The Recession That Was Not There

 

Yesterday upon the stair,

I saw a recession that was not there,

It was not there again today,

I wish, I wish, it would go away.

 

With apologies to William Hughes Mearns, Antigonish 1899.

 

 

The release of yesterday’s employment numbers by Statistics Canada once again threw a wrench into the ranks of those who have been predicting a recession by revealing a continued resilience to the Canadian economy’s job generation machine.  Total employment in September of 2023 was 20,270,000 – an increase of 0.3 percent over the previous month with 64,000 jobs created.  There were of course both gains and losses across regions and sectors with Quebec and British Columbia seeing the biggest employment increases while Alberta and New Brunswick saw declines. 

 

As well, there were increases in employment in education, transport and warehousing and declines – not surprisingly given the slowing housing market – in finance, insurance, and real estate.   Nationally, the unemployment rate remains unchanged at 5.5 percent.  When one adds to this the fact that the U.S. economy in September added over 300,000 jobs and their national unemployment rate remained unchanged at 3.8 percent, one has to come to the conclusion that the North American economy is still quite robust despite the unprecedented surge in interest rates over the last year. 

 

Despite the ever present and mentioned spectre of recession with numerous forecasts and projections painting dire scenarios it remains that the recession is not here yet unless of course we are planning to redefine the context within what the definition of a recession is.  After all, the most recent GDP release also showed that as of July 2023, the economy was flat, neither up nor down. And one forecaster has said the economy will get “back on its feet” next year after a few negative quarters that will see the unemployment rate hit 5.9 percent followed by an easing of interest rates to the 3 percent range.    If a 5.9 percent unemployment rate is the worst this recession will bring, then one must wonder if a recession has simply become a psychological mindset perpetuated by endless speculation and anxiety of hard times to come. 

 

After all, as the accompanying figure shows, both interest rates and unemployment rates have been much higher during past recessions.  The 1981 and 1991 recessions both had much higher interest and accompanying unemployment rates than anything at present.  And notwithstanding the COVID spike in unemployment, unemployment rates have trended down since the 1990s and remain at close to historic lows bettered only by those of the mid 1960s. I suppose the only remaining case for a recession coming is that in both of those recessions, interest rates spiked and remained high for quite some time before unemployment finally surged.  Still, a forecast of 5.9 percent unemployment because of the current spike in interest rates does not seem like a recession at all when placed in historical context.

 

 

Still, the Bank of Canada’s next interest rate decision has been complicated by this much stronger economic performance and inflation still in the four percent range.  Moreover, with the sudden new instability in the Middle East, one can expect oil and gasoline prices to spike meaning inflation is unlikely to go down anytime soon.  Inflationary pressure is also being fueled by wage increases in the 5 percent range.  Indeed, Statistics Canada reported that incomes in general have been rising particularly in the bottom two income deciles as a result of wage gains for workers as well as increased benefits for retirees. 

 

Indeed, when one factors in all transfers to individuals including not only higher social security benefits and what is essentially a basic income for lower incomes with children via the Child Tax Benefit, it appears that disposable income in the bottom 20 percent has increased 20 percent. And, much of this goes to consumption spending as studies have suggested that lower income deciles have higher marginal propensities to consume and lower propensities to save.  Meanwhile, another Statistics Canada report suggests that the economy is doing better because of rising exports. Given the strength of the U.S. economy, that is not a surprise. Then there is the rising population and its associated demands on the economy.  Put it all together, and one cannot but help conclude that there is still a lot of inflationary stimuli being pumped into the economy.

 

Recession?  At present, the coming recession is a mere spectre, a mythical beast that is conjured up but is not there.

 

Recession Anyone?

 

Well, despite the talk of recession and rumours of recession in the wake of Bank Rate increases around the world, to date the economy not just in Canada and also the United States and indeed in many other countries, remains relatively robust.  At the same time, inflation is coming down.  The narrative is only slowly starting to shift to explanations of why the economy is doing so well with a myriad of possible stories, the most entertaining is that what we are having is a “vibecession” in which people continue to spend unabated while externalizing anxiety that a recession is coming with the anxiety being aided and abetted by constant media stories on why interest rate increases will eventually bring a recession.  Or perhaps we are experiencing some type of economic cognitive dissonance in which spending all that pandemic cash makes us uncomfortable, so we project fears of coming recession to assuage our consumer guilt.  Needless to say, interest rates are continuing to rise and at some point there may or may not be a recession.

 

In the interim, any indicator is useful.  Statistics Canada has put out experimental monthly business data (Table 33-10-0279-01) that estimates the total number of active businesses as well as openings and closures for Canada, the provinces and Census Metropolitan Areas.  If there are glimmers of recession in the air, one might expect to see a slowdown in the growth of total active businesses or even a decline is business closures exceed new openings.  Figures 1 and 2 provide charts of some this data (Total active businesses and business closures) for Canada, Ontario, and four Ontario cities (Thunder Bay and Sudbury are included as after all this is Northern Economist).  And, because of the size differences between national level and CMA data, an index is calculated and used with January 2022 numbers set to 100 for all.

 

 

 

 

 

 

Both Canada and Ontario are above where they were in January of 2022 in terms of the total active number of businesses.  Since January 2023, there was a bit of a decline though it was followed by a rebound from March to April of 2023 where the data ends. This pattern appears to also mark Toronto and Hamilton. However, Greater Sudbury has seen a persistent decline since May of 2022 as did Thunder Bay though it was followed by a rebound after February 2023.  Nevertheless, all these geographic entities had more active businesses in April 2023 than at the start in January of 2022.  This suggests that overall, there have been on average more openings than closures. Figure 2 plots an index of business closings and again there are fluctuations but no discernible overall upward trend over the January 2022 to April 2023 period. If anything, there was a rise in business closures from about June 2022 to October 2022 and then a decline in business closures from about October of 2022 to January 2023 with a reversal since. 

 

The Bank of Canada began its current tightening cycle in March of 2022 and within a few months the number of closures began to rise but that was soon reversed.  Overall, there have been healthy amounts of new businesses created that have countered closures explaining why overall, the number of active businesses are up.  This data suggests that any recession if at all is still down the road.  Or, the soft landing that was envisioned is what has been engineered.

Recession? What Recession?

 

With the Bank of Canada’s recent rate hike and the expectation that there may be another hike in July, the talk of an economic slowdown and a recession has ramped up.  There is talk and rumor of looming  recession and that has been underway for some time.  At the same time, another view is that we risk moving into a 1970s style economic environment if inflation is not soon brought to heel. Given the lag between tighter monetary policy and the economic slowdown that would bring inflation down, it is possible that any downturn is still up ahead.  At the same time, the evidence to date suggests the economy is not yet slowing down.  Despite higher interest rates, demand is still being fueled by pent up consumer revenge spending, robust population growth – more people means more consumption spending - and residual post-pandemic savings. 

 

 

 

Figures 1 to 3 show that key economic indicators after post-pandemic re-bound and adjustment remain robust.  Figure 1 presents the Canadian City CPI total inflation rate (from FRED) and while it has been coming down it is still over five percent and high by the standards of recent history.  Figure 2 shows quarterly real GDP growth and while recent growth at about 2 percent is down substantially from the pandemic rebound, it is akin to pre-pandemic growth.  There have been no two consecutive quarters of negative real GDP growth – a traditional hallmark of a recession.  And while 2 percent growth is not great, that is more a long-term productivity growth problem than anything to do with rising interest rates and recessions.  And then there is Figure 3 which shows we are currently at the lowest unemployment rate in over a decade – again more a sign of an overheating economy rather than a harbinger of recession.  

 

 

 

 

 

So, it would appear that until there is evidence to the contrary, at least another interest rate increase by the Bank of Canada is in the offing.  The economy is still growing, labor markets are tight, and inflation remains high by historical standards.  The current level of interest rates seems to be compatible with ongoing inflation in the 4 to 5 percent range and is unlikely to bring us to the target 1 to 3 percent range of days of yore.  Keeping inflation at the 4 to 5 percent range is dangerous given that any demand or supply side shock when inflation is already in the 4 to 5 percent range could bring us to double digit inflation – a 1970s style scenario.

Canada's Response to COVID-19

In response to the COVID-19 situation, Canada is about to undergo a pretty major economic shock comprised of both an aggregate supply shock - given the disruption to supply and production chains - and an aggregate demand shock - as consumer and business spending dries up.  This is unprecedented and the ultimate effects on price and output will depend on the proportionate size of the leftward shifts.  And of course, when things in the global world economic order get tough, you can always count on "team players" like Russia or Saudi Arabia to make things worse as they have with their oil production squabble. This will provide the final push to conditions that were already driving a potential Canadian slowdown given the length of the business cycle, and the impact of trade restrictions and disruption with both the US and China.  Ironically, those elements in Canada who were trying to shut down the Canadian economy with transportation and production blockades only a few short weeks ago, will get their wish in ways they could not possibly imagine.

This shock is mainly to expectations and confidence on the part of consumers, investors and business.  Anything that requires non-essential consumer spending - restaurant meals, tourism, travel, and leisure activities - will be hit the hardest.  Essentials in sectors such as food and supplies will do better.  Many personal services will also be hit hard in the immediate term.  Online services and shopping especially with delivery service will get a boost. At the same time, this is an "animal spirits" driven crisis and once it appears the COVID-19 situation is under control, there will be a fairly rapid resumption of activity and pretty quick bounce-back from any recession in Canada.  The longer-term is more interesting.  Just as 9-11 changed global trade, travel and interactions in many ways, this too may result in changes in travel mobility especially.  The openness of borders that marked the second age of globalization from the 1990s to the present may fade.

From a health economics perspective, Canada is a highly developed economy with an excellent health care system.  Moreover, in the aftermath of SARS in the early 21st century, there was substantial investment in public health infrastructure so in general it is very well prepared.  However, like other countries, the danger from COVID-19 is that despite the fact that most people have mild symptoms, that small proportion that has more severe illness is large enough to overwhelm the health-care system - particularly the supply of acute care beds and respirators. Here Canada is less prepared than most.  Despite being one of the largest health care spenders in the OECD, it has one of the lowest per capita amounts of hospital beds and physicians in the OECD.  A case in point, Italy has much higher bed and physician numbers per capita than Canada and it is still being overwhelmed.  Canada's hospital system in particular has been at capacity for years and there really is no slack.  A major question that must be answered once COVID-19 is under control is where did all the health spending money go?  How can one be one of the biggest spenders on health in the developed world and yet be at the bottom for indicators such as hospital beds and physician numbers and often only mid-ranked on many health indicators? There should be a reckoning here.

In response to COVID-19, there has been a pretty unprecedented response on both the fiscal and monetary policy side from our federal government and the Bank of Canada.  Ottawa is about to open the spending taps with stimulus and supports, which will undoubtedly include money for the provinces to spend on health.  There will be large deficits and this is a time where deficits are called for though it should also lead to the question as to why deficits have been so large to date in the absence of a downturn or crisis.  Interest rates have dropped dramatically and by mid-April will probably drop even more.  In many respects, this is the right thing to do given the immediate crisis but there are limits to what all of this can accomplish. 

In the end, this downturn is an "animal spirits" driven crisis that is being driven by expectations and uncertainty.  All the king's spending and all the king's horses will not have an effect if people are afraid to venture out and spend. Put another way, you can lead a horse to water but you cannot make it drink if it is afraid to leave the barn.   The biggest stimulus to the economy is confidence that governments and health authorities know what they are doing and are getting the situation under control - a drop in infection rates would be the clearest indicator of this. 

Announcing measures like enhanced screening at airports and points of entry followed by news stories of people getting off planes on international flights in Vancouver or Toronto with nary a query is not a recipe for boosting confidence.  Where are the screening staff at Canadian border entry points making sure everyone is asked questions about where they have been and taking temperatures?  What is being done to boost the supply of beds and respirators?  Getting the situation under control ultimately requires more than spending announcements and moral suasion.  It also requires evidence of effective action.  These are not regular times. Words are not enough.

  

Recession?

There is now a fair amount of talk about recessions and rumours of recessions.  The German Central Bank recently warned that Germany may be about to enter a recession and of course there is all the talk about the inverted yield curve as a signal of recession.  The current disruptions in world trade are a factor in slower growth particularly in China and as talk of recession mounts, one might expect that there will be an effect on investor and consumer expectations that indeed makes a recession a self-fulfilling prophecy.  Indeed, the August 24^thEconomist noted that “The onset of a downturn is as much a matter of mood as of money”.  

The most recent Consensus Forecast Major Economies out of FocusEconomics(September 2019) is not ready to call a recession but notes that: “Growth is set to ease this year, due largely to weaker momentum in developed economies and China.  However, tight labor markets and more accommodative monetary policy should provide some support. A further escalation of trade tensions, particularly between the U.S. and China, is the key downside risk.”  At the same time, the outlook for growth is weaker for Canada and Europe with Canada now expected to see real GDP growth in 2019 of 1.4 percent and the Euro Area 1.1 percent with the U.K. and Japan clocking in at 1.2 and 0.9 percent respectively.  Canada is expected to see continued hits to its exports as well as the effect of pipeline delays and oil production cuts as elements of its slowdown.  The major risk factors for the Canadian economy are U.S.-China trade tensions, volatile energy prices (oil) and continued elevated household debt.  

The irony in all of this gloom is that one of the causes has been the behaviour of U.S. President Donald Trump’s administration in disrupting the world economy via trade disputes.  Interestingly enough, the U.S. is such a large wealthy market that combined with low interest rates and rather large government deficits it is expected to see growth ease but is still expected to come in at about 2.4 percent.  In other words, the rest of the world is being hit much harder that the United States as a result of all the economic disruption.  The ultimate irony is that the United States may escape a recession that its behaviour may indeed have helped trigger it in other parts of the world.