Economists have been predicting a recession in Canada and the U.S. for months now. Despite decades-high inflation and an unprecedented interest rate hike policy, a recession has yet to materialize. If anything, the Canadian economy has proven to been more resilient than many expected.
But cracks are beginning to appear. Economic growth is slowing, jobs growth is moderating, stubbornly high inflation has eroded purchasing power and rising interest rates are forcing more and more Canadians to turn to credit to keep their heads above water.
How Is the Canadian Economy Doing?
In the second quarter household debt increased by 4.2% to a record $2.34 trillion. At the same time, increased household debt and rising interest rates have resulted in increased minimum payments, which is putting further strain on household finances. Not surprisingly Canadian gross domestic product (GDP) contracted in the second quarter.
The big question is whether or not we’re heading for a recession, already in one, or will experience a soft landing (avoid a recession)? It all depends on who you ask. More than half (54%) of Canadians expect the country to slip into a recession over the next 12 months. A full 32% believe Canada is already in a recession, while 39% of Canadians say they are in a worse place financially than they were a year ago.
The majority of Canadians may already be pessimistic about the economy but analysts believe the economic bad times are only just getting started. First, it typically takes around 18 months for the impact of interest rate hikes to make their way through the economy. The Bank of Canada began raising interest rates 17 months ago, which means the true impact of those rate hikes are yet to be felt.
Second, personal consumption patters have yet to return to pre-pandemic levels. As a result, its difficult to tell if our spending is a result of current economy conditions or if the data is cyclical or seasonal. Consumer spending is a big economic driver, responsible for 55.9% of Canadian GDP.
How the Bank of Canada responds to this data will determine whether the landing for the Canadian economy is hard or soft. The central bank paused its series of rate hikes in early September but said it would look at the data going forward to see if it needs to take additional steps (rate hikes) to rein in inflation.
Economists think the Bank of Canada will start to cut interest rates in the first half of 2024, but a lot has to fall into place before that happens.
What does that mean for the TSX, Canada’s main stock market? The TSX could approach or hit a new high in late 2024 but Canada’s commodity linked stock index is expected to experience volatility as investors deal with higher borrowing costs and an economic slowdown in China.
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So far, Canada has avoided the long-touted recession, but because monetary policy takes a while to work its way through the economy, we are not out of woods just yet. If anything, the Canadian economy could be set to enter a very dark period. To find out how it could impact North American stocks, speak to the trading experts at Learn-To-Trade.com.
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