Varun Kohli November 14, 2023 No Comments

The Canadian economy is facing some challenges, and recent data from Statistics Canada suggests that we might be entering a technical recession. We’ve been writing about the possibility of this for years – literally. Tembo’s position was always consistent. With interest rates having been so low for so long, the moment the Bank of Canada chose to raise rates would spell the potential for an economic slowdown. Canadians instinctively understand this reality. We benefitted from low rates, and loose monetary policy gave us economic flexibility in tough times (the 2007-8 recession, COVID, etc.) But many of us knew it couldn’t last forever, and that eventually, we’d have to adjust.

This article will explain what the latest Statscan GDP data means and why it’s happening. We’ll use simple language to break down the situation for you.

A technical recession happens when the economy experiences two consecutive quarters of negative growth. It’s a sign that things are not going well in terms of economic activity. There’s no need to be alarmed yet, it’s important to note that the declines in the economy are still relatively small.

The Current Economic Situation:

According to the latest data, the Canadian economy remains relatively subdued. The latest jobs report released on November 3rd showed very modest overall national job growth, at some 18,000 new jobs created. Ontario lost jobs overall, and manufacturing employment in Canada’s largest province also declined. The preliminary GDP estimates for the third quarter suggests a small national contraction, which could mean a technical recession. We’re not 100% sure that this is the case yet, it’s just an estimate at this point of time.

Why is This Happening?

One of the major factors contributing to this economic slowdown is the rise in interest rates. When interest rates go up, it can discourage people from spending money, especially on high-cost assets. Higher interest rates mean that borrowing money becomes more expensive. Credit card expenses rise, people pull back on eating out, they invest less, they generally will save more and focus on paying down their debt. For those reading who have multiple debt products and lines of credit, consider a Tembo debt consolidation loan to turn several debt payments into one, and many debt products into one centralized, convenient loan. Clearing high interest debt products could raise your credit score.

Andrew Grantham, an expert from CIBC, believes that the Bank of Canada is unlikely to raise interest rates further because of the weak economy. This can be seen as a sign that policymakers are trying to prevent the situation from getting worse. Tembo agrees with this sentiment, and it’s our hope that the Bank of Canada does not continue to raise rates – the economy has slowed considerably, and inflationary pressures are stabilizing (but still not idea, obviously).

What to Expect:

If a recession does happen, it’s usually accompanied by layoffs and higher unemployment rates. However, this time it’s a bit different. Some sectors are experiencing layoffs, while others are trying to hire more people. This means that the quality of employment might change, with higher-paying industries letting people go while lower-paying sectors are still looking for workers. There are still a huge number of job vacancies across the country.

The unemployment rate, at 6.2%, is historically low. High immigration targets by the federal government show a desire to continue plugging those skills gaps and job vacancies with new workers from abroad, as our capacity to train new talent is insufficient. So, the labour market remains relatively strong and healthy, for the time being. There aren’t mass layoffs. Employers are generally looking for workers, not firing them. Not only that, but wages are increasing. Wage growth in October was at 5%. While this is inflationary, it shows how robust the employment situation is.

The Impact of Natural Disasters:

We should also keep the impact of natural disasters on the economy in mind. Forest fires and drought conditions are causing supply disruptions, which can lead to inflation. So, even though these events are slowing down economic activity, they might actually contribute to higher prices for goods and services.

Consumer Spending Affected:

One clear effect of rising interest rates is that consumer spending is taking a hit. Sectors like retail are feeling the pinch, even as the population continues to grow. This suggests that higher interest rates are influencing how people spend their money. Ontario lost almost 30,000 retail and wholesale trade jobs in October.

What’s Next:

The Bank of Canada has decided to keep the key interest rate steady to help the economy. The expectation is that high interest rates will continue to slow down economic growth, especially as more households renew their mortgages at these higher rates.

The Canadian economy is facing some challenges, and the possibility of a technical recession is a concern. Rising interest rates and other factors like natural disasters are contributing to this situation. It’s important to keep an eye on these developments and stay informed about the economy, as it can affect our daily lives, from job opportunities to the cost of living. The next GDP figures will confirm whether the downward estimates panned out. If we do enter an official, technical recession, it will be interesting to see what policies and direction cash strapped governments across Canada take.

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