There has been a lot of talk about a recession recently. So, it’s time to clarify if we are in a recession now and, if so, what it would mean for investors.
The most common definition of a recession is two quarters in a row of declining Gross Domestic Product (GDP). GDP is a measure of the value of all the goods and services a country produces and sells in a specific time period.
By this measure, there is still no recession in Canada. The country’s GDP likely increased by 0.3% over a month earlier in February 2023, as increases in the mining, quarrying, and oil and gas extraction, manufacturing, and finance and insurance sectors were slightly offset by decreases in construction, wholesale trade, and accommodation and food services. In January, the GDP increased by 0.5%, following a slight 0.1% contraction in December.
Other economic indicators remain rather positive too. Unemployment is about 5% in Canada, which is a historically low rate. The inflation rate recently eased to 4.3%, down from its 8.1% peak in summer 2022.
At the same time, many economists predict a more problematic second half of 2023. RBC expects that higher interest rates will eventually hit consumers’ and businesses’ debt payments. The share of household disposable income spent on debt payments should rise by the second half of this year. That will be compounded by a sharp pullback in household net wealth if housing markets continue to decline. With households feeling less wealthy and higher debt payments and prices cutting into purchasing power, consumer spending may slow later in 2023.
There are many voices though that these problems will not lead to a full-fledged recession. BMO Financial Group’s chief economist Douglas Porter expects about 1% growth in the U.S. and Canadian economies (normal is closer to 2%) in 2023, with a slight pickup in 2024. He gives a “mild recession” over two quarters in 2023 a 50% chance of occuring.
Interest rate hikes are currently on hold in Canada and there are expectations of a pause in the U.S.
The Bank of Canada announced a ‘pause’ in interest rate hikes in January to assess the impact of the 425 basis points worth of increases over the prior year (the fastest pace of hikes since the 1990s).
In the U.S., strong job growth, spending, and high inflation have recently indicated that further rate hikes may be warranted, but fresh financial turmoil has cooled those expectations down.
Recessions are usually not good for stocks. As the chart shows, recessions and bear markets tend to coincide. However, recessions are typically short and the forthcoming one, if it happens, promises to be rather mild. And, as the chart also shows, historically markets have risen over time. Which is why it makes sense for investors to stay in the market for the long term.
Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
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