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Canada’s economy is in a solid position. Jobs are being added in droves. GDP is expanding by more than almost anyone expected. And yet, if you ask around, a lot of Canadians think the country is either in or about to fall into a recession.
Even forecasters are a bit surprised by the resiliency of Canada’s economy.
“Most economists are a little bit befuddled by the fact that we have seen such a rapid and important rise in interest rates without having a bigger impact on the economy,” said Pedro Antunes, chief economist of the Conference Board of Canada.
The Bank of Canada has raised interest rates by 425 basis points — or 4.25 percentage points — since this time last year. Those rate hikes were aimed at slowing the economy; the theory goes that if you slow the economy enough, people will buy less stuff. As they buy less stuff, prices should fall.
Inflation peaked at 8.1 per cent in June. The year-over-year rate of inflation has steadily decreased since then. Economists said all those rate hikes would slow the economy considerably.
While that keeps not happening, the recession forecast refuses to go away entirely — in part because we don’t know for sure what inflation will do next.
The Canadian job market has once again outperformed expectations, adding jobs for a seventh month in a row and pushing up wages. The economy added 35,000 jobs in March, almost three times more than expected.
Jobs, GDP growing
Even the Bank of Canada said the fight to get inflation under control would not be easy or painless.
“The unemployment rate is going to go up,” Bank of Canada governor Tiff Macklem said in a CBC interview last fall. “We’re not talking about high unemployment rates that we’ve seen in past recessions, but it is going to go up.”
Since then, Canada has added more than 270,000 jobs. The unemployment rate has remained at or near historic lows.
Wages are rising. The total hours worked has increased.
All while GDP expanded by considerably more than expected in January, and Statistics Canada’s preliminary estimate shows another healthy gain in February.
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Derek Holt, the vice-president of Scotiabank Economics wrote a note to clients on Thursday titled “Canada’s Jobs Juggernaut Defies the Bears.”
“All totalled we’re likely looking at GDP growth of at least three to four per cent,” in the first quarter of this year compared to the one before, wrote Holt.
That’s not the stuff of a recession, and much higher than the 0.5 per cent growth the Bank of Canada forecast.
And yet, both consumers and businesses surveyed by the Bank of Canada show a sweeping amount of pessimism about the state of the economy. In two key surveys released last week, the central bank found people are bracing for a downturn.
“Most respondents expect a recession in the next 12 months,” wrote the Bank of Canada. “That said, people are very uncertain about the economic outlook. This economic uncertainty is pushing some consumers to reduce their spending growth and build up their savings.”
Population growth
So, what’s behind this unexpected surge in growth?
One key thing economists point to is the historic levels of immigration Canada saw in 2022. Canada added more than a million people to its population last year.
That means a million new people filling long-standing job vacancies, and a million more people buying stuff and growing the total pool of economic activity. So much so that the surge in immigration has economists like BMO’s Doug Porter saying they’ve needed to revisit what they consider a “normal” level of job creation.
“The bar for what we would consider a normal month in Canadian employment has certainly risen,” he told CBC News. “Economists used to think 15,000 or so was a normal month, I think normal is now 25,000. So in other words you need 25,000 new jobs just to keep the unemployment rate from rising.”
But for all the resiliency, it’s not like the risks to the economy have suddenly disappeared.
Canada’s population rose by a record one million people in 2022, driven almost entirely by a surge in immigrants and temporary residents. Such growth can lead to a richer and more diverse economy, says Matti Siemiatycki, director of the Infrastructure Institute at the University of Toronto.
The inflation question
The Bank of Canada may have temporarily hit the pause button on more interest rate hikes, but that’s largely because it has not yet seen the full impact of the hikes.
“I think we have not yet felt the full brunt of higher rates,” said Antunes. “Most households in Canada still take on five-year terms on their mortgages and so that takes some time before we see the full impact of that.”
Antunes says the impact will be felt more and more as those mortgage holders are forced to renew at much higher rates.
At the end of the day, the biggest and most important feature on the economic landscape remains inflation. If the year-over-year rate continues to decelerate, all that surprising resilience isn’t much more than a footnote.
But CIBC’s chief economist Avery Shenfeld says if the rate of inflation remains high, the Bank of Canada will have to make some tough decisions.
“In this topsy-turvy world, good news for the economy isn’t really what we’re looking for,” Shenfeld wrote in a note to clients.
“If the slowdown that central banks are aiming at fails to materialize, that could force yet more rate hikes, and risk a harder landing,” he said.
A hard landing is economist-speak for a recession, with jobs lost and the economy shrinking. As we’ve been expecting for months.
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