From inflation to recession?

The big question these days is whether inflation and central bank hikes in interest rates will cause the economy to contract.

Up to 55% of people questioned in a survey by the Quebec Retail Council (CQCD) expect the start of a recession in Quebec by the end of 2022. According to the CQCD Barometer, nearly 7 people in 10 believe that consumer prices will continue to rise in the next 12 months.

This Barometer is based on a survey carried out in June among 1,000 consumers, in collaboration with the firm Orama Marketing.

According to another survey, this one conducted online by Angus Reid, from August 8 to 10, among 2,279 Canadians, 56% of households say that they cannot keep up financially with the evolution of inflation. This rate is 41% in Quebec. Up to 80% of Canadian households, and 70% of Quebec households, say they are reducing their spending due to the rising cost of living.

A marked slowdown

Quebec is moving towards a sharp slowdown in real GDP growth according to Desjardins, by the end of the year. This is what economist Hélène Bégin wrote in a note published on July 29, stating that the Desjardins Leading Index shows that there are signs of shortness of breath of the Quebec economy.

Desjardins economists estimate that the probability of a recession in Canada and the United States is around 50% in 2023. They even estimate that the possibilities are greater in Canada, due to the importance of the energy sector. in gross domestic product (GDP).

Combined with weaker quarterly real GDP growth expected in Canada in 2023, we could enter a recession more easily than in the United States, wrote economist Randall Bartlett on July 14. The Canadian economy is also much more sensitive to interest rate increases than that south of the border due to the high level of household debt.

Quebec Finance Minister Eric Girard assesses the risk of a recession in Quebec at 35%, while the CEO of the Caisse de depot et placement du Quebec, Charles Émond, went up to 40% possibility in the interview granted to us on August 17.

We’re in a perfect stormsays economist David Dupuis, interviewed for episode 139 of the podcast Question of interest, on the Ohdio app. While inflation was already trotting over 5% at the start of the year, the outbreak of war in Ukraine amplified the rise in the cost of living with a surge in energy and food prices.

It’s been years since we’ve seen unemployment rates at the levels they are at now, so there’s a lot of room for wage bargaining on the employee side. […] And the danger, in a context like this, that the famous wage-price spiral sets in becomes significant. We have to control inflation expectations and if we don’t manage to do that, the rate hikes needed to slow economic activity will be much higher than otherwise. And they will, ultimately, push the economy towards a slowdown, which could be more marked than desired… what we would call a recession!

Economy zone presents the special From inflation to recession? Thursday at 5:55 p.m. EDT, rebroadcast Saturday at 6:30 p.m. EDT, on ICI RDI.

Banks prepare for the worst

A very clear signal that the economy is slowing down and that a recession is possible, the major Canadian banks have been announcing for the past few days lower profits because they have to put money aside, in advance, in the event of bad receivables.

National Bank CEO Laurent Ferreira believes that the risk of recession has increased in Canada in recent weeks. However, he expects a slowdown in growth and not a contraction, which still leads the bank to increase its reserves for bad debts.

National set aside $57 million in Q3 to prepare for possible credit losses.

At RBC, a moderate recession is predicted in 2023 in Canada, the United States and the euro zone, with rising unemployment. The Royal is setting aside $340 million in bad debt provisions.

Bank securities are down 10 to 12% for six months.

What is a recession?

The National Bureau of Economic Research in the United States is the entity that defines recessions on American soil. The organization bases its analysis on a series of data to arrive at determining whether there is a recession or not, and how long the cycle lasts.

A recession requires, for the body, a significant decline in economic activity that extends throughout the economy and lasts at least a few months. The Bureau makes its assessment based on three criteria: the depth of the downturn, its extent and its duration.

So we understand that, to talk about a recession, we have to see a slowdown in the job market, weaker growth in household income, a change in consumption habits and greater caution on the part of households. .

For now, in Canada, we are starting to see that consumption is slowing down. Retail sales rose 1.1% across the country in June, but only 0.4% in Quebec. The growth is mainly attributable to inflation, that is, to the fact that prices are higher.

According to Statistics Canada, early estimates for the month of July suggest a decline in retail sales of about 2% across the country.

Consumption represents more than 60% of the economy and the consumer confidence index has dropped significantly since October 2021 in Canada.

Moreover, job creation has stagnated since last winter, with a negative trend. From May to July, the number of jobs fell by 74,000 in the country. In Quebec, this decline began a little earlier: from March to July, the number of jobs fell by 53,000 in Quebec. It’s not much at this point, but the trend is down.

All this to say that a recession is not inevitable, but it would certainly be unwise to minimize or ignore the possibility of a contraction in the economy. If politicians forget it, it’s a safe bet that citizens, worried about rising gas and food prices, will remember!

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