There is too much focus being placed on the technical definition of a recession, according to a Manulife economist who argues that even a “soft landing” will have consequences for most people.

Frances Donald, global chief economist and strategist at Manulife Investment Management, told BNN Bloomberg on Tuesday that Canada and the U.S. could experience a soft landing where two-quarters of negative gross domestic product (GDP) growth does not occur.

In that scenario, she argued that most people will still face tough economic conditions, even if a technical “recession” has been avoided.

“In that type of environment, we don't get rate cuts, maybe we get fewer rate cuts. And yet growth is still not strong enough to support increases in jobs, better wages, and better economic outcomes for everyone,” Donald said in a television interview.

Donald said the question of defining the economic environment as a soft landing or a recession is not as relevant as often emphasized when it comes to real-life implications for Canadians and investors.

“I'm not sure that we should be cheering 0.1 per cent GDP growth either and doing victory laps over ‘Oh there was no recession,’” she said. “This is still not a very good economic outcome for Canadians and Americans.”

GROWTH MOMENTUM

Many economists define a recession as two financial quarters of declining economic activity.

A Manulife report published last week, co-authored by Donald and global macro strategy head Alex Grassino, said it is better to focus on growth momentum than the technical definition of a recession.

“In our view, lending, consumer activity, capital investment, and, among other things, earnings will weaken in the coming six months. These developments are likely to be far more relevant to investors than the mathematical computation of a lagging economic indicator,” the report said.

The difference between a 0.2 per cent contraction and 0.1 per cent GDP growth is not likely to be relevant to investors, the report’s authors argued.

CANADA VERSUS U.S. OUTLOOK

In Donald’s view, a potential Canadian recession could be worse than a downturn in the U.S. economy due to higher levels of debt among Canadians.

A report published this spring by Canada Mortgage Housing Corp. found that Canada’s household debt has risen due to increasing home prices. It also found that Canada leads the G7 countries in terms of household debt. 

“If you have $50 of debt and interest rates go up, it doesn't hurt you as much as if you have $100 of debt and the interest rates goes up. Canadians just have substantially more debt,” Donald said.

“In some ways, 25 basis points of (rate) hiking in Canada is even more powerful.”

Donald also noted that the “transmission mechanisms for interest rates” in the Canadian economy are shorter, because Canada’s mortgage system is based on five-year renewal intervals, while 30-year mortgages are common in the U.S.