curve inversion has renewed speculation about a North American recession. Indicators suggest that the next recession may hit Canadians harder than Americans. Canada’s household savings free, falling to 1.1%. We’re at the very end of a long run. Trade war with China is the harbinger of doom. This new report that’s come out with thousands of job losses additionally expected we’re headed towards a recession or bear market that will be accompanied by a recession. You know, this has been a long bull market…
Jordan: But hold on. As an individual, you actually aren’t that important. And you can’t let your emotions drive your finances. And there are bigger forces at work here. So you know what? Maybe relax. It’s gonna be fine. You know what? It’s because of that that we did this episode because a recession is an emotionally loaded term, but it has just cold unemotional numbers behind it. And that can really mess with our heads, which in turn can mess with our spending habits. Which leads to Yeah, so we will keep this basic. What is a recession and is one coming to Canada? How can we tell if our neighbors to the south do slide into one there any way? We don’t get hit too. And if or when we d’oh, how do you protect yourself? I’m Jordan, Heath Rawlings, and this is the big story. Daniel Tensor is the business editor for Huffpost Canada. I Daniel, Can you maybe start just by simply explaining what a recession is? I mean, technically and how often they happen. Well,
Daniel: The technical definition of a risk session is two consecutive quarters where the economy shrinks. So basically, if across a six month period, the economy shrinks rather than grows, they call that a recession. But that’s really just the technical definition. When people think of a recession, what they’re actually thinking of is losing their job, uh, expenses growing faster than they can afford it financial uncertainty, inability to pay your debts. That’s what people tend to think about when they think about a recession. Where is in fact, technically, that’s not what a recession is at all. It’s simply two consecutive quarters of shrinking economy. We had a recession in Canada in 2015 and really only the people in western Canada and maybe newfoundland noticed because it was driven by a decline in oil and that decline in oil caused a decline in our GDP. We had a recession, but if you are in Ontario or Quebec you wouldn’t have known it.
Jordan: How often does that happen? Does Does a technical recession happen without the majority of the public feeling it and not to minimize? You know, the pain felt in in certain regions in Canada, but there was no mass media coverage of Canada’s in a recession. What do we need to do?
Daniel: Well, I think that it doesn’t actually happen all that often, and ah, and it can also happen that sometimes you don’t get a recession, but it feels like a recession, right? Like if you go back to the dot com bust around 2000 Canada came through that impressively Well, the U. S. Actually did have a recession Canada didn’t and yet to just the drag, the psychological drag and the economic drag from the slowdown in the U. S. The bust out of all those dot com companies that turned out not to be worth anything. That just created a psychological environment in Canada, where people assumed that we were in a recession and everybody around 1 4002 was talking about you. Have you got a recession and so bad when in reality it wasn’t And so you know there’s the way I think about it is there’s two kinds of recessions. There’s the technical economic recession that you can see in the data. And then there’s what people believe, what they feel, what they see in their own lives. And the 2 may not always not always link up, and that’s why I think a lot of people today, including myself, I feel like we need better ways of measuring the economy than just GDP. We need to look at a kind of a tease, the word holistic, but I think we need to look at the economy in a more holistic way so that we actually measure what people are experiencing in the economy because it’s people’s actions ultimately that determine where the economy goes, whether or not you decide to buy a house, whether or not you decide to get an education, those are, you know, every every person’s decisions about those types of things that adds up to being the economy. So I think we need better ways of understanding what people are doing and why they’re doing it.
Jordan: What are some of the ways we can get a sense of which way those things are trending? My follow up question is, Which way are they trending?
Daniel: Well, let’s talk about that question. Which way are they trending? Because this is something I’ve been thinking, but it’s very hard to tell right now what is going on in the global economy. There are a lot of unusual things happening that make the usual signals for recession or the signals for a strong economy. They’re becoming sort of untrustworthy. You don’t know what those signals air meaning.
Jordan: Let’s start quickly before we get into why they’re out of whack is what are those usual signals. What are we used to tracking to tell whether or not we’re gonna hit a recession.
Daniel: Well, there are a number of different ways of looking at it. Um, there you can look at the financial markets and in the financial markets. Economists look at interest rates, and what they’re looking at to determine whether an economy is healthy or not is the difference in different kinds of interest rates. So, for example, short term debt generally has a lower interest rate, then long term. That just makes sense. If you’re lending for the long term, you’re taking a bigger risk. You want more return still, typically, if you’re borrowing for a year, you get a better interest rate than somebody was boring for 10 years or 20 years, Right? In a normal economy, that’s what you’ll see. But sometimes investors and lenders get nervous about the economy, and then they start to demand more interest on that short term debt because it’s the short term economy they’re not certain about. And when that happens, interest rates on short term debt go higher than long term debt. The term for that is yield curve inversion, and when that happens, that’s a fairly strong sign that the people who make a lot of the decisions about the economy, the investors, the executive class, that those people are losing faith in the economy. That is exactly what we’ve been seeing this year, both in the United States and in Canada. The yield curve on government debt inverted in Canada last month, so I think its steepest point since about 2000 since the dot com bust, huh? But it’s been flickering back and forth, inverting and un inverting and inverting and un inverting. So people are looking at that single saying, What does that tell us? We’re not exactly certain here, and that’s part of the problem Is that a lot of these signals that are telling us that usually tell us a recession is coming. Some of them are flashing but unreliably. And then there are other signals that are telling us something completely different, that the economy is very healthy and things are doing very well. That’s why I think there’s so much uncertainty about whether or not we’re moving into a recession. It’s just that the signals are telling us many different stories.
Jordan: Do we have any idea why they’re not aligning? Do they usually align to tell that kind of story? And it’s just this time that they’re wonky.
Daniel: No, this has happened before. I mean, this does tend to happen when there’s some kind of a change or an upheaval in the economic situation. And I think right now we’re seeing a lot of a people, for example, of the trade war, Donald Trump’s confrontation with China that’s been ongoing. It’s been escalating over the course of this year. You know, a lot of people in the economy, the decision makers in the economy don’t know what to make of that. What do we do about this? How do we plan for this? That kind of uncertainty. It causes investment to pull back when investment pulls back. Job growth pulls back, Trade Pulls back We’ve seen a real decline in global trade volumes this year. That’s the kind of signal that normally says yet a recession is coming. But if it the same time you’ve got record low unemployment in the United States and, uh, you know, strong expanding demand across much of Asia and that kind of thing, Well, then, is that actually a sign of a recession, or is it just kind of a blip? Is a result of this trade war. Nobody’s really certain. And it’s that uncertainty that itself kind of makes a recession more likely,
Jordan: Right? That was my next question is, can we kind of, Ah, scare ourselves into one by being worried for the future of our personal finances and saying, Okay, well, I’m not going to invest the 12% of my paycheck that usually goes directly into into mutual funds. I’m just gonna hold onto it and stuff it under the mattress.
Daniel: I think we can definitely scare ourselves into making things worse, but I wouldn’t make too much of the notion that the economy is psychological. It’s true that our decisions make up the economy and our psychology determines our decisions. But at the same time, there are a lot of mathematical realities that that have nothing to do with psychology. And, ah, that’s especially important when you’re thinking about debt. Almost every financial crisis in history has been some variation on somebody taking on too much debt and then not being able to pay it back. Whether you’re talking about the housing bubble in the U. S. In 2008 the stock market crash in 1929 the tulip bubble in Amsterdam in the 18th century. It all kind of comes down to this, you know, taking on too much debt because you’re too optimistic about your ability to pay off the set and too optimistic that you’re gonna make tons of money off of whatever it is you’re borrowing for. That’s how these crises happen time and time again. So there’s Ah, there’s a risk in psychology both ways. We can scare ourselves into making a recession worst, or we can be overly optimistic and accelerate ourselves right into a crisis. So I think when it comes to psychology, I think we should kind of pull back and try to be sort of detached from it and just look at it for what it is and look at our own finances in a realistic way and not stretch ourselves, but also not scare ourselves into not living our lives and not spending money.
Jordan: Which way are our personal debt levels trending in Canada? Then are we headed that way?
Daniel: While we are Yes, to be absolutely honest, we are on an unsustainable path when it comes to household debt in Canada. I’m not talking necessarily about government debt that’s a different picture and varies, actually quite a bit from province to province. But when it comes to household debt, we are now at record highs or just off of record highs of household debt of around. I think it’s about about a dollar 78 in debt for every dollar of income that we have. We have nearly $2 trillion in consumer debt in total in this country, and it grows faster than income year in and year out. And what that means is that as we go through economic cycles, you know these cycles of economic expansion and recession and expansion a recession. Every time we hit one of these cycles, we hit one of these cycles with more debt, and that makes us more vulnerable. When I look at you know what economists are saying out there on the analysts putting out notes about macro economics, The thing that I kind of notice is this sort of undercurrent of worry that the next recession, even if it’s not caused by anything that happens in Canada, even if it’s not that particularly intense, it could just kind of cause this domino effect because there’s so much debt in our economy, so many people are leveraged to the hilt. Every several months or so, the Consumer survey comes out showing that a considerable chunk of the population, I think somewhere between 40 and 50% in most of these surveys, you know, say that they are. You know, they wouldn’t be able to survive their paycheck being delayed by a week, or they wouldn’t be able to handle on additional $200 a month in extra costs. Well, what happens to those people if there is a decline in the economy and unemployment goes up? And you know some number of these people lose their jobs, that will have an enormous snowball effect right away because they won’t be able to make their mortgage payments Or, you know they’ll have to sell their house right away and put it on the market, cut rates, or they’ll have to move to another city and uproot their entire family. You know there’s going to be all these impacts on the economy because we’re vulnerable at the’s very high debt levels, and I think that’s one of the reasons, if not the major reason why the Bank of Canada is so cautious about interest rates and White. It’s now sort of signaling that it might be cutting interest rates soon, even though our economy isn’t particularly unhealthy and our inflation rate doesn’t really weren’t on interest rate cut right now. But I think the Bank of Canada is looking less and less that what inflation in our economy looks like. And more and more at this enormous debt burden Canadians are carrying and saying, You know, we can’t raise interest rates into this environment. This is the priority here to make sure people are able to carry this huge debt.
Jordan: If this indicator is so high and it’s flashing and there’s a ton of discussion in the United States for sure about a potential recession resulting from the trade war, why do you think it hasn’t and correct me if I’m wrong? But I haven’t heard a lot of discussion of a potential recession from any of the campaigns.
Daniel: Well, that’s a good point. I think that, uh, you know, we are at a point in our economic cycle where nobody really wants to throw that R word into the political cycle, because you might be accused of panicking the markets. You know, you might be accused of trying to talk down the economy for political gain. If you’re Justin Trudeau and you’re in power, obviously you don’t want the R word thrown around because you know you’re you’ve been in power for four years. To an extent, you own this economy. So I think, really, there’s not much political benefit at this point to throwing that out there. If, on the other hand, things were too rapidly deteriorate between now and the election, which I think is unlikely. But if, for instance, you know the economy really went downhill, then politicians would feel the pressure to respond to that, then, not mentioning it would seem like you’re delinquent in your responsibilities as a political leader. But without that happening, as long as it’s just this sort of simmering debate, are we or aren’t we going into a recession? I think it’s probably in the best interests of any politician to avoid the subject,
Jordan: Since we are hearing a ton about it from America, though I want to ask you kind of how closely our our economies tied together. When this kind of thing happens. Is it possible? For instance, that America’s trade war with China causes a recession there and and we some house scrape out of one. Or are we in the same boat?
Daniel: Well, I mean, it all depends on the specifics. If we’re talking about a small, mild recession caused by a decline in global trade caused by this trade war, then yeah, I think Canada could probably avoid recession in that case, as long as Canada’s own circumstances air pretty decent and were trading with the world. And and maybe we’re taking advantage of some of those opportunities that the United States has left on the table by getting into this trade war. Yeah, we could actually, no sort of position ourselves to benefit positively from that kind of thing. But if, on the other hand, the trade war leads to kind of like a cascade effect where things get worse and worse, you know where maybe investors and business leaders lose confidence in the economy and pull back and unemployment goes up and you get a more serious recession than it would be very hard for Canada to avoid being impacted by that. If you look at our history, it’s almost always been that Canada and the U. S. Go into recession together, right and come out of it together. We are still very dependent on the U. S. We have a distinctly different economy from the U. S. But the U. S is still far, in a way, our most important trading partner, and maybe even more importantly than that were perceived by the global financial and economic community as being one thing. And if something happens in America, traders you know will react the same way when it comes to Canada. If traders are dumping the U. S. Dollar, they’re probably dumping the Canadian dollar, too. You know, it’s it’s not necessarily fair, but that’s part of the price of being in North America being next door to the United States and, you know, enjoying the benefits of being part of this free trade market with the U. S. And Mexico, the world is gonna perceive us as being tied to the United States.
Jordan: So what are the one or two things that you’ll really be watching for in the next couple of months? That would signal to you like either Okay, this is coming or hey, maybe maybe we’re correcting
Daniel: Well I think that what I will be looking for is whether or not the global slowdown is having a particularly strong impact inside Canada. The numbers that I’m gonna be looking at to see how we’re doing through this economic slowdown, whether it’s a recession or not, I’m going to be particularly focused on consumer numbers. Are people paying their mortgages? Are people paying their credit cards? You know, what are the delinquency rates on different kinds of debt? Those are the numbers I’m gonna be paying attention to because then I think the Bank of Canada agrees. This is kind of the biggest vulnerability in our economy right now is these very high household debt levels. So what I don’t want to see is whether or not the slowdown begins to impact those debt levels. If it doesn’t, if it’s just, you know, if it kind of comes and goes through Canada’s economy without particularly impacting households, then I would say we’ll probably be fine and we’re not facing any kind of major or serious recession. But if I see those delinquency rates going up, then I’m gonna worry.
Jordan: If you’re worried and if people also see that and they’re worried on a personal finance or household level, how do you prepare for a recession?
Daniel: Well, I think preparing for a recession is something that people really should just be doing all the time. Like you should always actually make financial decisions. Keeping in mind the fact that we live in an economy that goes through cycles and that you know, every now and then the economy shrinks, people lose their jobs. When when you make any kind of plan, you should take into account the possibility that you may not have your job forever. You should take that into account when you get your education. When you buy your house everything. And as far as preparing for a recession goes, I think the most important thing anyone could do uh, the the generic advice that I think applies to almost everyone is Get your debt under control. Make sure that if something happens and you know your household has a decline in income or a spike and costs that you consult a handle that that you have some measure of flexibility there, you’ve got some cushion every month of income that you’re not spending. If you have no cushion. Change how you live so that you have a cushion. I know people don’t like to hear that You know the austerity People hate austerity. People hate having to cut back. But the reality is, if you don’t have that cushion, you will not be prepared.
Jordan: Right? Well, thank you for that sobering yet probably instructive advice.
Daniel: I hope it was helpful.
Jordan: I’m gonna go pay off my credit card now.
Daniel: Yeah, I think. Me too, actually.
Jordan: Thanks very much, Daniel.
Daniel: Thank you.
Jordan: Daniel Tensor is the business editor at HUFFPOST Canada. That was the big story for more from us, head to the big story podcast dot c a. You can also talk to us on Twitter at the big story F P N. Tell us about your saving habits. Hope you’re responsible. Of course, Subscribe, wherever You ever get your podcasts on Apple or Google or stitcher or spotify. Thanks for listening. I’m Jordan. Heath Rawlings. We’ll talk tomorrow
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