Macroeconomic Headwinds Point to an Unavoidable Recession

Canada’s inflation rate cooled in July to 7.6%, down from its peak of 8.1% in June. This has led some to believe that we will avoid a recession. But inflation is still unmanageably higher, at its third highest point over the last four decades and up more than double from the 3.7% mark from a year ago.

Sky high inflation forced the Bank of Canada to hike its key overnight lending rate by 75 basis points, moving the policy rate to 3.25% from 2.5%. Since March, the central bank has raised its policy rate by 300 basis points, the fasted pace since the mid-1990s, to crush inflation and bring it down to its mandated target of two percent. Chances are good the Bank of Canada will raise its rates again when it next meets on October 26. A four percent rate is possible.

Is Canada Heading for a Recession?

The sharp increase in interest rates is expected to slow economic growth in the back half of 2022, with a recession needed to bring inflation back down to two percent. A recession may be necessary to tackle inflation, but it could lead to job losses, pay cuts, and a drop in the stock market. In early 2020, the TSX fell more than 35% before erasing all of those losses in January 2021. During the 2008 financial crisis, the TSX also fell by around 35%. It took more than two years for the index to recover.

Even executives on Wall Street believe the likelihood of a recession is all but unavoidable. During their second-quarter earnings calls, the highest number of S&P 500 companies (240) in 10 years mentioned the term “recession.” This is well above the five-year average of 52. The previous record was during the first quarter of 2021, which was the start of the pandemic, when 212 companies cited recessionary concerns.  

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Inflation is still at decades highs, which means the next time the Bank of Canada meets in October, it has virtually no choice except to raise interest rates, which could trigger a recession. The trading experts at Learn-To-Trade.com can teach you how to prepare your portfolio for a recession and profit no matter what the broader markets are doing.

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