E-Sight July 4: Canadian economy solid in April weakens in May, Deloitte economic outlook

By alexanderecomnomicviews on July 4, 2022 • ( 0 )

The Canadian economy grew by 0.3 per cent in April with growth in 13-of-20 industries. Goods-producing firms increased 0.9 per cent, outpacing a slim 0.1 per cent gain by services. While the April gain was solid, Statistics Canada’s flash estimate for May was a surprise, as a 0.2 per cent decrease was reported.

Last week, Deloitte Economic Advisory released its June 2022 Economic Outlook. In it, we recognize the profound shift that has taken place. In two years, we’ve gone from the deepest recession since the Great Depression to an overheating economy with broad-based labour shortages. Now, we’re back to recession worries fuelled by inflation and rising interest rates that are making life increasing unaffordable for households. The base case forecast is for a sharp slowdown in economic growth in the second half of this year and into next and a gradual cooling of inflation. Is this soft-landing scenario too optimistic? Perhaps. We acknowledge the recession risks, putting the odds at least 40 per cent. There is also a chance that growth slows but inflation is sticky and we end up in stagflation. Our economic models say that raising the Bank of Canada overnight rate to 3.00 per cent doesn’t trigger a recession, so that’s the base case. But, the models don’t capture psychology well. If firms cut hiring and investment to prepare for a recession; if consumers cut back on spending in anticipation for a recession – I guarantee you that we will have a recession. Equally, herd activity is not your friend when fear takes over. However, there are sources of resiliency out there. For example, Canadians accumulated close to ten years’ worth of savings during the pandemic – to name just one of the positives. So, it doesn’t have to end badly. However, it is also true that the track record of central banks successfully managing to achieve a soft-landing is exceedingly bad. In this environment, it is critical that businesses and institutions think about contingencies. Slowdown, recession and stagflation environments have very different implications for sectors and governments.