A new report by Avery Shenfeld and Katherine Judge, economists at Canadian Imperial Bank of Commerce, attempted to figure out if the Canadian or American economy is in the most trouble based on past experience. The best they could ascertain is that the road is about to get bumpy for both, as the United States Federal Reserve and the Bank of Canada race to contain inflation with higher interest rates, but there are too many variables to determine who is about to endure the roughest ride.

If you’ve got money invested in Canada, that might be good news, given the assumption that U.S. economic pain always feels worse north of the border. “The facts don’t all line up one way,” Shenfeld and Judge wrote in a note on Oct. 3. “But in that sense, they’re supportive of our general conclusion, which is that there’s no strong case to be made that Canada’s higher level of household debt, or its greater weight in cyclical resource industries, implies it faces a greater shock ahead.”

There’s lots of recession talk because central banks around the world are jacking up interest rates in reaction to the biggest inflation scare since the early 1980s. Year-over-year price increases are around 8% in the U.S., and the Federal Reserve has made clear that it’s willing to risk a downturn to get inflation back to its target of 2%. Because monetary policy is a blunt tool, many Wall Street economists assume a recession is unavoidable.

Even though it’s taken as a given that the U.S. exports its economic pain north of the border, there’s no clear pattern for which country is hit the hardest during recessions. Canada fared the worst in downturns in 1990-91 and 1981-82, but the U.S. was the biggest loser in 2001, 1980, and 1973-75 and 1969-70, Shenfeld and Judge observed. The bigger loser this time could be the one whose central bank feels the most pressure to get inflation back to target by creating “slack,” economists’ jargon for unused economic potential that builds when economies perform below their capabilities.

The Fed’s growth outlook is weaker than that of the Bank of Canada, suggesting that U.S. policymakers reckon they will need higher interest rates to get inflation under control. That might allow Canada to post relatively stronger growth over the next couple of years. “The U.S. seems to need a bigger economic crunch to contain its inflation,” Shenfeld and Judge wrote.

Of course, the Bank of Canada may have been too optimistic when it last updated its forecast in July. CIBC revised its outlook in September and now predicts gross domestic product will increase a mere 0.6% this year from 2022. The Bank of Canada, which will revise its forecasts later this month, currently foresees growth of 1.8% this year. So, given all that’s happened this summer, it’s entirely possible the Bank of Canada will revise its outlook lower.

“Add it all up, and there’s not much to choose from in terms of who’s on worst,” Shenfeld and Judge wrote. “Both the U.S. and Canada are destined for at least a two year period of weak growth, or a shorter outright recession, as monetary tightening takes aim at inflation.”

Source: Financial Post