Canadians are gloomy about the likelihood of a recession as interest rates rise sharply and high inflation continues to erode the purchasing power of wages and savings, according to a new poll.
The Nanos Research survey, conducted in late April and early May, found that four in five Canadians were concerned or somewhat concerned about the possibility of a recession. The Bank of Canada is pushing borrowing costs rapidly higher in an effort to cool Canada’s overheated economy and rein in runaway consumer price growth.
The Canadian economy remains strong, unemployment is at historic lows, and the central bank is not projecting a recession in the next two years. Nonetheless, getting inflation back down without triggering a painful housing-market correction and significant contraction in consumer spending will require a “delicate balance,” Bank of Canada Governor Tiff Macklem said in April.
The Nanos poll, commissioned by The Globe and Mail, suggests that a strong majority of Canadians are worried about achieving this “soft landing.” The poll found that 43 per cent of respondents were concerned about a recession, and 38 per cent were somewhat concerned.
“Canadians have just come out of a pandemic, there’s war in Ukraine, the prices of homes are going up, interest rates are going up. It’s like being hammered with risk after risk after risk,” pollster Nik Nanos said in an interview.
“There is a significant amount of concern about going into a recession as a result of inflationary pressures and interest rates and all the other things that are happening right now.”
Most Bay Street economists are not projecting a high probability of a recession in Canada in the next two years. Canadian households have, on average, built up considerable savings over the course of the COVID-19 pandemic, which could support robust consumer spending even as borrowing costs march higher.
Likewise, the global commodity price shock caused by Russia’s invasion of Ukraine actually benefits Canadian commodity exporters and improves the country’s trade balance. This is a key difference from many European countries that import oil and gas from Russia and which are at a higher risk of a downturn.
Nonetheless, the likelihood of a recession in Canada will rise the longer inflation remains elevated, according to René Lalonde, Bank of Nova Scotia’s director of modelling and forecasting. Stubbornly high inflation could force the Bank of Canada to push interest rates higher and faster than currently projected to prevent inflation expectations from drifting away from the bank’s inflation target.
“Higher inflation would lead to a further erosion of real incomes and require higher interest rates, both negatively affecting growth,” Mr. Lalonde wrote in a note to clients near the end of April.
“We estimate that inflation of just over 7 per cent in the second half of this year would lead to a monetary policy-induced recession in the second half of 2023 as the Bank of Canada would need to increase their policy rate to 4.25 per cent to return inflation to its 2-per-cent target.”
The policy rate is currently at 1 per cent. Bank of Canada officials have said they intend to increase the rate to between 2 per cent and 3 per cent relatively quickly, and may move it higher depending on how the economy reacts.
Alongside general concerns about a recession, the Nanos poll found that Canadians are particularly worried about inflation at the grocery store, with nine in 10 respondents saying they were concerned or somewhat concerned about rising food prices.
It also found that close to three in four Canadians are concerned or somewhat concerned about interest rates going up. Notably, younger respondents were more nervous about higher borrowing costs than older respondents.
“For Canadians that are over 55 years of age … the vast majority are in the tail end of whatever borrowing that they probably had to do over the course of their lifetime,” Mr. Nanos said.
“But for a younger person under 35 years of age, they’re facing a situation where just the carrying cost and the interest cost to own a home will be a much greater burden,” he said.
The hybrid phone and online survey of 1,005 people is accurate to within 3.1 percentage points, 19 times out of 20.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.
Mark Rendell