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What is a recession? Here’s how a hit to Canada’s economy might impact you

Click to play video: 'What a 2023 recession in Canada could look like'
What a 2023 recession in Canada could look like
WATCH: Economists, market watchers, businesses and everyday Canadians are all asking the same question lately as inflation and interest rates take a bite out of household finances: Are we headed for a recession? Researchers at Deloitte are among a growing chorus of economists, including those at most big Canadian banks, expecting 2023 will see the economy take a hit. Anne Gaviola reports – Jan 19, 2023

Economists, market watchers, businesses and everyday Canadians are all asking the same question lately as inflation and interest rates take a bite out of household finances: are we headed for a recession?

A majority of business owners and consumers are saying yes, according to surveys released this week from the Bank of Canada that show most respondents are reining in their spending ahead of a possible downturn.

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Click to play video: '2023 Canadian economic outlook'
2023 Canadian economic outlook

Also this week, financial advisory firm Deloitte said it’s now forecasting a “deeper” recession than first expected as Canada’s economy slows more drastically.

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Researchers at Deloitte are among a growing chorus of economists, including those at most big Canadian banks, expecting 2023 will see the economy take a hit.

But for the sake of those without economics degrees — what is a recession, anyways? And how does it affect Canadians and their finances?

Here’s what you need to know.

What is a recession?

A recession is generally considered a decline in economic activity over a certain period of time.

That’s typically measured through gross domestic product, or GDP: the total value of goods and services a country produces.

What matters for a recession, then, is not how well-off Canadian households are, but how much business the country’s companies are doing — though those two things are often connected.

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Click to play video: 'Federal government warns Canadians of more economic challenges ahead'
Federal government warns Canadians of more economic challenges ahead

For a sense of what recessions can look like in Canada, take the 2008 financial crisis, which was tied to global market aftershocks from a housing and banking collapse in the United States. The value of Canada’s oil and other exports dropped sharply, housing activity in the country saw steep declines, and 400,000 Canadians lost their jobs over the course of a year, according to Statistics Canada data.

More rare is an economic depression, which sees a much steeper decline in economic activity amid a recession lasting multiple years.

Most economists are expecting a relatively mild or moderate recession in 2023 that would not extend for years.

What causes a recession?

Canada’s economy soared through much of the recovery from the COVID-19 pandemic, which spurred a recession at its onset in March 2020 as many sectors of the economy faced restrictions.

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The national economy has been cooling in recent months, thanks at least in part to the Bank of Canada’s efforts to tamp down inflation by hiking interest rates.

In doing so, the central bank raises the cost of borrowing for Canadians and businesses alike and discourages spending, which is one way to reduce demand and therefore take the pressure of prices.

While the Bank of Canada has been eyeing a soft landing — the sweet spot where its rate hikes cool the economy and reduce inflation without triggering a recession — policymakers at the central bank have been clear they will do what they must to restore annual inflation to the target range of one-to-three per cent.

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The Bank of Canada isn’t the only central bank raising interest rates amid high global inflation, and forecasts for economic downturns elsewhere in the world are also expected to hurt Canada’s business prospects abroad and south of the border in the United States, Deloitte noted.

Randall Bartlett, senior director of Canadian economics at Desjardins, says interest rates in Canada are now at levels last seen amid the 2008 recession. And while inflation is expected to keep cooling, it’s still high.

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With wages growing but not keeping up with these two stifling forces, Bartlett says Canadians aren’t able to spend as much — something that will slowly but surely weaken the country’s domestic economy.

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“Your dollars don’t go as far as they did before,” he tells Global News. “All of these things together will weigh on economic activity going forward. And that’s really what underpins our call for a recession in Canada.”

In a way, recessions can also be a self-fulfilling prophecy of sorts, according to Bartlett.

With the majority of Canadians and businesses already thinking the country is due for a recession, he says that households will start to scrounge away more of their dollars rather than spend freely, as they might in boom times.

Canadians will often change their spending and investment habits as their spending power takes a hit, Bartlett adds. Fewer homeowners will plan renovations with credit payments rising in cost, for example.

Canadians behaving like a recession is already here can therefore drive down business in these sectors and hasten the recession’s arrival, he says.

Click to play video: 'Frugal habits to save money'
Frugal habits to save money

How do we know if we're in a recession?

Bartlett says there are three Ds to consider when asking whether we’re in a recession or not.

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The first is depth: while the economy has slowed down, Canada’s GDP first needs to go into the negatives before the trend is considered a recession.

Next is duration: one quarter of decline does not meet the bar for a recession. Traditionally, a country’s GDP must be negative for two quarters in a row before we’re talking about a recession — though some economists argue even this isn’t enough on its own to warrant the call.

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Finally, a recession must have diffusion: it can’t just be one or two specific sectors dragging down the economy, it must be widespread.

While many economists are forecasting a downturn by comparing today’s economic trajectory to historic trends, the arbiter of whether Canada is in an official recession is usually the C.D. Howe Institute’s Business Cycle Council. In the United States, it’s the National Bureau of Economic Research (NBER).

These decisions, like most economic data, tend to come out on a lag — it could be months or over a year before a recession happens that the authorities declare it official.

What does a recession mean for you?

Canadian households don’t feel the impact of a few percentage points decline in GDP. What they do feel, Bartlett says, is not being able to afford things like they could before.

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“For your average Canadian, really what it feels like is a hit to your household income,” he says.

Some of that is already being felt, he notes. High inflation is forcing Canadians to spend more at the grocery store and on other essentials, while higher interest rates are pushing households to put more of their income into paying down debt each month.

Click to play video: 'Consumer debt surveys paint worrying picture'
Consumer debt surveys paint worrying picture

But the real income hit in a recession often comes in the form of job losses, Bartlett says.

If business dries up, he says, some workers could see their hours reduced or their jobs cut entirely.

Layoffs have already started to take root in some sectors such as tech, with major names including Amazon, Meta, Microsoft and Shopify going through deep cuts in recent months.

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Experts who spoke to Global News recently said tech is often a “bellwether” for the rest of the economy, with downturns here marking an early indicator of wider slowdowns.

But while many economists have been ringing the recession bell for months, some are less sure a downturn would come with significant job losses this time.

Deloitte’s report argued that with so many businesses struggling to find employees in Canada’s tight labour market, employers might be reticent to lay workers off over a short downturn for fear they won’t be able to get staff back when the recession is over.

In this case, Deloitte doesn’t see the unemployment rate rising beyond 6.0 per cent from the near-record low of 5.0 per cent seen at the end of 2022.

So, will there be a recession in 2023?

While many economic indicators are clearly headed towards a slowdown, the full context for 2023 is a bit abnormal, according to economists who spoke to Global News.

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“Calling this a recession, it almost feels strange,” says Pedro Antunes, chief economist at the Conference Board of Canada.

Antunes says that what the forecasts for a 2023 recession don’t have yet is a “shock” to the global financial system, like the pandemic in 2020 or housing market collapse in 2008.

While inflation and interest rates are certainly ratcheting up the pain on household budgets, he says the relatively robust jobs market is a countervailing force that’s helping to protect Canadian finances from an economic slowdown.

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Unemployment not expected to be at levels of previous recession: Bank of Canada governor

“We think labour markets are so essentially tight enough, there’s enough job vacancies in the economy that we should see … the pain of a recession, or a typical recession, really not be felt this time,” Antunes says.

The Deloitte report notes this upcoming recession might not have the diffusion element that previous downturns have had. Researchers at the firm expect job losses from a recession to be concentrated in industries including construction, retail trade, transportation and the arts.

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For all these reasons, Bartlett says it’s possible that even if Canada hits the duration and depth triggers — two consecutive quarters of negative GDP growth — that still might not meet the bar for an official recession.

In the United States this past year, for instance, the economy contracted for two quarters in a row but the NBER does not consider that enough to meet its technical standard for a recession.

A similar example happened in Canada in 2015, when two quarters of negative growth were determined not to have constituted a recession — a decision that divided the Business Cycle Council, Bartlett noted in a mid-2022 report.

He says that if 2023 sees widespread declines in more than half of industries contributing to GDP, and if employment sees a modest drop, it will likely be called a recession in Canada.

But words are just words, and with economic conditions deteriorating and financial pressures tightening around Canadian wallets, Bartlett says most consumers won’t care whether economists use the word recession or not.

“Whether or not it’s officially going to be called a recession, it’s going to be a very, very challenging year for Canadians,” he says.

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— with files from Global News’ Anne Gaviola

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