After a rapid series of interest-rate hikes from the Bank of Canada since early 2022, the economy is now limping along. Canada’s gross domestic product has flatlined in recent months, sparking a discussion of whether the country is entering a recession.
Making that determination is not always easy – and sometimes, it takes years to reach a definitive conclusion. Here’s an explainer that examines our economic malaise.
What is a recession?
A recession is generally defined as a significant decline in economic activity that is felt across business sectors and lasts for at least several months. The unemployment rate typically increases a lot in such situations.
There are, however, no hard-and-fast rules for what qualifies as a recession. The National Bureau of Economic Research in the United States has a committee that considers three criteria – the depth, breadth and duration of a downturn – in making its call.
It is not necessary for all criteria to be clearly met. From peak to trough, the economic downturn in early 2020 – during the first wave of COVID-19 – lasted only two months. However, the decline in economic activity was so severe and broadly felt that the NBER considered it a recession, making it the shortest one in U.S. history.
“Expansion is the normal state of the economy; most recessions are brief,” the NBER explains on its website.
However, the research organization also noted that it can take a while for economies to recover to their previous peaks, as seen after the Great Recession of 2007-09.
Is Canada in a recession?
No. The Canadian economy shrank at an annualized rate of 1.1 per cent in the third quarter of 2023, following an increase of 1.4 per cent in the second quarter. While the economy has stagnated in recent months, it has not recorded consecutive quarters of GDP decline since the Bank of Canada started raising interest rates. Analysts tentatively expect a return to growth in the fourth quarter.
The Canadian economy is also churning out jobs, which is not consistent with a recessionary environment. Over the past six months, employment has risen by roughly 26,000 positions a month.
“The economy isn’t in a recession when it is generating net new jobs,” Toronto-Dominion Bank economists said in a recent report. “The weak GDP prints are partly capturing idiosyncratic factors such as wildfires and strikes rather than recession.”
What is a technical recession?
“Technical recession” is sometimes used to describe when real GDP declines for at least two consecutive quarters. This is, however, not the definition of a recession, and many economists use the term sparingly, if at all.
Last year, the U.S. recorded two consecutive quarters of declining GDP, which was largely driven by a sharp reduction in inventory investments. However, there was strength in other parts of the U.S. economy – notably, the labour market – and growth picked up in subsequent quarters. This blip was not considered a recession.
The term “technical recession,” and its definition, first appeared in a Globe and Mail story in 1989. (There were a handful of earlier mentions in the newspaper, but the term was not explained to readers.)
“The big picture is that the Canadian economy is struggling to grow, yet managing to just keep its head above recession waters,” Bank of Montreal chief economist Doug Porter said in a recent research note.
Who decides if Canada was in a recession?
There is no group or organization that makes an official call that Canada experienced a recession.
However, the C.D. Howe Institute is an arbiter of business cycle dates in Canada, similar to the NBER in the U.S. The think-tank’s business cycle council was established in 2012 and meets annually, or when economic conditions warrant, to make assessments. Its recession dates are widely used by economists.
The topic of recession vs. not-a-recession can be hotly debated. For example, Canada recorded two consecutive quarters of GDP decline in the first half of 2015, resulting from a severe plunge in global oil prices. In July of that year, the C.D. Howe’s council determined that Canada had not entered a recession – a decision that was reiterated several more times in the following years, to account for data revisions.
At the final vote in 2018, the council’s members were still divided on the matter. Those voting “no” to labelling the period a recession pointed to employment growth and the concentrated nature of the GDP decline by industry.
While Statscan produces key economic data, the agency does not determine business cycle dates.
Does Canada need a recession?
Realistically, few people are rooting for a recession, because they’re generally accompanied by loads of financial pain for households and businesses. The unemployment rate tends to rise substantially, leaving people with less income, and companies suffer from fewer sales. Consumer and business insolvencies typically jump, too.
Canada’s economy is slowing after the Bank of Canada raised interest rates at the fastest pace in decades. The central bank is trying to bring inflation back down to its 2-per-cent target, and its primary way of doing so is raising interest rates. When households and businesses allocate more money to debt payments, less is available to spend in other ways. Also, higher interest rates encourage people to save their money and earn higher returns on risk-free investments. Ultimately, this brings supply and demand into better balance, helping to calm inflation.
The trouble is that rate-hike campaigns frequently tip economies into recession. Consumers spend less and businesses pull back on investment, which can spiral into a rough situation. It is rare for central banks to achieve a “soft landing,” in which inflation is brought under control without significant economic damage. That said, many economists think the U.S. will manage to pull off this feat during this rate-hike cycle.
Despite the concerns with a recession, Manulife Investment Management global chief economist Frances Donald argued in October that a mild recession may be preferable to a “soft landing” of prolonged weak growth. In the former scenario, inflation would subside more quickly, allowing central banks to lower interest rates. This, in turn, could set up a stronger economic rebound.
What about per-capita growth?
This is where Canada is undeniably hurting. On a per-person basis, Canada’s economic output has effectively stagnated for years; real GDP per capita is no higher today than in 2017. Many economists point to Canada’s productivity woes as one of the more pressing issues facing the country. Per-capita output is widely considered a proxy for living standards; residents of more productive countries tend to live longer and report being happier.
“GDP per capita would have to expand by an average of 1.5% per year over the next decade to get back to its historical long-term growth rate,” Statscan said in a recent report. “This is a similar pace to that observed in the 1990s, when the population was increasing at a slower pace.”
What is the economic outlook for 2024?
The coming year is looking shaky, given the restrictive interest rates in place to control inflation.
For its fall economic statement, which was released in late November, the federal government surveyed a group of private-sector economists on the outlook. They expect real GDP growth of just 0.4 per cent next year.
The Bank of Canada is projecting slightly stronger growth of 0.9 per cent in 2024, according to the central bank’s most recent Monetary Policy Report, followed by an acceleration to 2.5 per cent in 2025.