Many Canadians today are feeling the pinch and reining in their spending, waiting out harsh economic winds in a pattern of behaviour typical of major recessions and financial crashes in history.
The difference this time around? Canada’s not (technically) in a recession.
Economists typically define a recession as two consecutive quarters of negative growth in real gross domestic product, often accompanied by a surge in unemployment.
While the jobless rate in Canada stands at 6.4 per cent as of July, 1.5 percentage points higher than record lows seen just two years earlier, the Canadian economy has largely kept its head above water lately.
“In the past year, we’ve been flirting close (to a recession) with some very weak growth, but we haven’t had those two quarters of contraction,” says Charles St-Arnaud, the chief economist at Alberta Central, which represents credit unions in the province.
In a recent report giving his mid-year outlook for the Canadian economy, St-Arnaud sought to classify the peculiar economic moment: it’s not a recession, but a “me-cession.”
His thesis is that while the abstract Canadian economy is largely holding up under the weight of slowing growth and restrictive interest rates, individual households are not getting ahead.
Essentially, despite what economists on Bay Street and headlines in the media might tell you, it’s frankly hard out there for Canadians. Whether you call it a recession or not, many consumers are struggling.
Polling from Ipsos on behalf of Simplii Financial published Tuesday suggests Canadians are indeed feeling the pinch.
The survey conducted in late June showed that 46 per cent of respondents said they’re losing sleep over their finances. Some 56 per cent are dining out less to help cut costs, while others said they were delaying large purchases (28 per cent) or putting off a move (25 per cent).
St-Arnaud is not the only one to point out that the Canadian economy feels recessionary, regardless of how the GDP numbers read.
“Businesses are saying that they’re starting to see consumers paring back. Households are saying they feel stressed,” RBC economist Carrie Freestone says. “So it’s a question that we get asked a lot: why does it feel like we’re in a recession when we’re not actually?”
Freestone tells Global News that many households are taking hits to their budgets when it comes to mortgage renewals. The Bank of Canada, which recently started slowly easing its policy rate after the fastest tightening cycle in its history, estimates that roughly half of outstanding mortgages have so far been renewed in the new, higher rate environment.
That’s leaving less money in the monthly budget for discretionary purchases like trips to the mall or the movie theatre, Freestone explains. Fears of looming economic disruption also have Canadians acting more cautiously, she notes, so the savings rate is rising as spending falls.
Population growth keeps Canada’s economy afloat
Why haven’t these forces ground economic growth to a halt? Both St-Arnaud and Freestone point to Canada’s surging population growth amid the COVID-19 pandemic recovery.
While the Canadian economy has mostly eked out growth on a quarterly basis over the past two years, real GDP per capita — how much economic output Canada is generating on a per-person basis — has declined over six of the past seven quarters.
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There’s been plenty of ink spilled and fingers pointed in economic circles about real GDP declines and connections to a productivity crisis in Canada.
But to simplify the situation, Freestone breaks it down over a cup of coffee.
If times are tough, some Canadians might start to scale back on nice-to-haves like buying a cup of coffee, instead brewing their cup of joe at home. If that trend builds, in ordinary circumstances, that might mean that the neighbourhood coffee shop takes a hit in sales — lowering the cafe’s economic output and potentially affecting jobs.
But when a surge of people move into the neighbourhood, the same cafe doesn’t notice as big a hit, because even though some people are coming in less often, there are more people enjoying an occasional coffee to offset any losses.
Without the extra consumers joining the economy, Freestone believes that Canada would “undoubtedly” be in a recession right now.
St-Arnaud’s math agrees.
He crunched the numbers on how spending volumes would evolve if Canada had maintained its population growth trends from 2015 to 2019 through the pandemic, rather than accelerating as they did. In this scenario, the Canadian population hit 40 million in mid-2024, rather than today’s levels around 41 million.
He then followed the same aggregate spending trends seen in Canada over the recent years but plugged in the tempered population growth figures.
St-Arnaud’s calculations have the Canadian economy facing a full-blown recession in the second half of 2023. In actuality, Canada’s economy contracted in the third quarter of last year before rebounding in the fourth, narrowly skirting a technical recession.
The “me-cession” phenomenon is playing out on a national scale, but St-Arnaud argues that it’s been “turbocharged” in his home province of Alberta.
Albertan incomes have been “underperforming” the rest of the country in recent years, he says, and interest rates are having an outsized impact as households there are among the most indebted, behind Ontario and British Columbia.
But the province is also taking a bigger hit in per capita GDP because of the relative surge in population growth. Alberta’s reputation as an economic engine for the country has made it an attractive destination for both landed newcomers and interprovincial migrants seeking relative affordability.
Could the “me-cession” become a recession?
Economic warning bells have been getting louder in the United States as of late after a particularly bad July jobs report south of the border.
To the north, with interest rate cuts already underway and the Bank of Canada forecasting growth to pick up in the second half of the year, there’s growing talk that the Canadian economy might be headed for the elusive “soft landing” — achieving the two per cent inflation target without sending the economy into recession.
Freestone says RBC does not have a recession in its forecast, even though the kind of jump Canada has seen in the unemployment rate is typical of such a downturn.
But she notes that the rising jobless rate has not come as a result of mass layoffs — the kinds of income hits that can proceed mortgage defaults or other major pullbacks in spending. Rather, the population has been growing at a time when many employers are putting on hiring freezes, making it difficult for those looking for a job to readily find work.
St-Arnaud also says the jobs market has been “extremely resilient” to date, another major factor keeping this “me-cession” from becoming a widespread recession.
“The big question is, what is going to happen to the labour market going forward?” he asks.
For the first time, Canada is looking to limit the pace of non-permanent residents entering Canada, reducing their overall proportion to around five per cent of the population from elevated levels close to 6.2 per cent.
That same population growth that buoyed the Canadian economy in recent years is set to slow, in other words.
“We won’t have that support for the economy anymore. So that’s where the risk might come, next year or the year after,” St-Arnaud says.
And if that resilience in the labour market does break and employers are forced to turn to layoffs in greater numbers, he worries that the impact from mortgage renewals yet to come could put renewed pressure on Canada’s highly indebted economy.
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“The issue is if we were to see some decent layoffs in the economy, the negative feedback loop might be much bigger than in previous recessions, just because of the amount of household debt that is on the household balance sheet,” he says.
While St-Arnaud expects that Canada’s unemployment rate will continue to tick higher, reaching seven per cent by the end of 2024, he added in his report that there is “no indication” that Canada is on the “eve of a wave of significant layoffs.”
“All this supports our view that the Canadian economy is on the path to a soft landing. However, with the health of the labour market behind the economy’s resilience, any deterioration in the labour market should be monitored closely,” he wrote.
Freestone also expects the unemployment rate to tick higher by a few tenths of a percentage point.
But as she looks towards the end of the year, she sees signs for hope as well.
“We do expect that households will start to feel some relief into next year,” she says.
Freestone says the “good news” in all the economic uncertainty is that one key trend has been strong for Canadian households: inflation has been on a downward trajectory, coming in under three per cent annually at every reading so far this year.
That means households renewing into higher mortgage rates are not dealing with the “double whammy” of higher debt payments alongside a rising cost of living, she says.
With expectations that the Bank of Canada has additional rate cuts in store for 2024, RBC’s forecast has real GDP per capita turning positive once more in 2025 as consumer confidence eventually returns.
It might take a bit of time for spending to tick back up amid continued weakness in the labour market, Freestone notes, but she believes lower borrowing rates and cooling inflation should help some households feel a bit more comfortable buying a cup of coffee in the months to come.