In her economic update speech to the House of Commons last November, Deputy Prime Minister and Finance Minister Chrystia Freeland warned of an approaching recession in 2023. She emphasized the need for Canadians to be prepared. Indeed, economists are increasingly confident that the recession they have been predicting for months is on the horizon.
But economic indicators always change, and experts have varying opinions on this upcoming recession. Its severity, duration, and specific impacts on different groups of people remain uncertain.
Why do people say there is going to be a recession?
Current recession concerns generally trace back to the generous pandemic stimulus that boosted economies worldwide out of the 2020 recession brought on by COVID-19 lockdowns. Three years later, the consequence of the stimulus is now manifesting as unprecedented levels of inflation, which refers to the increase in the average price of goods and services over a certain time period. Economists argue that injecting more money into an economy — in the form of stimulus packages, in this instance — bolsters inflation.
Other factors, however, are increasing the average cost of goods and services too. The war in Ukraine, along with the US and China’s trade war, is causing supply shortages that are increasing the price of certain products, especially food products.
At the same time, average wage rates are not keeping pace with inflation. The result is that people also have less money in their savings accounts. In the US, the average person is only saving 3.5 per cent of their income as of this past August, which is significantly lower than the pre-COVID average of nine per cent.
Central banks in various countries, including the US Federal Reserve and the Bank of Canada, have been significantly increasing interest rates over the past year. This makes it more expensive for people and businesses to borrow money, and is a way for countries to stop inflation from getting out of control. High interest means that consumers have less money to spend, bringing the overall demand for products and services down, which in turn decreases the average price of things — in theory, at least.
The US Federal Reserve’s deflationary monetary policies began in 2022 and strengthened the US dollar over other currencies. This means that countries that depend on the US for imported goods have to pay more for them, making the average cost of things more expensive in these countries, too.
How do we know when a recession is starting?
The definition of a recession may vary depending on who you ask. Formally, investors generally say a recession is happening in a given country when its GDP — the total value of all the goods and services it produces during a certain period — gets smaller for two consecutive three-month periods.
The US National Bureau of Economic Research (NBER), which is responsible for officially declaring recessions in the country, defines a recession as a decline across various factors in a country’s economy for “more than a few months.” Those factors include the country’s GDP, along with the percentage of people experiencing unemployment, consumers’ confidence in the economy’s health, the rate of inflation, the value of retail sales, and others.
The NBER can delay making a decision on whether or not to declare a recession for months. If the factors it considers do not align, a recession may not even be officially announced. This all contributes to the uncertainty and ambiguity of what a recession means and whether or not we will enter one soon.
How bad will the next recession be?
With experts warning of a recession, some people may have concerns that the economy will deteriorate like it did during the 2008 financial crisis, which was triggered by the US housing market and caused severe economic problems worldwide. That recession wiped out $19 trillion USD in American households’ net worth. 10 per cent of Americans became unemployed, leaving 2008 as one of the worst years for students to graduate from university and start looking for a job.
Fortunately, economists generally agree that the recession will not be so severe this time around. The circumstances of the global economy are different from what they were in 2008. Some economists even argue that the overall economy remains healthy, citing strong retail sales and a robust job market.
Nevertheless, the impending recession will not impact everyone equally. Individuals with tighter finances, such as students, may encounter greater challenges. Recent graduates entering the job market during a recession may also find it harder to secure positions after completing their university education, due to reduced demand in various industries. Many companies may already be making new hires a low priority in response to economic pressures.
Students should prepare for the effects of inflation, which may manifest as rising living expenses and perhaps even tuition costs. This inflationary pressure can be particularly burdensome for students who rely on loans that charge interest, as those loans’ interest rates are liable to increase. Students in tight financial situations may need to trim non-essential expenses and may also need to postpone expensive purchases to alleviate financial strain during the recession.
For recent graduates, it may be wise to seize opportunities to enhance skill development and experiences to enhance their prospects in a job market with diminished demand.
When will the recession end?
The question of how and when Canada will recover from the recession is complex. Different factors influence our economy’s health, making it impossible to precisely predict when it will fully recover. The trajectory of Canada’s recovery also depends on how severe the recession gets and what policies Canada and other countries implement in response.
But we will know we are recovering from the recession when inflation rates become stable, the average cost of living becomes more sustainable, our economy’s GDP increases, and the unemployment rate decreases. As the experts debate how best to recover from the impending recession and mitigate its effects, we can keep an eye out for these visible signs of a healthy economy.