The bad economic times have only just started

The bad economic times have only just started

Frances Donald, the global chief economist and strategist at Manulife Investment Management, says we should spend less time debating what to call this downturn and focus more on how it will impact people.

“Even if there are technical factors that avert two quarters of negative GDP, this economy will feel like a recession to most Canadians, for the next year,” she told CBC News.
How bad are things, really?

Experts say there are several factors masking just how bad the economy really is. The first is that it usually takes about a year and a half for the full impact of interest rate changes to get absorbed into the economy.

The Bank of Canada began its rate-hiking cycle 17 months ago. That means the impact of the fastest, most aggressive interest rate hiking cycle in Canadian history is still to come.

Second, consumption patterns changed during the pandemic and haven’t fully reverted to normal, predictable ways that make economic modelling easier. During pandemic lockdowns, Canadians bought a lot of “stuff.” We snatched up electronics, gym equipment, household wares. Now, those same households are primarily spending on experiences.

So, retail sales figures just released show an uptick in July but a slowdown in August. How much of that is seasonal or cyclical isn’t as easy to determine when all of these other factors are pushing and pulling consumers in different directions.

If you don’t like inflation, you’ll hate deflation

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“Discretionary consumer spending is getting held back by inflation and surging borrowing costs. Another sign of sluggish growth for the Canadian economy while the Bank of Canada, at the same time, grapples with above-target inflation,” Robert Kavcic, senior economist at BMO, wrote in a note to clients.

Hovering above all of the numbers and all of the changes is an unprecedented surge in immigration. More than a million people moved to Canada last year alone. That has driven consumption but masked some underlying weaknesses.

Donald says all of those factors have combined to make the economy look healthier than it really is.

“We are in the moment between when the Titanic hit the iceberg, but the ship has not sunk. When it seems as though we’ve experienced a shock, but not a problematic one,” Donald said.

“The good news is that, unlike the Titanic, we can heal the economy if we need to by lowering interest rates.”

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