Economists predict a 'mild recession,' but what would that look like in Canada?

Is Canada on the verge of a recession? Elke Rubach of Rubach Wealth shares her thoughts on where interest rates are headed in Canada and says the goal is to control inflation.

With inflation on the rise and central banks poised to increase rates to fight it, there’s one major question Canadians are asking about the state of our economy: Will there be a recession, and what would it look like?

A recession is defined as two financial quarters of decline in economic activity.

RBC predicts that the Canadian economy is on track for a “mild recession” in 2023, with variables such as real estate, jobless claims, and delayed economic ramifications of pandemic restrictions leading to GDP growth of less than 1 per cent.

WHAT IS A 'MILD RECESSION?'

"There are various shades of recession -- from gray to dark black," Sal Guatieri, senior economist and director at BMO Capital Markets, told CTVNews.ca in a phone interview Monday.

"Our view is that we’re going to get off fairly lightly. We do expect the economy to contract for one quarter next year and maybe stall later this year. This would be called a growth recession."

A "growth recession," Guatieri explained, is a term for when the economy is so weak that the unemployment rate drifts higher by about one per cent over a couple of years.

"The economy, for the most part, would still be expanding, but just not strongly enough to provide jobs for all the new people entering the labour force," he said.

When it comes to staffing shortages contributing to inflation, it requires companies to pay more -- to not only attract new workers, but to retain current staff, Guateri told CTVNews.ca in an interview in July.

This, in turn, can add to the chain reaction of increasing costs, he explained. But if companies can no longer afford to pay workers, less jobs become available. Increasing costs and less work exacerbate the problem.

Guiatieri recognizes that other forecasters are predicting a more substantial recession.

"It comes down to depth. How deep is the decline in GDP? If it’s just one per cent or so I would say that’s fairly mild. And it also comes down to the duration. Is it just a couple of quarters or is it spread over several quarters? If it’s just a couple that would fall into the mild camp. If it’s more, then, of course, you could get into a more standard recession."

On average, he said recessions tend to involve GDP contracting about three per cent, the unemployment rate rising about three per cent or more, "and that occurs over several quarters."

Finally, he explained, there’s the "Great Recession."

"This is what you had in 2008, where the economy contracts pretty significantly -- four or five per cent over many quarters. And when the unemployment rate rises much more than three percentage points."

According to RBC’s special housing report, as a rise of interest rates cause a ripple effect in the Canadian economy, factors such as real estate – with an estimated 12 per cent decrease in housing prices next year -- can lead to decreased wealth and, therefore, decreased economic activity.

On their site, RBC says, this recession would be "short-lived by historical standards – and can be reversed once inflation settles enough for central banks to lower rates."

If inflation falls quickly, it would be possible for the Canadian economy to head into what’s called a "soft landing."

WHAT IS A 'SOFT LANDING'?

Investopedia, a financial literacy website, defines a "soft landing" as "a cyclical slowdown in economic growth that avoids recession." The term is attributed to the goal of central banks seeking to raise interest rates just enough to stop an economy from overheating with high inflation.

"Soft landing may also refer to a gradual, relatively painless slowdown in a particular industry or economic sector," Investopedia explains.

Economists believe a soft-landing isn’t out of the realm of possibility, as post-pandemic demands continue to fuel recovery in a few sectors, says RBC in a report.

"Canadians continue to fuel a recovery in the travel and hospitality sectors. And higher global commodity prices have boosted the mining sector. But businesses are struggling to find the workers they need to expand production."

So, as Canadians continue to feel the economic impact at gas pumps and grocery stores, the recession might be "mild," but the economic reality – with staffing shortages and higher costs and less wealth -- won’t feel so small.

There’s a word for this. It’s called a "vibecession."

WHAT IS A 'VIBECESSION'?

The term was coined by Kyla Scanlon, a writer and influencer, and is attributed to the public interpretation of economic realities.

Scanlon argues that "how you feel compounds into how everyone feels," she said, maintaining that consumer sentiment is a major component of GDP growth.

"We take experience and evidence, shape out expectations, which warps perception and acts as a forcing function for interpretation," she wrote on her site.

"So when people are feeling bad (which they are right now) they might pull back on some aspects of spending -- which we have seen. Inflation is the bogeyman in the room."

WealthSimple, which broke down the concept of a "vibecession" in a newsletter, considers the concept an inverse of a soft-landing.

In the context of the Canadian economy – with high mortgage payments and soaring grocery bills – a "vibecession" would ultimately entail inflation falling enough to stop central banks from rising interest rates, but maintaining soured consumer sentiment throughout the country, WealthSimple explained.

In the phone interview, Guiatieri pointed out that "there are other [economists] who are forecasting a real recession -- a two quarter decline in GDP, or a broader decline in economic activity."