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Canada’s economy is about as hot as it could be at the moment.

Employment is nearly a half-million workers above where it was before the COVID-19 pandemic, and the unemployment rate has tumbled to a nearly 50-year low. Real gross domestic product surpassed its prepandemic level about five months ago, and economists’ consensus forecasts see it growing by about 4 per cent in 2022 – roughly double the pace of economic growth prior to the crisis.

Last week, the Bank of Canada declared the economy “is moving into excess demand” – meaning that the appetite to consume is so strong that it is exceeding the country’s productive capacity.

So, why do so many people suddenly have recession on their minds?

Data from Google show that web searches for the term “recession” spiked in both Canada and the United States in the past week. Interest in the topic in Canada on the popular search engine is at its highest level since the spring of 2020 – when the pandemic was sinking the economy into a deep recession.

In nearly two decades of Google data, the only times “recession” searches have been more prevalent than they are right now have been either just before or during contractions in the Canadian economy (2008-2009, 2015 and 2020).

It should be noted that the search rates in those instances were substantially higher than they are today. Nevertheless, this new surge in interest in the topic indicates, at very least, that the general public has become unusually concerned about the risk of a recession, even in the midst of what is, by many measures, an economic boom.

The big trigger appears to be the rapid rise of interest-rate expectations, as central banks get serious about fighting inflation. Those concerns came to a head last week, as the Bank of Canada took the unusual step of raising its key rate by 50 basis points (0.5 percentage points), the first time in more than two decades that it has made such a large rate increase. Normally, the bank’s rate changes are confined to 25 basis points at a time.

The message from the bank was that rates will have to climb faster than previously thought – and, perhaps, higher – to bring inflation under control.

It’s a similar story in the United States, where the Federal Reserve raised its key rate in March and has strongly signalled an accelerated pace of increases to come – including, in all likelihood, its own 50-basis-point hike at its next meeting in early May.

For those familiar with economic history, it’s an unsettling prospect. The beginning of Fed rate-hiking cycles have, more often than not, proven a precursor to a recession. The trend is strongest in cycles in which the Fed raises rates quickly and aggressively to shut down inflation.

Most consumers in the U.S. and Canada probably don’t know about that historical relationship. But they do have a sense that central banks are preparing to slam the brakes pretty hard on the economy in order to put out the raging inflation fire. And they have an instinctive nervousness about what steep interest-rate increases will do to their finances.

“I think there is a gnawing realization that after dramatically over-easing, the central banks are going to end up overtightening,” said veteran Canadian economist David Rosenberg, who has been warning about the risk of a central-bank-induced recession for months now. (Mr. Rosenberg was among the first prominent economists to see the global financial crisis and Great Recession of 2008-2009 coming, when he was chief North American economist at Wall Street giant Merrill Lynch.)

In Canada, the overheated housing market, and the big mortgage debts that have come with it, magnify the risks associated with an aggressive tightening of rates. The Canadian economy has become highly exposed to the housing sector and to consumer debt over the past several years, and economists say that could make it hypersensitive to rate increases.

On the other hand, the economy enters this rate-hiking phase with remarkable strength. Employment is extraordinarily strong, and wages are rising. The war in Ukraine, while both a human tragedy and a source of global economic risk, has sharply increased commodity prices, lifting income from Canada’s substantial resource sector. Households collectively have built up huge stockpiles of savings during the pandemic, providing pent-up fuel to sustain consumer demand.

“The economy can handle higher interest rates,” Bank of Canada Governor Tiff Macklem assured Canadians after last week’s rate-hike announcement.

But the Google search data suggest that Canadians are getting nervous. That in itself is a recession risk.

If that concern translates into a serious erosion in consumer confidence, it could manifest in a retreat in consumption, which could, in turn, derail business investment and hiring. That’s pretty much what an economic downturn looks like.

This is why consumer sentiment is such an important economic indicator – and the Google numbers are, in effect, an early indicator of consumer sentiment. The more “recession” becomes a part of the public conversation, the bigger the danger that those fears will mutate into self-fulfilling prophecy.

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