Is a recession coming to Canada?

BMO economist weighs in

Is a recession coming to Canada?

While Canada has indeed experienced some economic slowdown in recent months, the indicators of an actual recession have yet to appear, according to Robert Kavcic of BMO Economics.

“Another round of soft Canadian GDP data [last] week is rekindling the recession chatter,” Kavcic said. “The economy contracted slightly in Q2, and the early read on Q3 growth is not looking good either, suggesting that past interest rate hikes are now really biting.”

Kavcic said that due to the gap between a hike and its impact on the economy, the current numbers “would suggest we’re just now seeing the full effect of last summer’s aggressive moves.”

However, the shallowness of the decline does not seem to conform to the standard definition of a recession.

“The economy contracted at a 0.2% annualized clip in Q2, and the early read on Q3 is flat-to-very slightly negative,” Kavcic outlined. “Even the weak 2022 Q4 performance was a modest 0.1% annualized decline. Suffice it to say that the economy has clearly stalled, but these declines are not yet the stuff that would mark a textbook recession.”

Decline has not lasted long enough yet

Kavcic added that while two quarters of negative growth represent the clearest indication of a recession, “we haven’t quite seen that yet in the quarterly data, although the early Q3 read suggests we’re at risk.”

“Monthly GDP has completely stalled for seven months, with growth over that period through September effectively flat,” he explained. “So, the economy has certainly been struggling for about two quarters, but combined with the lack of depth in declines, we’re again probably not there yet.”

Still, Kavcic acknowledged that some economic sectors “are clearly underwater” at present, “and it might already at least feel like recession for some… Suffice it to say that there are cracks showing in the economy now under the weight of 475 bps of tightening.”