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With central banks aggressively raising interest rates and the word “recession” suddenly on a lot of lips, everyone is nervously looking at every statistical release for signs that the economy has started to dip.

You don’t need to look all that hard. It has. Frankly, it has run out of room to go any other direction.

Recent data suggest that the wave of economic recovery from the COVID-19 recession has already crested. Fast-rising interest rates may be applying the brakes on an economy that has begun to decelerate anyway.

On the other hand, if central bank rate hikes signal that the party is coming to an end, they do so at a time when the punch bowl is full. It’s a long way to go before a slowdown from the peak of an economic cycle starts to look like a recession.

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Consider last Friday’s employment report from Statistics Canada. Jobs grew a puny 15,000 in April, which, given margins of error, amounts to a statistical goose egg. This marked the first month since the recovery from the recession began that the labour market truly stalled, without any new wave of the virus or increase of public-health restrictions to blame.

Economists viewed the number not so much with alarm as resignation. The unemployment rate is the lowest on modern record, and businesses have been widely reporting acute labour shortages for months. The supply of available labour has effectively run dry.

Meanwhile, Canada’s housing market has taken a decided turn, as the Bank of Canada’s rate hikes have had an almost instant numbing effect. National home sales fell more than 5 per cent in March from the previous month, according to the Canadian Real Estate Association; preliminary figures for April indicate 20-per-cent-plus slumps in the long-booming major markets of Toronto and Vancouver.

The speed and severity of the sales drop suggest that the country’s housing market was ripe for a downturn, just waiting for a catalyst. With the Bank of Canada expected to raise rates considerably higher still over the next few months, housing could continue to slow for a while.

In both cases, these elements of the economy were giving off clear signs of being strained to their limits. A slowdown is not only inevitable, but healthy, and levels of activity remain elevated even with the pullback. Nevertheless, a slowing of hiring, and of residential real estate, implies deceleration of two of the most important drivers of Canada’s growth during the recovery from the COVID-19 recession. Their retreat is a pretty good indication that the economy, having already reached the limits of its capacity, is headed into the downside of the economic cycle.

In the United States, meanwhile, some economists argue that the descent was under way long before the Fed jumped into rate increases with both feet last week. The U.S. government recently estimated that the economy contracted at an annualized pace of 1.4 per cent in the first quarter of 2022. Economist David Rosenberg, of Toronto-based Rosenberg Research and Associates Inc., points out that since October, when U.S. real GDP peaked, the economy is down at a 2.4-per-cent annualized rate.

Sébastien McMahon, senior economist at Industrial Alliance Investment Management, says there is mounting evidence that high inflation is eroding U.S. consumer demand.

“Inflation is now pushing real (inflation adjusted) U.S. disposable income on a downward trajectory, meaning that purchasing power is contracting,” he said in an e-mail last week.

The economic view for Canada looks somewhat brighter, as the war in Ukraine has further elevated already high prices for oil and commodities, giving Canada’s substantial resource sector a lift. Nevertheless, with the United States accounting for three-quarters of Canadian exports, Canada’s economy is heavily exposed to any U.S. slowdown. At any rate, Canada’s exports to the U.S. soared 25 per cent over the past two quarters – suggesting that the export sector may be another part of the economy poised for a slowing of unsustainable growth.

The economy has had a great run – indeed, a remarkable run, given the severity and uncertainty of the COVID-19 recession – but we’re looking over the edge of the peak. From here, the risks to the downside are not only unavoidable, they’re now visible. That came into focus in last week’s sell-off in the stock market – which, as portfolios shrink in this adjustment of thinking, presents yet another drag on demand and growth.

Any time the economic cycle turns downward, there’s some danger that it ends in recession. That’s exacerbated when monetary policy is leaning hard into the descent, as it is now.

But let’s remember – and this is the Bank of Canada’s key argument – this isn’t an economic shock up-ending an economy in mid-expansion. We really are going into this from the top, from a position of considerable strength. The economy can decline a lot from this point while still maintaining healthy levels of activity, employment and growth. That’s certainly the hope, as the bank devotes its attention to shutting down inflation.

The one factor that could carry both the Canadian and U.S. economies through this is the huge glut of household savings that have built up over the pandemic. Those savings could sustain consumer demand even as employment gains wane, borrowing costs rise and inflation nibbles away at real incomes.

But the key drivers that have propelled consumption up until now – booming employment, surging housing wealth, rising stock markets – look unlikely to do so for much longer, if at all. Without them, inflation and rising borrowing costs will be pretty high hurdles for consumer demand to clear, even with those savings to draw upon.

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