Despite reassurances from the Trudeau government that the Canadian economy is on the road to recovery, economists are warning that a recession is coming to Canada.
A culmination of rising interest rates, rising inflation, Covid lockdowns in China, sanctions on Russian energy and a contracting US economy is all leading to a Canadian economy that is on the brink of recession.
Despite the best efforts from the Bank of Canada (BoC) to combat inflation by hiking up interest rates to bring down consumer demand, inflation has consistently risen, reaching 7.7% in June 2022.
As the BoC continues to hike rates, the sale of homes in May 2022 fell by 9%, contributing to a 0.1% contraction of GDP.
The effect of a slowing housing market is likely to take a bigger toll on the Canadian economy than on the American economy, as Canada is more than twice as much reliant on the housing market for economic growth compared to the US.
Macquarie Group economist David Doyle says that “When [Canada] has recessions, the lion’s share of the weakness in gross domestic product tends to come from residential investment.”
The housing market dragging Canada’s GDP down could lead to a much more severe recession, causing unemployment to rise higher and the recession to drag on longer.
If a recession does not occur, a period of ‘stagflation’ could take hold.
Stagflation – characterized by a period of stagnant economic growth with high inflation – can take hold if the BoC fails to bring down inflation despite the interest rate hikes.
If the BoC succeeds in its effort to flatline economic growth but fails to bring down inflation, this would be characteristic of a period of stagflation.
China’s policy of eliminating Covid-19 completely has driven the country into mass lockdowns, which is contributing to not only a Chinese economic contraction but is also stunting economic growth worldwide.
China is Canada’s second-largest trading partner, and therefore supply chain issues occurring in China have ripple effects, especially concerning Canadian imports.
Chinese economist Si Ling said, “Major exporters to China could be impacted, which will slow the flow of global supply chains through China and drag down global economic growth.”
The cost of living is not likely to improve for Canadians anytime soon.
The BoC will more than likely increase the interest rate by 75 points the next time the board meets, mirroring the US’ FED interest rate increase.
Despite reassurances from Finance Minister Chrystia Freeland that the government is focused on “fiscal restraint,” the Trudeau government continues to spend at an astronomical rate, causing the economy to overheat.
In June, a Scotiabank investors report decried the Trudeau government’s lack of action in reducing government spending, forcing the BoC to hike interest rates. Scotiabank economists argue that the burden of lowering inflation is falling on the private sector as the federal government continues to spend at high levels.