Recessions are a natural part of an economy, although predicting when one will happen is not an accurate science. Even without a pandemic causing havoc on economies around the world, a global recession was inevitable. By 2019 we were more than 10 years into a bull market, the longest in financial market history, which had some saying we were soon due. Here’s what you should know about previous recessions in Canada, and what to do now.
Coronavirus and recession
Economic growth had stalled going into the crisis. According to experts, the March economic decline was record setting, but bigger drops are expected to follow because of measures that were implemented to slow the spread of the virus. In April, home sales in Vancouver, Calgary and Toronto took a plunge.
More than a million jobs were lost in March and nearly two million in April. The April Labour Force Survey from Statistics Canada shows that as broad national unemployment rockets up at an unprecedented rate, the Canadian jobs market has split into two; on one side, hourly paid workers of both genders that are feeling most of the economic pain; on the other, salaried workers that are largely insulated from the employment downturn.
Definition and indicators
A recession is a prolonged period of time in which a country’s economic activity declines. This is often measured by two quarters in a row of negative growth. The government is responsible for communicating when the country is in and out of recession, through the Minister of Finance or institutions such as the Bank of Canada. A recession can become a depression depending on its length and severity, though there is no clear definition for the term.
Bond yield curves have set investor nerves on edge because they’re deemed a recession warning when inverted, or when short-term interest rates are higher than those at the longer end.
Some indicators are less common, such as those described by George Athanassakos, a professor of finance and Ben Graham Chair in Value Investing at the University of Western Ontario’s Richard Ivey School of Business.
“The first metric is the well-known seasonal effect in the financial markets, which, in my opinion, has had a better success in forecasting recessions in the past … The second metric has to do with the relationship between the so-called value premium (namely, value stock returns minus growth stock returns) and economic growth going forward,” he writes.
A single province in Canada can experience recession. Alberta was still feeling the effects of the 2015 crash in the oil industry and a mixed recovery.
Alberta’s economic woes were largely left out of the federal election campaign earlier this fall. However, “the prolonged slump in the province’s oil-and-gas sector has left tens of thousands of Albertans unemployed, wreaked havoc with the province’s finances and inflamed a sense of anger and resentment in a region that has a long history as seeing itself as ignored by the rest of the country,” write James Keller and David Parkinson.
The downturn forced a rethinking of Alberta’s dependency on the oil and gas sector. Read 10 ways Alberta has been changed by the recession.
A global financial crisis affected Canada in 2008. Known as the Great Recession, the downturn lasted just seven months in Canada. The U.S. recession lasted 18 months, beginning at the end of 2007 and ending a month after the Canadian downturn in June, 2009.
C.D. Howe senior policy analyst Philippe Bergevin pointed out that the last three Canadian recessions – 2008-2009, 1990-1992 and 1981-1982 — were all Category 4 events. That’s the most severe since the early 1950s. He said recessions are less frequent than in the 1950s, but they’re also more severe.
Before 2008, Canada experienced two other category 4 recessions, in 1990 and 1981. We also experienced a category 1 in 1980. Canada has suffered two Category 5 recessions – in 1929 and 1937.
However, in hindsight, some say the Great Recession was not as bad here as it was for other countries. Canada saw far fewer bankruptcies than in previous recessions. In Canada, no major financial institutions required government bailouts, while in Europe, 20 banks in 10 countries failed. The recession was also shorter than elsewhere. Employment, too, didn’t dip as much as it did around the globe, nor were job losses as severe as they were in previous downturns.
Do’s and don’ts for investors
Investors are getting a crash course in crisis portfolio management. Here are some key investing lessons that have resulted from the pandemic:
- Don’t sell into a panic: A better strategy is to build a diversified portfolio of high-quality stocks and fixed-income investments and – as difficult as it may be – hold them through thick and thin.
- Utilities are your friend: Utilities and other companies with regulated or contracted cash flows, such as power producers and infrastructure stocks, can provide much-needed stability during a crisis.
- Don’t invest in things you don’t understand: One way to avoid nasty surprises is to stick with investments you understand. Shares that were risky before the pandemic are likely hit hard after.
- Don’t forget fixed income: You shouldn’t wait for a pandemic or other crisis to remind you that you have more equity exposure than you can stomach.
Stocks are going to be volatile for some time to come because of uncertainty over how quickly the economy will rebound, so choosing whether to stay in or pull out of the market will be important.
David Rosenberg, founder of independent research firm Rosenberg Research and Associates Inc., writes that before buying into this rally, there are four things every wise investor should know. He also offers five big-picture points for investors to consider at this historic moment in time.
- Will it be a quick or lengthy economic rebound? Charting the possible shape of a challenging recovery
- ‘We can’t fail the re-entry’: Royal Bank chief on the high-stakes of opening economy again
- Survival of the unicorns: As the economy skidded, so did startups. Now they need new ideas, and fast
- How Canada’s crucial data gaps are hindering the coronavirus pandemic response
- In the pandemic, your creditors are not the enemy
- The pandemic has ended the debt shame game
- Let’s restore confidence in Canada’s economy
- We need an exit strategy for the economy
- It’s a ‘she-cession’. Governments must put women first during the recovery
- Take this warning: the postpandemic economic order will be driven by geopolitics
- The best lessons from abroad about reopening our economies are in Europe
- Workers have been left to save capitalism from COVID-19
- Lessons are learned from every pandemic. And every time, we forget them
- Editorial: Thanks to Canadians, we can start talking about reopening the economy
This guide was compiled by Sierra Bein with reports from Rob Carrick, John Heinzl, Rachelle Younglai, Matt Lundy, Patrick Brethour, Michael Babad, George Athanassakos, James Keller, David Parkinson, Todd Hirsch, Barrie McKenna, Tavia Grant, Claire Neary, David Rosenberg and wire services.