Going through prolonged periods of poor economic growth is more common than many Canadians may believe. Between the end of 2013 and 2021, GDP per capita grew by 0.36 percent annualized. The number is not biased by the lockdowns and includes the bounce back. Do not forget that during the pandemic, the federal government turbo-charged the economy by printing record amounts of dollars. My point is that mild or more severe recessions followed by strong recoveries are preferable to prolonged periods of economic malaise, which is probably the case now. The boom period from 1982 that continued until the 2008 Global Financial Crisis began after a sever double-dip recession.
The U.S. Conference Board’s Leading Economic Index has been pointing to a recession since the middle of 2022. Some believe this is “proof” that previously reliable indicators have no value anymore. “This time it’s different,” is the cliché that won’t die. I’ve heard that before. In 2006, those indicators flashed red. We bears were ridiculed until the summer of 2008 when the financial world collapsed.
It should also be pointed out that one of the best indicators of a recession is an inverted yield curve, which is when long rates uncharacteristically trade below short rates in yield. This has been true for almost a year and a half. I would be cautious about giving up on this indicator. First, it can take up to two and a half years historically between the beginning of the inversion until the start of the recession. Also, it may take up to six months between the time a recession begins, and it manifests in the data. Recessions tend to begin after the yield normalizes and long rates trade above short rates. We are not quite there yet. This fact is not well known to many economists and market analysts, let alone ordinary market participants. In 1974, President Nixon assured Americans that the economy was strong and there would be no recession, despite the protestations of the pessimists. Little did he realize that the recession had already begun. Nixon was not lying. He was making a mistake many of us keep making.
I’m not surprised by the lag between the indicators and recession. Rates were at historic lows, and many borrowers locked in this cheap debt for years. Consequently, tightening is taking longer to affect the economy than in the past as debt rolls over. I believe 2024 will not be recession-free. Canada is a relatively small and open economy. Europe and China are slowing. The United States will too eventually, despite the fact that they are entering an election year and the U.S. Administration will desperately try to prop up the economy.
Returning to the question at hand, are we in a recession? The answer:
1) The United States is not, or at least was not in the third quarter of 2023.
2) Canada might have begun one in the third quarter.
3) Other parts of the world are already in recession.
4) The odds of a recession in 2024 are very high.
5) “Recessions” are a construct by economists. The Canadian economy is in poor shape, and Canadians should be less concerned with two consecutive quarters of negative GDP growth and very concerned about how to get out of this prolonged period of self-inflicted economic deterioration.
