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Are We Heading for a 90s-Style Recession?

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From flannel shirts and baggy jeans, to the golden age of hip-hop, there were many amazing things about the 90s. The recession wasn’t one of them. 

But are we headed back to the future?

In today’s climate of climbing interest rates and sky-high inflation that’s rendering the cost of basic living unattainable for many, the idea of a looming recession is both the subject of endless headlines and conversations. 

A new report from Desjardins examines what conditions would have to be in place for Canada to experience a 1990s-style recession. In Back to the Future: What it Would Take to Get a 1990s-Style Recession in Canada, Desjardins’ Randall Bartlett, Senior Director of Canadian Economics, and Lorenzo Tessier-Moreau, Principal Economist forecast a mild recession in Canada for the first half of 2023. They acknowledge that today’s economy may trigger fear of a repeat of history, when similar conditions — climbing interest rates, high inflation, and a housing market slowdown — led to a recession. 

For those in need of a refresher, the 1990s recession saw the most dramatic decline in real household consumption of any Canadian recession since World War II. And people are worried that history could repeat itself. 

Bartlett and Tessier-Moreau forecast a 50% of a mild recession in the first half of next year. They highlight that annual GDP growth is expected to be flat in 2023, while household consumption should advance by 1.6%. 

Recession
Toronto, Bell Trinity Tower on a sunset

The authors say that risks to the baseline forecast are tilted to the downside. “If households dig in by slashing consumption and keeping the savings rate elevated, the real GDP growth could contract like it did in the early 1990s,” reads the report. “In this downside scenario (as much as a 30% chance of occurring), we could see real GDP fall by 1.5% in 2023 and real household consumption decline by 1.1%.”

According to the report, materially low consumption will have knock-on effects on the labour market. According to Bartlett and Tessier-Moreau, in the downside scenario, employment shrinks by 0.3% in 2023 (vs. a 0.3% advance in their baseline scenario) and, consequently, the unemployment rate rises to 7.0% in 2023 (vs. 6.5% in their baseline). “With employment and household income falling, other real GDP expenditure categories such as residential investment would also move lower relative to our baseline forecast,” reads the report. 

The economists expect that this would prompt the Bank of Canada to reverse course sooner than Desjardins’ baseline scenario. After months of interest rates that began once the ground began to thaw, Bartlett and Tessier-Moreau say that the Bank of Canada could begin cutting interest rates as early as the second quarter of 2023 if the downside scenario comes to fruition. The authors say that the overnight rate could reach 3% by the end of 2023, vs. 3.5% in their baseline projection. 

However, on the other hand, the authors says that more aggressive interest rate hikes by the Bank of Canada could squeeze mortgage holders enough to not just reduce spending, but also increase insolvencies if the unemployment rate spikes. “New listings would likely rise if this were to happen, pushing the sales‐to‐new‐listings ratio lower. This could lead to a prolonged 1990s‐style seller’s market and recession,” they write.

A policy mistake by the Federal Reserve could have similar implications for Canada, say the economists, driving up longer‐term borrowing costs at home while weakening the prospects for Canadian exports. “But
what if Canadians instead take on more debt to keep up their consumption?,” they write. “This could mean a less severe downturn in the short run, possibly prompting a stronger response from the Bank of Canada and leading to even more insolvencies and pain in the future. Needless to say, the risks to our baseline forecast are tilted very much to the downside.”

The bottom line, say the authors, is that risks to the outlook abound, whether from consumers slashing spending or banks hitting the breaks too hard. “Canadians would therefore be wise to keep the downside scenario in mind,” they write. “That said, we don’t think it’s the most likely outcome.”

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