We’re in a recession. Don’t panic

The unemployment rate remains unchanged at 6.8%

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By now, most economists feel confident that the Canadian economy contracted in the second quarter of this year. Following a 0.6% decline in the first, it’s time to accept the fact that we’re—cue the strings from Jaws—in a recession.

By nature, the R-word conjures up a lot of scenarios: job losses, spending cutbacks, falling home prices and stock market corrections, among other things. But so far, no one has seen any of those events occur in a big way. The technical definition of a recession is two consecutive quarters of decline, and even though that’s probably what just happened, “it’s about as mild a recession as you could ever imagine,” says Doug Porter, chief economist at Bank of Montreal. Indeed, for many businesses, the temptation would be to batten down the hatches, freeze hiring and hope it all blows over quickly. But in this case, that might be an overreaction. There’s evidence to suggest this is “recession lite”—a mild sprinkling of gloom rather than a financial downpour. The best strategy for weathering this rough patch? Don’t panic, stay cautious, and carry on as usual.

Let’s get the bad stuff out of the way first. Yes, the economy is still weak. Earlier this month, Statistics Canada revealed abysmal export data for May, showing the country’s merchandise trade deficit widened to $3.3 billion—the second largest in history. Economists expected Canada would benefit from growth in the U.S., but that country had its own problems earlier this year. As such, the anticipated bump in Canada never arrived. The situation prompted the Bank of Canada to cut its key interest rate by a quarter-point to 0.5% in hopes of giving some lift to the economy.

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But the rate cut is just one of many reasons why you might not want to go into retrenchment mode. Slashing interest rates could translate into more favourable lending terms, for starters, and help to stimulate business investment. It’s also important to remember the downturn that has everyone spooked is mostly regionalized. Porter argues that our thinking around what constitutes a recession should more expansive than the simple technical definition. We also need to consider the depth of the slowdown and its dispersion—how broadly based is the decline? “On that one, it falls flat on its face,” he says. “This has been a one-region story.” The pain has mostly been felt in Alberta, where low oil prices are taking a toll on the energy sector.

Elsewhere, the picture is not so dire. Canada created 96,000 jobs during the first half of the year, and the unemployment rate remains unchanged at 6.8%. Job data tends to lag, but according to a report from Scotiabank Economics, “during past periods of sharp oil price declines, we would have seen a jobs hit by now.” Retail sales increased a modest 1.4% during the first four months of the year, and auto sales are at a record high. Consumer confidence rose in June, and the number of bankruptcies hasn’t moved much. None of these figures is consistent with an economy in a serious decline—in fact, it’s the opposite of recessionary behaviour.

The second reason not to panic is that economists are banking on a stronger back half of the year. The U.S. is showing signs of the recovery that was anticipated at the start of 2015, with solid employment growth, home construction and auto sales. This is welcome news for Canadian exporters, tourism operators and any other firm that benefits from a low Canadian dollar. “The oil shock should diminish, and we should see a rebound in growth,” says Derek Burleton, deputy chief economist at TD Bank Financial.

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Perhaps the most important thing to remember is that panicking will only make the situation worse. When consumers pull back on spending and businesses stop investing out of fear, then the economy suffers even more. “Business confidence is not very strong already,” says Pierre Cléroux, chief economist at the Business Development Bank of Canada. “So with all this talk about a recession, that might make business people more worried.”

The idea that a recession can become a self-fulfilling prophecy is more than an abstract concern. Shiu-Sheng Chen, a professor of economics at National Taiwan University, studied the connection between consumer sentiment and recessions. In a paper published earlier this year in the research journal Macroeconomic Dynamics, Chen found that fear does in fact lead to a higher probability of economic downturn and that a lack of confidence can tip even a growing economy into a recession. “That’s why analysts should be extraordinarily careful before they label something a recession,” Porter says.

Let’s just call it an economic feint, then.

This article was originally published on Canadian Business

2 comments on “We’re in a recession. Don’t panic

  1. Ya you still gotta buy gas, food and pay the rent or mortgage, but going out and buying any big ticket items is beyond the reach of most people in Canada unless they go so far into debt that the banks will own them until they retire or beyond and CPP and what ever else they paid into retirement funds over the course of their dismal working experience (I speak from experince) won’t cover what they will need to pay of the banks little alone eat. This year alone if your going to retire you need at least 3 Million in the bank to survive.

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  2. A cynic would say the PM pushed this rate cut via the boc to push off talks of a recession until after the election. This rate cut will do nothing to spur business investment but it will continue to full the fires of ridiculous house prices in Toronto and Vancouver. Meanwhile, Canadians continue to borrow themselves to record levels with debt to disposable income now at 163%.

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