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Posthaste: Canada's recession odds are now down to a 'coin flip' Back to video

Good morning!

Canada’s risk of a recession is growing, but a hard landing isn’t a done deal, according to The Conference Board of Canada’s latest forecast.

Though the economy is slowing down, it is still likely to eke out growth over the next 12 months, avoiding a recession, the Conference Board said in an analysis published this week. That being said, there is still a chance Canada could miss its soft landing. The Conference Board pegs the country as having a 50-50 chance of recession, “down to a coin flip.”

“Although it’s challenging to assess the different risks facing Canada and the global economy, our modelling shows that the probability of Canada entering a recession in the coming year stands at 50 per cent,” Pedro Antunes, chief economist at The Conference Board of Canada, said in a news release.

There’s much to be optimistic about, the Conference Board said in its analysis. For one thing, it’s betting strong consumer spending will help carry the economy through. The board says Canadians’ flush savings accounts, amassed during the pandemic thanks to government supports, are likely to keep getting spent on travel and services in the coming months. Adding to that is a tight labour market that’s sent wages higher, helping to keep consumers buying even as inflation rises.

Meanwhile, high commodity prices will light a fire under Canadian exports. Commodities such as oil, gas, wheat and fertilizer are all seeing price gains, good for exporters’ bottom lines. Higher profits are filtering down to governments as companies pay higher taxes and royalty fees. That sets the country up for success, The Conference Board said, and it’s likely to grow more than its peers.

“Currently, the most probable path for Canada’s economy looks relatively solid,” the report said.

But, there’s still a lot that could go wrong. Inflation remains a major issue, not just in Canada, but globally. Though Canadian inflation slowed to 7.6 per cent in July on a year-over-year basis, after hitting 8.1 per cent in June, the rate is still well outside the Bank of Canada’s comfort zone. That means the central bank will keep raising interest rates for as long as it deems necessary to get inflation back to its two-per-cent target. But rate hikes take time to work their way across the economy, which raises the possibility the Bank of Canada could go overboard on increases, sending the economy into a recession, the Conference Board said.

Rising interest rates could also erode the value of assets such as housing. A severe correction in the housing market would ripple through the economy, pausing construction and leading to mortgage defaults. If home prices drop excessively, consumer spending is also likely to take a hit, putting a pause on economic growth.

Other wild cards that could hit the economy include another severe COVID-19 wave, and an escalation in Russia’s war in the Ukraine, the Conference Board said.

One other recession clue lies in the bond yield curve, which the Conference Board says is a good way of “reading the tea leaves.” Historically, an inverted yield curve indicates a recession, though not all inverted yield curves have led to one. Right now, the yield curve is what the board calls “somewhat flattish.” That indicates markets are pricing in higher interest rates in the short-term, and then a pivot to lower rates after 2023. That model points to a 50 per cent chance of recession, the board said.

But after sifting through all the scenarios and models, the Conference Board says it is sticking to its forecast that Canada will avoid a recession, at least for now.

“We believe the Bank (of Canada) will be successful at engineering a soft landing, but the risk of a recession in Canada remains very palpable,” the report said. “… Our outlook will only hold true if the things that can go wrong, don’t go wrong.”

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ALBERTA IS CALLING The Government of Alberta has launched an ad campaign to get young professionals in Toronto and Vancouver to move to the province in the face of a skilled labour shortage and a low unemployment rate. Premier Jason Kenny is the voice of the campaign, which launched Monday. The campaign plays on the economic anxieties of young workers, while boasting Alberta’s comparative advantages, writes the Financial Post’s Meghan Potkins. Photo by Government of Alberta

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Canada’s year-over-year inflation rate decelerated in July, coming in at 7.6 per cent, compared to 8.1 per cent in June. CPI fell on lower gas prices. But prices still climbed in other areas, including food, which were up 9.9 per cent on the year, compared to 9.4 per cent in June.

Prices seem to be responding to the Bank of Canada’s aggressive interest rate hikes, writes the Financial Post’s editor-in-chief inflation slowed to 7.6 per cent. But inflation is still well above the central bank’s two-per-cent target — and that means continued higher interest rates.

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Four out of the top five North American cities to live are in Canada, with Calgary ranked as No. 1, followed by Vancouver, Toronto and Montreal, according tot the Global Liveability Ranking. Our content partner MoneyWise Canada looks at what makes Canadian cities liveable, despite issues with housing affordability.

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Today’s Posthaste was written by Victoria Wells (@vwells80), with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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