Written by 9:09 PM Economic news • 2 Comments Views: 6,948

Is Canada in recession? Economists weigh in on the economic slowdown

Despite rising unemployment and a slowdown in per-capita GDP growth, most economists are not forecasting a major downturn for the Canadian economy

Canada recession risk

While Canada’s economic growth may face challenges in the coming years, most economists don’t foresee a recession on the immediate horizon.

Even with concerns about a potential downturn, experts are optimistic, forecasting a robust rebound starting in 2025 and beyond.

While there’s no official measure of a recession, it’s generally understood as two or more consecutive quarters of economic contraction.

Canadian unemployment rate

According to one measure, Canada may already be in recession. Since 2022, output per capita has declined in six of the last seven quarters. Unemployment has also risen by a full percentage point from the previous year, crossing the ‘Sahm rule’ threshold, which is often used to signal the early stages of a recession.

However, the criteria for determining a recession in Canada differ from those used in the U.S., where the Sahm rule was originally developed.

According to Royce Mendes and Tiago Figueiredo at Desjardins, the threshold for the Sahm rule in Canada is approximately 1.1%, compared to the 0.5% often referenced in the U.S.

The question of whether Canada is in a recession largely comes down to the metrics used, according to Michael Davenport, economist at Oxford Economics.

Oxford Economics’ latest report shows raw GDP growth at 0.5%—a modest increase, but an increase nonetheless. Davenport also notes that Canada’s economy is undeniably in a rough patch, with unemployment expected to hit 6.6% for the year and private consumption projected to rise by only 1.7%, a sharp decline from the 5.1% increase seen in 2022.

“Whether or not the current period we’re in is actually characterized as a recession, when we look back on it, we do think it will be defined by weak economic activity, a rising unemployment, and, overall, just a mediocre performance of the Canadian economy,” Davenport told Canadian Mortgage Trends in an interview.

According to Oxford Economics, the Canadian economy “likely grew modestly” in the second quarter of 2024, but the firm anticipates a moderate slowdown in Q3 as consumer spending contracts. Oxford Economics, along with economists from BMO, TD, and Desjardins, attributes Canada’s recent economic underperformance to several factors, including the post-pandemic population surge and ongoing mortgage renewals.

Mixed signals

How can Canada experience both rising output per person and falling GDP per capita simultaneously? Marc Desormeaux of Desjardins Economics notes that falling GDP per capita is “a streak not previously seen outside of a recession.” However, Davenport explains that this seeming contradiction is due to a recent surge in immigration, which can drive up total output per person while pushing down GDP per capita.

Canada has long relied on immigration to support its economy. However, between 2022 and 2023, the country’s population surged by approximately one million people annually, with a significant portion of that growth coming from both permanent and temporary newcomers. This was unprecedented, Davenport says, and contributed to economic growth throughout the last two years.

As Davenport explains, when GDP growth is distributed across a rapidly expanding workforce, it results in a lower per-person output estimate.

“When you combine those two factors — one being slowing GDP growth from the pandemic rebound and this rapid surge in population growth — that’s really what’s caused this descent in GDP per capita,” he says.

Then there’s the issue of unemployment. After peaking at a record 13.7% in early 2020, it dropped significantly over the next two years, reaching a low of just 4.9% in July 2022.

However, unemployment is on the rise again. By June 2024, it had reached 6.4%. Youth unemployment, particularly among those aged 15 to 24, has surged to nearly 14%, marking one of the worst rates in decades. For immigrants who have lived in Canada for less than five years, the unemployment rate is around 12%, according to Desjardins.

“Outside of the pandemic, the jobless rate for new entrants hasn’t been this high since the oil price crash in 2014–15 pummeled Canada’s labour market,” Figueiredo and Mendes wrote for Desjardins. “Conversely, the unemployment rate remains very low for residents born here and those who immigrated more than ten years ago.”

They note that this increase in unemployment isn’t a result of widespread company closures but rather a more gradual rise in joblessness. “The absence of mass layoffs has contributed to a steady increase in the unemployment rate, unlike the sharp spikes seen during recessionary periods,” they wrote.

Oxford Economics forecasts that Canada’s unemployment rate will climb to 6.9% by 2025, before easing to around 6% by 2027.

Growth post-2025?

Canada’s economy is projected to slow through the remainder of 2024 and into 2025, driven by reduced consumer spending. Davenport says this is due to higher-than-expected mortgage rates. In 2025, millions of Canadians will face mortgage renewals at significantly higher rates than those they secured in 2019 and 2020, despite the Bank of Canada’s recent rate cuts. “That’s essentially a large drag on the overall economy,” Davenport says.

Meanwhile, businesses are anticipated to reduce the speed at which they build up new inventory. Davenport notes that inventory levels have surged rapidly since global supply chain issues began to ease in early 2023.

“We just think that inventory growth is going to slow to a more normal pace, rather than continue to rise at such a strong pace,” he says.

Add to that lower-than-expected investment, and the result is a fairly sluggish fall 2024 through summer of 2025. But most economists expect rate cuts by the Bank of Canada could kick-start the economy. Oxford Economics is expecting two more rate cuts of 25 basis points (or 0.25 percentage points) by the end of October. In late 2025, it expects Canada’s benchmark interest rate to be around 2.75%.

Other forecasts, including those from TD and CIBC, see even more aggressive Bank of Canada rate cuts both this year and next.

While Canada might not be facing a full-blown recession, there could be some positive developments for homeowners who can manage a down payment or stay current on their mortgages. Falling interest rates, coupled with a potential increase in distressed home sales, might create more opportunities for financially prepared buyers to enter the market.

“We think that’s going to cause about a 5% drop in Canadian average home prices from around where they were in the second quarter to the fourth quarter of this year,” Davenport says.

Visited 6,948 times, 5 visit(s) today

Last modified: August 21, 2024

Brennan Doherty is a Toronto-based writer. His work has appeared in a multitude of publications, including the Toronto Star, TVO, Maisonneuve, VICE World News, MoneySense, Future of Good and Strategy Online.

Close