Recession Is on Its Way, But Interest Rates Are Expected to Remain High

The definition of a recession is two consecutive quarters of negative growth. Unfortunately, we are only told we’re in a recession after the fact. Technically, the Canadian economy could be in the early stages of a recession.

This may sound contrary to what we’re hearing about the Canadian economy. In January, the Canadian economy added a whopping 150,000 jobs, crushing the 15,000 estimate economists were expecting.

The big numbers suggest the Canadian economy is running hot, in spite of unprecedented rate hikes from the Bank of Canada to tame stubbornly high inflation. This also raises the question as to whether or not the Bank of Canada is really done hiking rates.

Is Canada Already in a Recession?

In January the central bank increased its policy interest rate by 25 basis points to 4.5%, the highest level since 2007. This represented the eighth consecutive rate hike. Bank of Canada governor Tiff Macklem said the central bank was pausing further rate hikes, which buoyed investor optimism and led many to suggest the central bank would actually start cutting interest rates later this year.

But, Macklem said, the Bank of Canada could still raise rates if it needs to in order to get inflation to the two percent target. It doesn’t look like inflation is falling quick enough for that to happen.

Mark Carney, the former Bank of Canada governor said its unlikely that interest rates will come down this year. If anything, because the economy is so hot, the Bank of Canada could raise interest rates numerous times in 2023.

To cool inflation, monetary policy needs to be tight. If the central bank cuts rates too soon, inflation could spike again. And the Bank of Canada will not want to take that risk. High inflation and additional rate hikes are expected to send the Canadian economy into a recession.

The big question is whether any recession will be severe or mild. And that all depends on who you ask. Historically, a strong labour market and moderating inflation points to a so-called soft landing. That said, the Canadian economy is awash in contradictions, with strong economic data, high household debt, rising prices on virtually everything, and housing imbalances.

A large number of Canadian companies also took on debt during the pandemic when interest rates were effectively at zero. But their debt payments have since skyrocketed on rising interest rates.

As a result, the majority of Canadians think the country will enter a recession in 2023. According to a recent survey released by the Bank of Canada, 70% of Canadian consumers and two-thirds of businesses think a recession is going to happen in the next 12 months. Roughly 30% of businesses attribute the slowdown to rising interest rates and reduced household spending.

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It is expected that the Bank of Canada will need to continue to raise interest rates to bring persistently high inflation back down to the central banks target rate. A move that is expected to tip the Canadian economy into a recession.

How will this affect the stock market? The trading professionals at Learn-To-Trade.com understand that a recession opens the window of opportunity for certain equities. They can show your how to diversify your portfolio, mitigate risk, and teach you proven investing strategies that can help you profit no matter what the broader market is doing.

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