We still see a soft landing despite recession risks: Economist
The Canadian economy came to a standstill in August as overall demand for goods and services weakened, according to Statistics Canada data released Tuesday – and economists predict the slowdown will continue in the months ahead.
Gross domestic product (GDP) came in flat in the month of August and saw 0.9 per cent growth year-over-year, according to data released by Statistics Canada on Tuesday. Flash estimates for the country’s third-quarter GDP show a contraction of 0.1 per cent.
“There’s a lack of business confidence. It’s very weak. It’s at recession levels and consumer confidence keeps coming down as well, and there’s a real risk here that this could unravel into something deeper,” Pedro Antunes, chief economist at the Conference Board of Canada, told BNN Bloomberg in an interview on Tuesday.
While Antunes isn’t calling for a recession, he does anticipate flat economic activity to continue from now until 2024.
“We’re starting to see the full impacts of this very restrictive monetary policy,” Antunes said.
Accommodation and food services declined 1.8 per cent in August, while retail trade contracted 0.7 per cent, continuing the downward trend that started at the beginning of 2023, the data showed.
In terms of what’s driving the economic weakness, Antunes pointed to a weakened consumer with spillover effects for business profitability, as well as a general slowdown in global growth. Despite those factors, Canada's labour market is still proving to be fairly resilient, he noted.
“We’re still calling for a soft landing but there are some risks there,” he said.
FIRMS 'HOARDING WORKERS'
Typically there is a lag between economic data and job cuts, Jean-François Perrault, senior vice-president and chief economist at Scotiabank, told BNN Bloomberg in an interview on Tuesday.
“We are expecting a modest tick up of unemployment, a half a percentage point or so in the next few quarters, which isn’t really big deal by historical standards, but of course is required if you’re trying to slow the economy,” he said.
Economists typically expect more job losses during an economic slowdown, but Perrault said recent labour shortages may explain the current pattern.
“Firms spent a tremendous amount of energy attracting and retaining workers over the last couple of years, and we know that that’s probably leading them to hoarding workers,” he said.
“Once workers are gone in this economy, they’re going to be very difficult to get back,” Perrault added.
FORECASTED THIRD-QUARTER CONTRACTION
A preliminary reading of Canada's third-quarter growth revealed an economic contraction, which is in line with what an RBC economist had forecasted.
“Details were arguably softer than the headline growth number suggested, with consumer-sensitive sectors like retail sales and hospitality services looking softer (despite surging population growth) and the manufacturing sector pulling back for a third straight month," Nathan Janzen, assistant chief economist at Royal Bank of Canada, wrote in a note on Tuesday.
WHAT DOES IT MEAN FOR INFLATION?
The weakening of the Canadian economy is likely to ease any inflationary pressures ahead, despite the Bank of Canada’s concerns of inflation running above its two per cent target, he added.
"We don't expect additional interest rate hikes from the (Bank of Canada) as long as that continues,” Janzen wrote.
Desjardins economists agreed that inflation would likely ease as a result of the economic climate, allowing the Bank of Canada to stay on the sidelines.
“We think inflation should come in weaker that the (Bank of Canada’s) upwardly revised forecast, allowing it to remain on hold for the foreseeable future,” Randall Bartlett, Desjardins senior director of Canadian Economics, wrote in a note on Tuesday.
“We remain of the view that the next move by the Bank will be a cut around the middle of 2024,” he said.