Is a recession coming, and how bad will it get?

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Jordan Heath-Rawlings Just a couple of weeks ago, while being very careful not not to actually use the word recession, canada’s Finance Minister gave us a window into how she’s feeling about the upcoming months in Canada’s economy. I personally, as a mother and wife, looked carefully at my credit card bill once a month. And last Sunday I said to the kids, you’re older now. You don’t want to watch Disney anymore. Let’s cut that Disney Plus subscription. So we cut it. As you might imagine, with inflation sitting around 7%, groceries more expensive than ever, and economists being much less hesitant than Chrystia Freeland to use the word recession, the idea of just cutting Disney Plus didn’t go over well with many Canadians. But it did highlight some important questions. If we are headed for a recession and there is still some difference of opinion over that, where will we feel it first? How bad might it get? What are policymakers like Freeland and the bank of Canada doing to prevent it? What could they do but aren’t doing? And finally, because I’m no economist, and most likely neither are you, how does a tail spin into a recession manifest anyway? What should we be watching right now for clues about next spring’s economy? And what do those sectors tell us? I’m Jordan Heath-Rawlings. This is The Big Story. Jim Stanford is an economist. He is also the director at the center for Future Work. Hello, Jim.

Jim Stanford Hello, Jordan.

Jordan Speaking of future work, I’m going to ask you the big question right off the top. Is Canada headed for a recession or not?

Jim Stanford I think we are. And it’s not just Canada. It’s probably most of the industrial world is going to experience some kind of downturn in 2023, largely because of these incredible jump ups in interest rates that we’re seeing in Canada and most other countries as well. That’s really kind of like a cold bath for economic activity. Consumers and businesses start calling back their spending as a result of higher interest rates. And because it’s happening everywhere at once, you’re getting a kind of magnified global impact, and Canada will not be immune to that. So I’m not an economist, obviously, but from what I can understand, you may have stated that pretty directly, but there seems to be a lot more disagreement about the immediate future of Canada’s economy and as you mentioned, the global economy than there usually is. Is that fair to say? Well, I mean, economists were put on Earth, Jordan, to make astrologers look good. Okay, so you have to take any predictions that economists make, myself included, with a big grain of salt. But I actually think there’s been a kind of growing consensus among most economists. Most of the major banks in Canada, for example, are forecasting a recession of some sort next year. The IMF is projecting the biggest global slowdown since the turn of the century worse even than the global financial crisis in 2008,2009 so I think the general view is we’re definitely headed for some kind of a recession. Whether it’s a kind of a short, shallow flattening out that’s what the bank of Canada is hoping for, or an actual genuine lasting downturn that would last for a year or two before the economy started growing again, that’s what has yet to be determined. But I think it’s pretty clear that we’re going to have a decline in real GDP. That’s how economists define a recession next year. And my fear is it’s going to be a severe one, similar to the recession we had in the early 1980s and the early 1990s. And in fact, for similar reasons, both those recessions were caused by dramatic increases in interest rates. And that’s exactly what we’re doing. Again, this is a sequel. If you like a painful sequel.

Jordan I want to understand a little bit more about the degrees of a possible recession. You just mentioned that a negative GDP is kind of the definition of one, but you also refer to a severe recession. What constitutes that? What numbers are you looking at to say, okay, this is a mild recession or versus a severe one? Right?

Jim Stanford Well, the so-called technical definition that most economists use is that if real GDP declines for two quarters in a row, a quarter is a three month period, and our GDP statistics are gathered on a quarterly basis. So if you get two negative numbers in a row, then you’re in a recession. That’s kind of the conventional definition. Now, that’s really a simplistic kind of way of looking at it. There’s lots of other things happening. The US. Economy, for example, declined in the first two quarters of 2022. So by that definition, the US. Was in recession, but it wasn’t really in recession, and their job market was still growing and other things were still happening. So in terms of whether it’s severe or not, that’s really just a matter of judgment. So you could have what the bank of Canada is expecting is kind of a technical recession where you might get two quarterly GDP numbers that are negative, but they wouldn’t be very negative, they’d be close to zero, and then you’d get positive growth again. Now, that is still a painful event. Let me stress even just stopping GDP growth for a year leads to a very significant increase in unemployment and losses of consumer income and big impacts on government deficits. So even that short, shallow scenario was a painful one. What would be more painful, of course, would be where GDP declined continuously over four quarters or six quarters or even eight quarters. That’s what happened in the early eighties and the early nineties and where it took much longer to get back to where we would have been without that recession. In that case, you’d see a very significant increase in unemployment probably towards 8% or possibly higher. And very serious job losses, very serious economic, social and fiscal consequences. So a lot depends also on how policymakers respond when the first signs of recession become evident. And here again is where I think we could have some real self inflicted misery. Right now the bank of Canada is still indicating it’s going to increase interest rates further. So we would be going into the recession. And instead of trying to offset it with lower interest rates, which is what you normally expect, you’d still have the bank of Canada with its foot firmly on the break with higher interest rates even as the recession starts, because they are really focused on one thing and one thing alone, and that’s getting inflation down from 7% to 2%. 2% is their desired target and that’s a long way for inflation to move. And it isn’t going to happen after one or two quarters of roughly zero growth. It’s going to take years to get inflation back to 2%. So if the bank of Canada literally continues to increase interest rates even as the economy is shrinking, then we’re really going to be in a mess. Similarly with governments. Governments have the fiscal policy at their disposal, that is their taxing and spending decisions. And some of them will be more obsessed with cutting back spending and balancing the budget than with trying to prevent a recession. And again, that would make it even worse. So I’m starting to see this confluence of negative influences that makes me think it could very well be a rather severe downturn.

Jordan I want to talk about interest rates in just a second, but first, because you segued so nicely into policymakers, it was a couple of weeks ago now that Finance Minister, among other hats she wears, christia Freeland gave an economic update looking forward from the government’s point of view. Now, I don’t think she said the R word but summarize what she said and what you and maybe other economists took away from that. Yeah, she certainly was signaling that tougher times are ahead. She did not use the R word in that address, but in other speeches she’s given, she’s been even more explicit that we’re headed for a slowdown, certainly. And her view was get ready for tough times and think about what’s most important in your family budget. And she said the government will do some things to try to help Canadians. But she was dampening expectations about how much assistance people can expect from the federal government saying number one, we can’t help everyone. And then number two, she was kind of buying this line that by helping people say you lose your job, you get more access to employment insurance, you get money to spend. There’s a theory out there that actually makes inflation worse. I don’t accept that theory, but there is a theory that anything the government does to help people at this point will make inflation worse and therefore lead the bank of Canada to increase interest rates even further. She’s been trying to walk a bit of a fine line there. There have been some targeted supports. There’s an increase in the GST tax credit. She announced a new kind of working income benefit. It’s like a wage supplement for low income workers. There’s a bit of assistance for renters, so it’s not like they’re doing nothing. But I would say they are not doing enough. And she’s clearly signaling that they’re going to be a bit tight fisted again, even if we go into her recession.

Jordan One of the things that I have trouble grappling with is the negative indicators that appear right alongside what I would assume, again, not being an economist, are positive indicators. You know, we keep hearing about how recessions will lead to job losses. As I understand it, job numbers have been pretty good and remain so, right?

Jim Stanford Yes, they are. So in that regard, we’re starting from a good position and this is certainly beneficial. We have an unemployment rate. 5.2% is the latest official data. That’s not the lowest in history. It’s kind of equivalent to where we were about the time the Pandemic started and we’ve got in that regard, a lot of employers are trying to find new workers there’s. The statistics on job vacancies, for example, which employers advertise, are quite yeah, I keep hearing it’s a strong labor market and wages are rising. Yeah, wages are rising on one level in the sense the average wage increases 4% or 5% a year. It was 4% a year before the Pandemic, so that’s not such a jump up. But what has changed is inflation. Of course, we’ve gone from 2% inflation to 7% inflation. So in real terms, that is what you can actually buy with your wages. Wages are falling and falling quite rapidly. So I’d be cautious about assuming that there’s a labor shortage. I don’t like that term. I’d be cautious about assuming that wages are booming. They clearly are not. And I certainly would reject the idea that it’s wages that are causing this inflation. This is the argument you hear nowadays even from the bank of Canada. The governor, TIFF Macklin, made that argument very strongly recent in recent speeches, that this is all because of a tight labor market, overheated employment and rising wages. And that’s absolutely wrong. The inflation we’re experiencing is still a hangover from the Pandemic and the supply chain disruptions and the energy price shock and droughts and floods and agricultural areas. That’s why the price of lettuce is shooting up, not because the workers at law blocks got a big race. So we’re starting from a relatively strong position on the labor market, and that helps. But we’re still going to see unemployment increase, we’re still going to see hundreds of thousands, if not millions, of Canadians lose their work if we go into a serious recession. It means the unemployment rate will go from 5% to 8%. If we were starting at 8%, then it would go from 8% to 11%, which is even worse, of course. But that doesn’t negate the fact that we’re heading into a serious downturn and then it’s going to cause serious pain.

Jordan I’m sure this is one of these obvious questions that’s way more complex than I realize, but you mentioned that the bank of Canada has signalled there may be more interest rate hikes to get inflation under control. If the interest rate hikes are driving us towards a recession, why would they do this? And honestly, and I’m asking this for probably most of the listeners, how much higher can interest rates go and how much can Canadians take of that? Like, this is impacting mortgages every day right now, right?

Jim Stanford Yeah. If you have a variable rate mortgage, which many Canadians do, then you’re already paying for this. And what that means is you’re paying hundreds of dollars more per month towards your mortgage than you were a year ago. And that means the money you’ve got to spend on other stuff isn’t there anymore. So you’re cutting back on your other expenses. So that’s one way that the higher interest rates bite. All that money now goes to the bank. Instead of going to buy goods and services and groceries and restaurant meals and travel and appliances, et cetera. Another way they bite is any kind of big, durable purchase. That could be a home, obviously, or a car or a business investment. They become more expensive because you’re paying higher debt charges. So we’re already seeing a big downturn in the construction sector, for example, and much business investment cooling off. So that’s another way it hurts. Another way it hurts is just through expectations. If people think that a recession is coming, and most people do, well, they start cutting back on their spending. Even Finance Minister Freeland said her family canceled their Disney Plus subscription right now. Infamous quote, but it is, in a way, real. That’s exactly what families do. If they think tough times are coming, they’re going to stop spending and batten down the hatches. Well, guess what? If every household in Canada stops spending and battens down the hatches because they fear a recession that’s just created the recession that they fear. So these expectations can easily become self-fulfilling. So for all those reasons, the interest rates are having an effect. And the biggest effect is still to come. Not just because the bank has said they haven’t just hinted. They have said they’re going to increase interest rates further. So that will make it worse because we haven’t even felt the full impact of the interest rate increases, the six that they’ve put in place so far.

Jordan Now, why would they do this? Even though it pushes the economy into a recession, they actually think that increasing unemployment is how to solve the inflation problem. So it sounds bizarre, and ultimately it is upside down. How would that work if that was correct?

Jim Stanford Yeah, well, what they say is it starts from this assumption that I’ve already critiqued that inflation as a result of a tight labor market and rising wages.

Jordan Okay, so if that is the assumption, then what do you do?

Jim Stanford You got to loosen the labor market. That means create unemployment. So Governor Tiff Macklem came out explicitly the other day, a speech in Toronto and said we are going to increase unemployment. We have to in order to reduce wage pressures. He says the unemployment rate is too low. He actually said the unemployment rate is too low. We have to get it back up there. Yeah, us, we’re going to get the unemployment rate back up there. So it is perverse. It is absolutely perverse. And I think we need to find better ways of managing inflation other than deliberately throwing hundreds of thousands of Canadians out of work.

Jordan Are there indicators that we can look for in certain sectors that can tell us what’s in store for us and what we should expect? And I ask this specifically because the news cycle has been dominated for about a week or so with layoffs across the tech sector. Right. Twitter, obviously, that might be an edge case, but Facebook, Apple has a hiring freeze as we speak today. On Friday, Amazon announced massive layoffs. Is that a bad sign? And if not tech, what other markets are indicators for what’s to come?

Jim Stanford Yeah, well, the tech sector obviously experiencing a bloodbath. Amazon, that one particularly stands out because that is not a fly by nightite kind of.com bubble type company. Amazon is a real business. It’s the fifth largest employer in the world and have experienced huge growth. So even just stopping hiring at Amazon would be big news. But laying off tens of thousands of people is worse news. Typical leading sectors, Jordan, that you would look for kind of the canary nob coal mine kind of theory. One would be construction activity. That often leads big swings in the economy. Construction starts booming, then that leads to a broader expansion. Construction starts contracting, which it is right now. That can lead to a broader contraction.

Jordan Business investment spending is another one that tends to lead. What happens in the rest of the economy?

Jim Stanford Consumer spending usually follows. Usually consumers get the money and then they go out and spend it. So if the overall economy is expanding, then consumers have more to spend and that reinforces the expansion. So usually the first signs are not at least in the kind of DayToday consumer spending, sometimes the spending on obviously homes, but other durable goods like autos, etc, etc. Can be an early sign. You can also look to financial markets themselves, the stock markets, the derivative markets, the foreign exchange markets, the energy futures markets. Those are places where financiers basically gamble and place bets on what they think is going to happen in the future. And they tend to react very quickly to changes in expectations. And we’ve already seen that happen. We’ve seen a big downturn in equity prices in the Toronto stock market and others around the world. Energy prices have come down because of the impact of an expected global recession on energy demand. Other speculative markets think about cryptocurrency. That’s in total meltdown right now, and that in and of itself wouldn’t cause a recession. Crypto was always a sideshow. But you are, I think, seeing a shift in expectations and in liquidity and in the fear factor, if you like. And that as we saw in the 2008 2009 crisis. That alone can cause the system to rupture in those leading indicators, they’re all negative right now. They’re all flashing red. So it is really hard to believe that we are somehow going to achieve a perfect soft landing guided to a low inflation nirvana unlikely in history. The only way to get inflation down as much as it is pegged to come down to meet the bank of Canada’s target. The only way to do it is to have a big painful recession. I know that we’re not talking here about gigantic purchases like houses and cars, but in terms of consumer spending, I wonder if the next couple of months will be a good indicator. Just because I’ve seen and maybe these are speculative articles, but I’ve seen a couple of surveys and articles about Canadians planning to spend less on Christmas gifts.

Jordan Obviously, as we speak, Black Friday is coming up, whether that’s more American or not. Is this a good time of year to gauge how nervous Canadians are about their money?

Jim Stanford Potentially. Jordan although there are still sources of strength for that kind of DayToday, discretionary consumer spending. One of them is the job market itself is still, as we talked about in Canada, relatively strong. And typically it takes twelve to 18 months for higher interest rates to have an impact that’s visible in the job market and other real economic indicators. And we haven’t seen that yet. In fact, the October jobs data that we got from Statistics Canada was a blockbuster. 108,000 new jobs created in Canada. I was shocked by that in a positive way. And then we’ve also got this funny experience where household savings in Canada really went up during the pandemic. And I know again, that sounds a bit odd because we’re in this big crisis, but think about it. First of all, you couldn’t go out and spend, right? Restaurants and stores and travel, etc. It was all off the books. You could buy, you know, home electronics to watch Netflix on and building materials to renovate your basement with. Those things did keep spending, but a lot of other spending was curtailed. Then you also had those emergency income supports, the Serb and the other programs like that that were very effective in protecting Canadians incomes as the lockdowns were in place. So those two things, the income protections. And the reduction in spending meant Canadians saved tens of billions of dollars above and beyond what they normally save. And that money is still sitting there. So for a little while anyways, consumer spending can be powered by drawing on those unusual savings from the pandemic. So I would not expect to see the first signs of a recession in a, you know, a sudden drop off in consumer spending. On the other hand, as those other things, construction, business investment, financial market chaos, etc. But as they start to take their toll, that’s when you will see consumers reigning back what they’re buying and then that reinforces the negative momentum of the whole economy. So, last question I was going to ask you originally for your prediction. I think we’ve already gotten that. But I will ask you this then, because you’ve kind of done a pretty good critique of policymakers approach to this. What would you do?

Jordan Nobody wants a recession. All of a sudden they give you the reins to Canada’s economic policy. What do you do to avoid one?

Jim Stanford Yeah, nobody wants a recession and nobody wants 7% inflation forever either. So in that regard, it’s a tough balancing act and I appreciate that. I think that we could have done a better job and could do a better job managing that postpandemic inflation without throwing the whole economy into a recession. And we’ve published some work through our center jointly with the Canadian Labor Congress to explore some options in that regard. One of them would try to be more tailored in terms of the restrictions on credit rather than just higher interest rates across the board for everyone. Put limitations, including through things like Prudential lending requirements or the things that the CMHC does, put restrictions on sectors where higher credit expansion have been negative, like in the the housing housing sector and so on. Secondly, some of those root causes of the post pandemic inflation things like supply chain disruptions, transportation bottlenecks, the energy shock from OPEC and the oil producers after the Ukraine war, even housing itself. Those are all things that can be addressed through long term investments like affordable housing, renewable energy which OPEC doesn’t control, investments in infrastructure, and so on. Part of it I think, also has to be protecting Canadians against that moderate inflation until its underlying causes are addressed. And this is where some of the things the government has been doing for low income people make a lot of sense, ensuring that workers wages keep up. If your wages keep up, then five, six, 7% inflation is not the end of the world and you can take some time to get inflation back down. So I think that a more balanced approach is possible. I’m not optimistic that the folks at the bank of Canada are going to be influenced by this. In fact, they’ve hardened their language lately saying it’s all about wages in the labor market and we’re going to get unemployment up to solve the problem, and I think that’s a misreading of the causes, and I think it’s going to impose unnecessary harm on a lot of Canadians.

Jordan Well, kind of hope you’re wrong about that. But thank you for running us through this, and thank you for explaining it so well. I understand a lot more about the push and pull going on, so thank you, Jim.

Jim Stanford Well, Jordan, I hate to sound so pessimistic, but they say economics is the dismal science, and these days we’re living up to our reputation.

Jordan Jim Stanford, economist and director at the center for Future Work. That was the big story. I’m so happy to be back, but I want to give a huge shout out to Fatima Syed and the team at the Narwhal for bringing us such amazing climate stories over the past week. While I was off, it was so good to hear stories about the climate and the environment that don’t just sink into a spiral of depression. So many thanks to them. And many thanks to so many of you who wrote in or left messages to tell us how much you liked it, especially Carolyn, who called Fatma the best podcast host ever. So there’s that. I’m just kidding. I think Fatma is also the best podcast host ever. I’m just glad I still have a job. You can find the big story at thebestorypodcast CA. You can talk to us on Twitter, if it still exists by the time you hear this at thebigstory FPN. If Twitter is gone forever, you can always write to us. Hello at thebigstorypodcast CA. And hey, if social media dies, maybe we’ll pick up the phone again and you can call us and leave a message. 416-935-5935. Thanks for listening. I’m Jordan Heath-Rawlings. It’s great to be back, and we’ll talk tomorrow.