A tight labour market and elevated savings during the pandemic will cushion the impact of a recession on Canadians, says a new report from Deloitte.
Deloitte’s most recent economic outlook report forecasts Canada will enter a short-lived recession by the end of the year.
The report says while rising interest rates will cause a significant economic slowdown, the accumulation of inventories will push the economy into a technical recession.
However, because the job market has been so tight, Deloitte chief economist Craig Alexander said unemployment might not rise as much as it typically would during a recession.
For Canadians, that’s what will matter most, he said.
“Nobody eats GDP. From a point of view of Canadians, what really matters is what happens to their jobs and their income,” Alexander said.
According to Deloitte’s forecast, the unemployment rate will tick up to six per cent in the third quarter of next year before falling again.
Canada’s unemployment rate was 5.4 per cent in August, up from a record-low of 4.9 per cent.
Alexander said businesses he’s spoken to are still concerned about ongoing labour shortages.
Given the existing hiring challenges, he said employers won’t be inclined to lay off workers even if there is an economic downturn so long as it’s expected to be temporary.
“If a recession hits, businesses are likely to still want to hoard labour because of how difficult it has been to find workers that have the skills that they need,” he said.
While economists are split on whether Canada will enter a recession, an economic slowdown is widely expected because of rising interest rates.
The Bank of Canada has raised its key interest rate five times since March, bringing it to 3.25 per cent. While inflation slowed to 7.0 per cent in August, the central bank is still expected to hike interest rates again in October.
As the Bank of Canada works on bringing the inflation rate down to its two per cent target, higher interest rates will feed into higher borrowing costs, which should slow economic activity.
There have been some early signs that a slowdown is already underway, including falling housing prices and three consecutive months of job losses.
The report from Deloitte says household consumption will fall as the slowdown continues but for households that accumulated savings, their spending won’t be impacted as much.
According to Statistics Canada, households saved more than a quarter of their disposable income during the second quarter of 2020. In comparison, the savings rate was just two per cent a year prior.
While the household savings rate has since fallen, it remains elevated compared to pre-pandemic levels.
Households with higher incomes are generally considered to have higher savings rates.
“The inflation environment that we’re in right now is absolutely punishing on low-income Canadians. So, there’s a very big inequality dimension to it,” Alexander said.
“But at the middle- and higher-income households, what we’re likely seeing is that the cost of living is going up for them, but they can easily afford it and continue spending.”