With inflation on the rise and a historically tight labour market, economic growth is slowing.
But now with rising inflation, especially in food and energy prices, and a historically tight labour market, that growth is slowing. The Bank of Canada, like many central banks around the world, has been aggressively raising interest rates to tame inflation. But raising rates has consequences. In the best-case scenario, the Bank of Canada would reduce discretionary spending enough to stabilize prices while the economy grows, though at a slower pace. In the worse-case scenario, economic growth stops as spooked consumers rein in spending, and the economy tumbles into recession. We expect the Bank of Canada to continue its effort to restore price stability despite the costs. In the coming months, more people will become unemployed, which will present a challenge for low-income households as they try to keep up with the rising cost of living. Even with these challenges, though, Canada is not currently in a recession, which is defined as a significant decline in economic activity lasting more than a few months. A rule of thumb frequently cited for a recession is two consecutive quarters of contraction in gross domestic product. In contrast, Canada’s GDP has been growing every quarter since the third quarter of last year, at a rate of 6.6% in the fourth quarter last year and 3.1% in this year’s first quarter. More recently, GDP grew by 0.3% on a month-over-month basis in April and stayed flat in May. But having two consecutive quarters of contraction is not a hard and fast definition. Rather, to determine whether the economy is in recession, other indicators need to be considered, including payroll employment; the unemployment rate; real income and spending; and industrial production. By most of these indicators, the economy is in a downturn rather than a recession. The unemployment rate of 4.9% remains at a historic low despite the modest decline in job numbers over the past two months. The industrial sector has been robust as Canadian producers reap the benefits of strong global demand for metals and energy. Still, there are elevated risks that Canada could enter a recession early next year after modest growth this year.