TD Economics breaks down the factors that could trigger a slowdown
By most indications, the current risk of recession is elevated, with TD Economics anticipating a “sizeable” slowdown in consumer spending and job losses in the US and Canada, coupled with an extended period of sub-trend economic growth.
Such a downturn is not likely to arise naturally based on the trends seen in the last few months, but the Bank of Canada’s benchmark interest rate remaining frozen at 4.5% for a prolonged duration would be the most likely catalyst of such a deceleration.
This is despite the marked divergence in the BoC’s language from its counterpart in the United States.
“The central banks’ fastest tightening cycle in the history of inflation targeting will take many months to affect the economy and prices,” TD said in a new analysis. “Unfortunately, there is considerable uncertainty about how these policy lags will play out, so we won’t know if central banks went too far with the policy rate until … well, they do.”
However, a 2023 deceleration could also shape up to be a more modest episode compared to previous full-fledged recessionary periods, TD said.
“Consumers on both side of the border still have sizeable savings that should support consumption,” TD said. “The labour market is also coming from a period of remarkable strength. Even, with some cooling, we think the job market should remain resilient relatively to past economic slowdowns.”
At the same time, even a “gentler” downturn will not be a walk in the park for Canadian households.
“In Canada, a big portion of [consumer savings] will be directed towards covering a rising cost of debt servicing – the reason we have a much softer growth outlook for the Great White North,” TD said.