The most likely path for the Canadian economy is slower but continued growth, according to recent analysis from The Conference Board of Canada. The risk of a recession in Canada and outside of the country, however, is growing.

“As we hope for pandemic waves to settle and the war in Ukraine to end, a return to normal could look very different from the pre-pandemic past,” said Pedro Antunes, chief economist at The Conference Board of Canada. “Although it’s challenging to assess the different risks facing Canada and the global economy, our modelling shows that the probability of Canada entering a recession in the coming year stands at about 50%.”

Key factors that could prevent Canada from entering a recession include the high job vacancy rates, high commodity prices and continuing high consumer savings levels. With record inflation limiting purchasing power in Canada, GDP is forecast to grow 3.5% in 2022 but slow to 1.9% in 2023. With consumer spending holding up despite inflation, the commodity price boom that is driving inflation will also serve to boost Canadian exports. High prices for oil, gas, wheat, canola, and potash, to name a few, are boosting profit and output for Canadian exporters.

Central banks in the United States, Canada and globally are actively working to slow inflation without hitting the economy too hard. The challenge is amplified because the excesses that are driving inflation are not confined to any one country. During the pandemic, many governments opened their purse strings, borrowing massively to support households and businesses to offset the impact of health restrictions that shut down many segments of the economy.

Inflation is now running at above 7.0% in most countries and workers are demanding higher wages to help offset that. The fear is that inflation expectations will become unanchored, where businesses and households lose confidence that central banks will succeed in bringing inflation back to target rates. This reality could easily result in central bank overshooting—bringing about a hard-landing scenario that sends the economy into recession.

The reaction of equity or financial markets to these risks can be telling about the future path of the economy. Reading the tea leaves in yield curves and other indicators suggest that the risk of recession in Canada, over the next 12 months, is at about 50%.

The full analysis is available at the Conference Board of Canada website. 

Source: Conference Board of Canada