The Bank of Canada building in Ottawa on Sept. 6.Adrian Wyld/The Canadian Press
In a press conference the day after last week’s Bank of Canada interest rate decision, a reporter asked Tiff Macklem, the head of the central bank, if he agreed with some economists’ view that the country may be slipping into recession.
“I don’t think we’re in a recession,” the bank’s Governor said. He pointed to still-historically-low unemployment. He dismissed the contraction in gross domestic product in the second quarter – the statistical event that prompted the question – as only “very slightly negative … essentially zero.”
Could the Governor be right? Possibly. Does he know with any certainty? Absolutely not.
The starts of recessions are notoriously difficult to recognize, and even when you can successfully pinpoint them, it’s usually only in the rear-view mirror. They’re very, very hard to see when you’re standing on the edge of one. Even if you’re the head of a central bank.
Sometimes, ugly-looking economic data get better. Sometimes, they don’t. When they don’t, we look back at those first signs of ugliness as the beginning of the recession – often long after the fact. (For example, the U.S. arbiter of recessions, the National Bureau of Economic Research, concluded that while the global financial crisis of the fall of 2008 did trigger a deep economic slump, the U.S. recession had already begun nine months earlier.)
What we know is that Canada has increasingly ugly economic data. Uglier than Mr. Macklem and his colleagues expected just a couple of months ago. Ugly enough that they halted their interest-rate increases, despite their serious reservations about stubbornly elevated inflation.
That negative GDP reading – a contraction of 0.2 per cent, annualized – was far weaker than the 1.5-per-cent growth that the bank had expected in its mid-July forecasts. And it’s only one of several key economic indicators that took a sharp turn for the worse over the summer.
Retail sales volumes fell two months in a row, and have declined in four of the past five months. Both import and export volumes shrank. So did manufacturing sales.
It’s not just that the numbers are bad; the suddenness of their weakness has a feeling of building negative momentum. Standard and Poor’s Canadian manufacturing Purchasing Managers’ Index, or PMI – a trusted forward-looking indicator of future economic activity – fell to its lowest reading since the midst of the COVID-19 recession in June, 2020. That suggests that this slowdown is not passing but deepening.
There is a pretty good chance then that the Canadian economy could contract again in the third quarter. Some people will tell you that two consecutive quarters of GDP contraction is the definition of a recession; it’s not. It’s not even a “technical recession,” as some people call it, when trying to lend that definition an air of formality. At best, it’s a very loose, informal guideline of a sustained economic downturn that may or may not be a recession.
A true recession not only has a sustained downturn in economic activity, but also is broadly based across the economy, and, typically, includes significant employment losses. Not all two-quarter GDP declines clear that bar. For instance, the C.D. Howe Institute’s Business Cycle Council – the closest thing this country has to an official arbiter of recessions – concluded, three years after the fact, that 2015′s two-consecutive-quarter contraction of GDP did not qualify as a recession.
While Mr. Macklem reiterated that the Bank of Canada expects “low positive growth” over the next few quarters – a forecast that now looks, frankly, optimistic – he did allow that it wouldn’t take much for small positives to turn into small negatives.
Still, he said, “I don’t think a couple of very small negatives are what most people think of when they think of a recession. It’s not a big contraction in output; it’s not a large rise in unemployment.”
Mr. Macklem’s assertion that we don’t, and won’t, suffer a recession seems to balance on that labour market. It certainly does not resemble the type of employment environment of any recession worthy of the name. The unemployment rate, at 5.5 per cent, is near the bottom of its historical range. Employment keeps growing, albeit at a slower pace. Vacancies are still well above historical norms.
Nevertheless, the job market isn’t what it was a few months ago. The unemployment rate has risen by half a percentage point since April, and sits at a 19-month high. The population of available workers has been far outpacing job creation for months now.
Maybe that does imply, as Mr. Macklem argues, that there’s still too much health in the economy to slap the recession label on it, even if it is in the midst of a two-quarter contraction. Because employment entered this slowdown from a position of extraordinary strength, there may be a temptation to view its slowing as merely a healthy moderation, a much-needed cooling of a long-overheated labour market.
Nevertheless, the downturn in the labour market could turn out to be the beginnings of a deeper slump to come. History is littered with recessions that started out as breathers.
Mr. Macklem can continue to believe that economic growth won’t turn meaningfully negative, that this slowdown won’t devolve into recession, that soft landings are real. But Mr. Macklem also believes in data. And the data are telling him that the risk that he’s wrong are growing.