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Could Canada follow the U.S.’s economic decline? Here’s what experts say 

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Call it a tale of two economies: the latest figures from Statistics Canada on Friday show economic growth in the country slowed but likely avoided a decline through the first half of the year, just as the United States reported its second consecutive quarter of contraction a day earlier.

The economies of the two North American neighbours have long been entwined; as of late, the two countries have been rocked with decades-high inflation and rising interest rates as central banks push to dampen surging prices.

Read more: Canada’s GDP unchanged in May, but early signs point to Q2 growth

Both Canada and the U.S. have seen manufacturing output slow, dragging down real gross domestic product this past spring, and housing markets on both sides of the border have significantly cooled in response to rising rates.

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Economists say the main difference lies in the pace of the two economic recoveries from the COVID-19 pandemic. But as recession rumblings get louder south of the border, Canada’s economic fate might well be tied to the U.S.

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Canada’s recovery — and decline — lags U.S.

Consumer spending makes up a significant portion of both the Canadian and the U.S. economies, notes Beata Caranci, chief economist of TD Bank.

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But the consumer side is an even larger chunk of the U.S. economy, she tells Global News, which makes slowdowns in demand even more apparent in their GDP results.

The U.S. also began its reopening cycle from the COVID-19 pandemic much sooner, as the country had a faster COVID-19 vaccine rollout and loosened restrictions earlier.

Carrie Freestone, economist with Royal Bank of Canada, says the Canadian economic recovery is still progressing this summer as consumer demand for air travel and dining at restaurants, for instance, remains strong.

Read more: Canadians are in a spending mood heading into summer. What that means for inflation

When this demand eases off, as Freestone expects will happen in due course as rising interest rates bite into household budgets, Canada’s consumer spending trends could fall back in line with its southern neighbour.

“I don’t necessarily think it’s a divergent path. I think it is just that we have a lot more of this pent-up service sector demand in Canada being unleashed,” she tells Global News.

While the U.S. GDP has a heavier weight towards consumer spending, Canada’s economy is more exposed to the housing market, Caranci notes.

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As a result, Canada could feel an outsized impact on its GDP as most economists predict a continued housing correction into the fall.

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Some global forces, meanwhile, could buoy the Canadian economy, notes Capital Economics’ Stephen Brown.

He notes that while commodities have seen “pretty widespread falls recently,” oil prices are still holding up, representing a boon for Canada’s energy sector.

“And that is more beneficial for the Canadian economy than the U.S.,” he says.

Would Canada follow the U.S. into a recession?

News of the U.S. recording two quarters in a row of negative growth was met with swift debate over whether the bar has been met for a technical recession, with most American officials downplaying such talk.

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The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

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If the U.S. ultimately does fall into a recession, Caranci says it will be hard for Canada to achieve its own “soft landing” because the same forces will be acting on the closely-tied economies.

Both countries are facing rampant inflation caused largely by global forces such as supply chain delays and the war in Ukraine, and are meeting these challenges with aggressive interest rate hikes.

Though Caranci notes there are “nuances” in how government policies are guiding their respective economies through a pending downturn, it would be hard to end up with a different result.

“You would have to come up with a logic on why an interest rate shock would impact Canadians less than the U.S. and an inflation shock would hit us less than the U.S. and I don’t think there’s a strong argument there,” she says.

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RBC is forecasting mild recessions in both the U.S. and in Canada in the year to come. Freestone says the U.S. could fall into recession by the end of the year, with Canada’s contractions coming in the second or third quarter of 2023.

Read more: Recession fears won’t faze Bank of Canada, economists say. Why that may be a good thing

While she notes that Canada does not always follow the U.S. into recession — 2001 being a recent outlier in that regard — Freestone agrees with Caranci that Canada can’t necessarily escape the pressures stifling the U.S. economy.

“The forces that are playing out in the U.S. that would cause a recession to take place are also forces taking place in Canada and a lot of these forces are beyond our borders,” she says.

All of the economists who spoke to Global News said they expect the latest Canadian GDP report, which was slightly higher than the Bank of Canada’s forecast, won’t deter the central bank from raising interest rates at its next decision on Sept. 7. Each anticipates another outsized rate hike to take the bank’s policy rate to three per cent or higher.

Caranci says that even if Canada and the U.S. are on similar economic paths, the “depth” of any downturn might not be the same. She notes that the U.S. saw a historic leap in durable goods spending during its latest economic recovery, a trend Canada did not follow.

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She argues that distinctions like this could put the U.S. at risk for a bigger correction than Canada.

“So just bear in mind that the trajectory may be the same, but the magnitude may differ.”

— with files from The Associated Press

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