Analysis | From inflation to recession?

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Analysis | From inflation to the recession?

Many people say they have reduced their expenses due to the rising cost of living.

The rising cost of living is the primary concern of Quebecers, at the dawn of the electoral campaign which begins Sunday in Quebec. At the same time, signs of an economic slowdown are visible. A political formation that ignores these issues could pay dearly the price. After inflation, will Quebec plunge into recession?

The big question these days is whether inflation and central bank hikes in interest rates will cause the economy to contract.

Up to 55% of respondents in a survey by the Quebec Retail Trade Council (CQCD) expect the onset of a recession in Quebec by the end of 2022. According to the CQCD Barometer, nearly 7 out of 10 believe consumer prices will continue to rise in the next 12 months.

This Barometer is based on a survey conducted in June among 1,000 consumers, in collaboration with the firm Orama Marketing.

According to another survey, this one conducted online by Angus Reid , from August 8 to 10, among 2,279 Canadians, 56% of households say they can't keep up financially with inflation. This rate is 41% in Quebec. Up to 80% of Canadian households, and 70% of Quebec households, say they are reducing their spending due to the rising cost of living.

Quebec is heading for a sharp slowdown in real GDP growth according to Desjardins, by the end of the year. So wrote economist Hélène Bégin in a note published on July 29, saying that the Desjardins Leading Index shows that there are signs of the Quebec economy running out of steam.

Desjardins economists estimate that the probability of a recession in Canada and the United States is around 50% in 2023. They even estimate that the possibilities are greater in Canada, due to the importance of the energy sector. in gross domestic product (GDP).

Combined with weaker quarterly real GDP growth forecast in Canada in 2023, we could enter a recession more easily than in the United States, wrote economist Randall Bartlett, the July 14th. The Canadian economy is also much more sensitive to interest rate increases than that south of the border due to high levels of household debt.

Quebec Finance Minister Eric Girard puts the risk of a recession in Quebec at 35%, while the CEO of the Caisse de depot et placement du Quebec, Charles Émond, went up to 40% in the interview which he granted us on August 17.

We're in a perfect storm, says economist David Dupuis, interviewed for episode 139 of the podcast Question of interest, on the Ohdio app. With inflation already hovering at over 5% at the start of the year, the outbreak of war in Ukraine amplified the rise in the cost of living with a surge in energy and food prices.

It's been years since we've seen unemployment rates at the levels they are now, which means that there is a lot of room for salary negotiation on the employee side […] And the danger, in a context like this, that the famous wage-price spiral sets in becomes important. We have to control inflation expectations and if we can't do that, the rate hikes needed to slow economic activity will be much larger than otherwise. And they will, at the limit, push the economy towards a slowdown, which could be more marked than desired… what we would call a recession!

Economy zone< /em> features the special From Inflation to Recession?Thursday at 5:55 p.m. EDT, rebroadcast Saturday at 6:30 p.m. EDT, on ICI RDI.

Very clear signal that the economy is slowing down and that a recession is possible, the big Canadian banks have been announcing for a few days lower profits because they have to put money aside, in advance, in case of bad debts.

National Bank CEO Laurent Ferreira believes that the risk of recession has increased in Canada in recent weeks. However, he expects a slowdown in growth and not a contraction, which still leads the bank to increase its reserves for bad debts.

The National has set aside $57 million in Q3 to prepare for possible credit losses.

At RBC, a moderate recession is predicted in 2023 in Canada, the United States and the euro zone, with rising unemployment. Royal is setting aside $340 million in bad debt provisions.

Banking stocks are down 10-12% for six months.

The National Bureau of Economic Research in the United States is the entity that defines recessions on American soil. The organization bases its analysis on a series of data to determine whether or not there is a recession, and how long the cycle lasts.

A recession requires, for the body, a significant decline in economic activity that extends throughout the economy and lasts at least a few months. The Bureau makes its assessment based on three criteria: the depth of the downturn, its extent and its duration. slowdown in the job market, weaker growth in household incomes, a change in consumption habits and greater caution on the part of households.

For now, in Canada, we are starting to see that consumption is slowing down. Retail sales rose 1.1% across the country in June, but only 0.4% in Quebec. The growth is mainly due to inflation, that is, the fact that prices are higher.

According to Statistics Canada, the first estimates for the month in July suggest a drop in retail sales of about 2% across the country.

Consumption represents more than 60% of the economy and the consumer confidence index has dropped significantly since October 2021 in Canada.

Furthermore, job creation stagnated since last winter, with a negative trend. From May to July, the number of jobs fell by 74,000 in the country. In Quebec, this decline began a little earlier: from March to July, the number of jobs fell by 53,000 in Quebec. It's not much at this point, but the trend is down.

All that to say that a recession is not inevitable, but that it would be certainly unwise to downplay or ignore the possibility of a contraction in the economy. If politicians forget it, it's a safe bet that citizens, worried about rising gas and food prices, will remember!

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