As IMF warns of economic slowdown, Canada’s labour market could be critical buffer

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Canada will fare better in the year ahead than some other global economies amid dire warnings Tuesday from the International Monetary Fund (IMF) about a looming downturn, according to economists who spoke to Global News.

The IMF revised down its World Economic Outlook on Tuesday, citing a “combination of shocks” that would “stall” major economies.

Global GDP growth next year is expected to slow to 2.7 per cent, compared to the 2.9 per cent forecast in July, the IMF said, as higher interest rates weigh on the U.S. economy, Europe struggles with spiking gas prices and China contends with continued COVID-19 lockdowns and a weakening property sector.

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Canada’s GDP growth will slow to 1.5 per cent next year, down 0.3 percentage points from the summer’s forecasts, the IMF forecasts.

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“In short, the worst is yet to come, and for many people, 2023 will feel like a recession,” said IMF Chief Economist Pierre-Olivier Gourinchas in a statement Tuesday.

Will Canada hit a recession?

Pedro Antunes, chief economist of the Conference Board of Canada, told Global News on Tuesday that the IMF’s revised projections showing a more pronounced slowdown are not necessarily bad news.

The forecast for 2.7 per cent global economic growth next year is only slightly down from the typical three per cent annual growth, Antunes notes, and points to the early success of tightening cycles from the Bank of Canada and its central bank counterparts globally.

“Despite all of the dire warnings that we’re hearing in that (IMF) report, I think what it’s telling us is, their baseline outlook is for this kind of successful monetary policy, soft landing. And we think for Canada, that means still positive growth,” Antunes says.

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Click to play video: 'Will Canada see a recession by the end of 2022?'
Will Canada see a recession by the end of 2022?

He added that Canada is “definitely sensitive” to economic headwinds beyond its borders, especially any disruption from the United States, the nation’s largest trading partner.

Global fears of a recession are among the forces pushing up the value of the U.S. dollar, Antunes says, as investors seek “refuge” in the reliable greenback.

That’s driving the Canadian dollar down by comparison, he says, making imports from south of the border more expensive for consumers in turn.

While Antunes predicts consumer spending will be “soft” for the next few quarters amid the weak loonie and rising interest rates dampening demand, he does not at this point expect Canada to fall into recession — traditionally defined as two consecutive quarters of negative growth.

Antunes says that if global inflationary pressures continue to abate, as the IMF predicts, the Bank of Canada will be able to pause its interest rate hikes next year and allow the higher cost of borrowing to slow growth without entirely snuffing it out.

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It’s only if inflation proves persistent through next year and the central bank is forced to keep raising its policy rate, that the odds of a recession — perhaps in early 2024, he suggests — grow.

Others have a more pessimistic view.

Deloitte is among those forecasting a moderate recession to strike the country in 2023.

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Deloitte Canada’s chief economist, Craig Alexander, told Global News last week that global economic pain will inevitably drag down Canada’s output.

“We will import the weakness that is outside of our borders, and that is before the impact of the higher interest rates here in Canada that are weakening our real estate market and dampening consumer spending,” he said.

Deloitte is projecting a recession in Canada to last only two or three quarters before returning to growth.

Will it ‘feel’ like a recession in Canada?

While Antunes and Alexander disagree on whether Canada will catch the window for a soft landing, both say that any slowdown will be mitigated because of the country’s tight labour market.

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Oftentimes, Canadians experience the “pain of a recession” through layoffs and rising unemployment, Antunes says.

But with the unemployment rate sitting at a low 5.2 per cent in September and many businesses unable to fill vacancies, he argues any downturn might see employers “reticent” to let go of workers, lest they be unable to replace them when economic growth returns.

Alexander, too, says that as he’s been speaking to businesses and sharing his forecasts for a contraction, he’s heard in response that many employers will be “hoarding labour” even as the outlook darkens.

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“They’re not going to shed workers like they would normally during a period of economic weakness because of the fear that these labour shortages will be back with us very quickly,” he says.

“For Canadians, it may not feel like much of a downturn, and that could create some resilience in the economy.”

— With files from Global News’ Eric Sorensen, Reuters

Click to play video: 'Business News: Spending cutbacks with possible recession on horizon'
Business News: Spending cutbacks with possible recession on horizon

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