As real estate markets slow, inflation balloons, and the GDP came in lower than expected, economists are split over whether a global recession is coming.
A new report from financial advice provider Finder found a 50-50 split between economists who believe a recession will happen in the next year and a half and those who don't expect a recession to happen within the next two years at all.
For those who see a recession coming, there was a tie as to the time frame they expect it to happen, with 17% of respondents saying they believe it will come as soon as the second half of 2022, and another 17% predicting it to hit in the second half of 2023. Just 6% said they believe it will happen in the first half of 2024, and 11% responded that it will happen in the first half of 2023.
Carl Gomez, chief economist and head of market analytics for CoStar Group, is in the "second half of 2022" camp, saying that he believe that the "leading indicators are pointing to a 30–40% chance of recession in the next six months."
"A policy error with regards to increasing interest rates could possibly tip the economy into recession by then," Gomes said.
Associate professor at the University of New Brunswick Murshed Chowdhury is also predicting a recession in the near future, but thinks it will take a bit longer than a few months.
“It’s becoming a self-fulfilling prophecy. Many financial agencies started raising flags regarding possible economic downturns," Chowdhury said. "It also depends on what happens to the real estate in the near future, how the supply-side issues are being managed and what would happen to the Russia-Ukraine crisis.”
But for Tony Stillo, director of Canada economics for Oxford Economics, although there are a number of contributing factors at play, there isn't enough happening yet to say with any certainty that there will be a recession within the next two years.
“Our baseline forecast expects the economy will avoid a recession over the next two years," Stillo said. "GDP growth is forecast to slow sharply from 4.1% in 2022 to 2.2% in 2023 and further to 1.8% in 2024. However, the Canadian economy is facing several headwinds that risk pushing the economy into recession. These include aggressive monetary policy tightening by the Bank of Canada, elevated inflation that is weighing on real disposable income, heightened uncertainty due to the war in Ukraine, and our forecast for a 24% decline in house prices. We currently put the odds of a recession over the next 12 months at 35%.”
These predictions come as a new report from the World Bank reflected a "sizable downgrade" its outlook for the global economy. It now predicts economic expansion will slow sharply to 2.9% this year, down from the 4.1% predicted in January. It pointed to Russia's war against Ukraine, as well as the potential of food shortages and concerns about stagflation, as driving factors behind this change.
"Several years of above-average inflation and below-average growth are now likely, with potentially destabilizing consequences for low- and middle-income economies," World Bank President David Malpass wrote in the report. "It’s a phenomenon—stagflation—that the world has not seen since the 1970s."
Should the Bank of Canada consider the price of assets?
The Bank of Canada (BoC) has implemented three rate hikes this year, raising its historically low interest rate from 0.25% to 1.5% as of June 1. At the same time, major stock markets have experienced downturns, the value of cryptocurrency has fallen, and housing markets have softened. With this in mind, Finder asked economists whether the BoC should be more concerned about asset inflation as they decide on further rate increases.
A majority of respondents -- 56% -- said no, while 33% said yes. The remaining 11% were unsure. But Philip Cross, a senior fellow at MacDonald Laurier Institute, argued that BoC should, in fact, take asset values into account, stating that not doing so is an error that's been made before.
“It was a mistake to de-emphasize asset price inflation in the 1990s," Cross said. "Time to correct that, among many, mistakes.”
On the other hand, Angelo Melino, a professor at the University of Toronto, believes that although "asset inflation provides a useful information signal to the Bank, its mandate is to control CPI inflation.”
As the already implemented rate hikes take hold, the majority of economists believe a housing market correction -- when prices drop 20% from all-time highs -- is imminent. In fact, 25% said this correction is already underway. Remaining opinions were mixed as to when it's going to happen.
Stillo predicts that the third quarter of this year will be when it hits, based on the current market and data anaylzed by Oxford Economics.
"We believe a 24% house price correction will get underway by autumn, triggered by record unaffordability, rising interest rates and new government policies designed to curb speculators, tax vacant housing and bans for foreign buyers," Stillo said. "However, the housing market may have already reached a breaking point, with home sales down sharply over the past few months and average home prices already down 6.3% from their February peak. Canada entered the pandemic with historically elevated household debt, and that vulnerability has only been exacerbated by the $300B rise in mortgage debt during the pandemic.”
With further rate hikes expected throughout the year that will likely have noticeable effects on household finances, there's a chance the BoC may temper their increases. BoC Deputy Governor Tony Gravelle recently told economists in Quebec that “[a factor that] might lead us to pause [rate hikes] is that many households have taken on more debt to get into the housing market.”