Front Burner - Are we headed for a recession?

Episode Date: September 29, 2022

There have been some gloomy economic headlines lately as stock indexes like the TSX and Dow drop and Canada’s unemployment rate goes up for the first time in months. This, as central banks continue to raise interest rates to combat inflation, which — while showing signs of slowing — remains high. Today, CBC business reporter Pete Evans brings us a closer look at whether a recession is near, and the role that central banks — including the Bank of Canada — play.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hello, I'm Jamie Poisson. Things haven't been looking so hot in our economy lately. Stock markets have tumbled, unemployment has ticked up. And of course, inflation is still high. It was just a few months ago that we heard this from Canada's finance minister, Christia Freeland.

I think that a soft landing is absolutely possible for Canada. But is that soft landing, where inflation is fixed without a major economic downturn, still likely? Or at this point, is another recession looking pretty much inevitable? I've got business reporter Pete Evans with me to tackle those questions and more. Pete, hi. Hey. Give it to me straight.

Are we headed into a recession? I mean, it kind of feels like we are, if not already being in one, doesn't it? It's funny. Recession is like a very technical thing that means certain things to certain people. But like what we think it means is basically is the economy doing badly, whatever that means for you, like your job or your house price things, like your overall level of wealth and your sort of affluence is what you define it as. Technically, the rule of thumb is two quarters of negative GDP. So that basically means is the economy shrinking? Is the total value of everything in the economy getting smaller for two quarters in a row?

That would be when we can start talking about it. But it's one of those things you can't really see until it's in the rearview mirror. It's hard to sort of call as it's happening or ahead of time. But more and more people are saying it's on the table. Well, let's look at some of the indicators that would suggest it's on the table. I think one place to start would be the stock market, right? Sure. Yeah. I mean, TSX is at about 18,000. So it's still above sort of where it was pre-pandemic. It's lower now than it was a few months ago, which is always a sign that generally,

unlike a recession, we sort of like see it in the rearview mirror, the stock market is very much forward looking, right? So people sort of spend money buying and investing in stocks today because of what they think the future is going to be for those companies. So if that's an indicator, then investors are saying, we don't think the future looks better than the present. What was good for the dollar was bad for just about every other market that there is with the S&P 500 giving another 4.6% on the week, and at one point falling below its June closing low before ending just above it at $36.93. NASDAQ nose-diving 1.79%. The Dow just slightly behind with a 1.6% loss today.

And another sign that a recession might be on the table is the unemployment rate. Right. And I feel like we were just talking about how it was at a record low. Right. So what's what's happening? Yeah. I mean, so before the pandemic, unemployment was about six percent. It it spiked. We lost about two million jobs in the first two months of March and April 2020. So it spiked up double that about 12, 13 percent%. And at last count, it was now at 5%. So that's good, obviously. Like, you know, more people working, more people, the labor market's very tight.

You can go get a job if you want one. That's where we are right now. It's interesting that it has inched up the last few months. For the first time since the pandemic started, we actually lost jobs the last three months in a row, which is like generally the sort of thing that you would see in a recession. But it's by no mean panic stations.

Like by any reasonable metric, the job market, joblessness is still at a level that policymakers are going to be fine with even a bit more before getting worried about. Are there certain sectors that we're seeing being hit harder than others when it comes to job losses? Weirdly, it seems to have been tech. I mean, tech was the sort of sector that really did very, very well in the early stages of the pandemic as we all sort of work from home, like your Shopify, that kind of stuff. I didn't do with e-commerce, shopping at home, doing stuff online did great. Starting about June or so, all these big companies like your Wealthsimple and your Shopify started laying people off and we reported on all of it. And that's basically them saying, look, we're still making money. We're still doing OK, but we basically overexpanded.

We thought we were going to continue to see this 10, 20, 30 percent growth, and we're not seeing that now. So they're sort of, you know, like waving the flag, saying maybe we were growing too fast, so we're going to cool things down for a bit. Layoffs appear to be on the way for many of the big winners over the past few years. Alphabet, Microsoft, and Meta announcing laying off existing workers or slowing down hiring over economic uncertainty. Shopify shares getting crushed today. On news, the Canadian e-commerce company will lay off approximately 10% of its global staff after making the wrong bet on how long the pandemic-fueled surge in online shopping would continue.

So we've got the stock market going down somewhat, unemployment going up somewhat. You mentioned the tech sector is down, but what about other corporations, corporate profit in general? Generally speaking, they've been pretty strong. Generally speaking, they're all still mostly profitable. I know like certain sectors, grocery stores have had a great run on the pandemic. We've talked about that extensively. They are still making more money than they normally do. That's a subject of much consternation for some. But there isn't really evidence of some sort of massive slowdown in terms of what people are spending. Because the thing about inflation is even if you're buying the same amount of stuff, it's costing you more, which is going to sort of juice those numbers. Even if you're buying the same sort of volume of groceries, volume of gasoline, if it costs more than it used to, that's going to increase those revenues and those profits. And speaking of those revenues, let's stick with grocery stores for a second.

Like the NDP called for an investigation into whether grocery giants are taking advantage of inflation. CEO profits are up. Corporate grocery store profits are up. But workers aren't getting paid more. Producers aren't getting paid more. And families certainly are having a hard time affording it. So that's why we are pushing to investigate the cost of food rising. This is at a time when the cost of groceries, as you said, has gone up almost 11% in a year. And the consternation at the grocery chains right now, is it valid?

Yeah, I mean, it's a valid question to ask. You know, it's certainly true that any company, food companies especially, have seen higher costs themselves, you know, like the price of wheat, the price of whatever went up. Did their consumer prices go up by a level that was sort of commensurate with that or more or less? Based on their profits, you wouldn't assume it's less. And now that we sort of seem to be through the worst of those sort of food increases, like I mentioned wheat and milk and all that stuff, it's still up on an annual level, but it's not quite at the extreme spikes we saw back in the spring. So it's perfectly valid to start asking those questions about, hey, if you raise their prices because of inflation, if your costs are down, why are your prices not coming down too? The other sector I want to talk to you about is oil because

we know prices are down, right? The cost of oil is down. And so is that a good thing or a bad thing for the economy? I mean, it kind of depends on your perspective. I mean, Canada's oil producing, energy producing sector. So generally speaking, when there's demand for oil around the world, that's good for our economy. It gets past the sweet spot whenever it becomes so expensive, whenever you and I are spending so much of our family budget on things like putting gas in the car and heating our house that we stop spending on other stuff. The price of a barrel of oil right now is about $80. So that's back to what it was back in sort of January, February before Putin invaded Ukraine and sent the market crazy. So it's certainly good for most consumers that it's come back down. Ukraine and sent the market crazy. So it's certainly good for most consumers that it's come back down. I would argue you don't necessarily want oil to go down to less than it is now,

or at least much less, because A, that's going to have all kinds of environmental problems with, hey, there's no cost of oil. Burn it, it's free, it's cheap. And that's when you start seeing more layoffs in this sector, to raise interest rates to bring down inflation. And I know we've talked about this on the show, but why might that contribute to or cause a recession? Right. I mean, that's one of those things where the treatment is worse than disease sort of thing, right? So central banks, including in Canada and the Fed and around the world, they're all raising these rates for the sole purpose of getting on top of inflation. So how that works is when they make the cost of borrowing more expensive, you're now less inclined to go spend money or borrow it to invest or spend on anything.

So they're raising this rate like specifically to like push down demand for goods, whether that's housing or like a liter of milk or a liter of gasoline. By raising those rates, you and I are less likely to want to buy it, which has the effect of bringing down prices. That's the idea. And it is certainly working. I mean, the last two months in a row, it's July, yes. But the last two months in a row, inflation came down from 8.1 down to 7.6. Now it's at 7%. Next month, we'd expect that to come down a little bit more. That's not to say that it's a painless process. But at least in the short term, the price that comes with raising rates is that things get more expensive. So it's counterintuitive to think, you know, the cure for high prices is to make things temporarily more expensive. But that's the idea which central banks seem to be telling us they're fully committed to. Right.

But, I mean, just to be clear here, like when you make it so that there's less demand for products, people buy less stuff. And also you make it harder for businesses to borrow money or more expensive for businesses to borrow money. Then they don't grow. Or maybe sometimes they contract. So we're talking about layoffs, right? Yeah. I mean, that's in the short term, the price of some of these rate hikes will be reduced consumer demand for just about everything. And that's going to filter down and is already into lower prices, lower revenues. Yes. Layoffs potentially and all kinds of stuff that has customers that are going to spend money on it. Now, central banks are telling us whatever they have, they're going to do this because that's how concerned they are about high inflation. They're saying even despite all that collateral damage of like we've nuked the housing market, we are, you know, 100,000 jobs in Canada have been lost in the past three months.

They're saying we're okay with that temporarily, maybe even a bit more, because the end goal will be to bring down inflation, which will make everything else better. I just wonder if we can dwell on that for a second. You know, you mentioned before that the cure could be worse than the disease here. Like, for sure, I get why inflation is such a problem as everything gets more expensive and wages aren't keeping up. Like, that's a problem. But won't it be harder to afford inflated food prices when you have no wage at all because you don't have a job? Absolutely. I mean, the thing that central banks, including Canada's do is what they call

inflation targeting. And that's based on the idea that if you can figure out inflation, if you can figure out, manage things so that inflation stays in a range between one and 3%, all the other problems in the economy can be fixed. Like those are sort of secondary concerns. It's only when things get wildly out of that range of one to three that the other problems sort of, like, snowball on themselves. So they're saying, you know, by continuing to raise rates, even, you know, they've raised 300 points in the past six months, they're going to go a little bit more the next time they meet.

Yeah, that's coming pretty soon, right? The Fed's expected to raise its rate again when they meet in November. So rates are going to go up most likely from the already high level they're already at. But the reason they're doing that is they're saying, despite the problems we've talked about, despite the fact that layoffs are up slightly, the unemployment rate is still at 5%. So the Fed and Bank of Canada are saying,

we are okay if our attempts to rein in inflation by raising rates even more leads to some job losses because we think the economy can swallow it. So that sucks for that person who's going to lose their job. You know, like maybe it's the grocery store worker who's going to lose their job in 20 bucks an hour because the plan from the bank candidate says, listen, temporarily we can live with that because if we fix inflation, that person will have a new, better, more productive job somewhere else very soon in a world where they don't have to worry about

the price of pasta going from $1 to $2 to $3. I get the argument that they're trying to strike some sort of balance here between bringing down inflation and causing an economic downturn, right? But like you mentioned before that inflation is coming down. And I guess my question is, is it coming down because of what they're doing? Or is it coming down because of factors that are beyond their control? Like I saw a tweet from Frances Donald, who I know we both know she's a well respected Canadian economist. And she's responding to a recent video from the Bank of Canada where Tiff Macklem explains why the bank is raising interest rates. And she wrote, like, just wondering if the Bank of Canada can explain how domestic interest rates in Canada can help control food prices,

gas prices, and inflation created by global supply chains. Because I sure hope the rising rates, which will put a lot of Canadians out of work, will solve this inflation problem. Like she's saying, this is because of global supply chains. It's out of our domestic control. Right. I mean, when the Bank of Canada raises its rate, the thing that feels it most often is going to be, you know, the price of servicing your mortgage, the price of buying a house, the price that you feel every day, on top of those other things, like, you know, the price of oil and food, a lot of which comes from outside Canada, and all that stuff. So she's absolutely right. It's fair to wonder if maybe it's time for some sort of different path. I mean, no one is out there suggesting they should cut rates again. Maybe, you know,

pause for a while and say, listen, let's just let these 300 points of hikes that we put in the economy in six months, let's just let that filter out and see what happens. Do we really need to keep making things, you know, more expensive in the short term for this long term gain? That's a totally valid question. Yeah. Okay. I have another one. You know, I want to put to you some comments by another expert. And this is Jeremy Siegel. And he's directing these critiques towards the U.S. Federal Reserve, which is also raising interest rates. He's a professor at Wharton. And he says he's worried the Fed's making a big mistake and could provoke a steep recession. You know, Scott, I find it very amusing.

A year ago at that September meeting, when we had booming commodity prices, housing prices rising at the fastest rate in post-war history, when we had all commodities going up at rapid rates, Chairman Powell and the Fed said, we don't see any inflation. We see no need to raise interest rates in 2022. Now when all those very same commodities and asset prices are going down, he sees stubborn inflation that requires the Fed

to stay tight all the way through 2023 makes absolutely no sense to me whatsoever. He sounded genuinely upset about the impact that this is going to have on working people. And now we're saying, oh, my God, he's the God that's going to stop inflation and he's going to crush the wages, which have fallen behind inflation by 3%, 4%, 5%. I mean, why is he putting the burden on these working people, on the employed people? That's, I mean, what is it? And every other commodity price is going down. And so what about the argument that, like, they've gone too far now? He's right in that inflation does seem to have peaked at least the headline number in the U.S.,

all kinds of underlying things, gas prices, oil prices, we talked about that. All these commodities, which we were losing our minds about back in the spring, they're all down 20, 30, 40%. So that argument, basically, if I can translate it from economist speak is, hey, listen, we're over the worst of inflation, can't we just like chill out for a bit and just let things settle down? That's not a bad argument. I mean, it's the Fed is doing this in large part because they felt the pressure because they are perceived to have been asleep at the switch raising in the first place. Like, you know, this time last year, they're talking about, you know, transitory inflation, it's going to be temporary.

While they were saying that, the inflation went from 1% to 10% without doing anything. So this is their sort of, you know, they miscalculated on the way up, and now they might be miscalculating on the way down again. I mean, time's going to tell if that's true, but he's not the only person making that argument. In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization. Empowering Canada's entrepreneurs through angel investment and industry connections.

Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people, and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo, 50%.

That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. Look, like raising interest rates as a tool is largely thought of as a hammer. I know you and I have talked about this before. And I wonder if there are other tools here that might be like a little bit more strategic or pointed that could be used. Like what about legislating some kind of emergency price stabilization on certain grocery items or rent? Yeah, I mean that's a valid argument making their rounds right now. At the UK this

week in their budget, they basically released a bunch of stuff that sort of amounts to price controls. They're doing this sort of, you know, Margaret Thatcher on steroids version of, you know, like cutting taxes for businesses while also giving like consumer rebates to keep them happy so they can keep the lights on and keep the power going this winter. That's not without its risk, but at least on a very baseline consumer level, yeah, people who are worried about having their bill to heat the house go from 100 pounds a month to 1000 are going to feel that because the government's coming in and saying, listen, cap it at 200 and we'll make up the difference. How they pay for it down the line, who knows? That's a problem for later.

But you're not wrong. Rate hikes aren't always necessarily the best tool for this. I mean, fundamentally, central bankers are a guy holding a hammer and all they see is a nail everywhere. Sometimes maybe a screwdriver is the right tool for the job. Look, before we go, I know this has come up a couple times in the conversation when we have been talking about which sectors are hurt. And certainly when we were listening to Jeremy Siegel and what he's worried about, but I just, I want to spend some time talking about like who this is really going to hurt because it strikes me that inflation is obviously really hurting people who are living paycheck to paycheck, but also a looming recession is going to hurt those exact

same people, right? Like, it's going, it's going to hurt those exact same people. Yeah, I mean, prepare yourself for a shock. But the people at the bottom of the economic period are the ones who are going to pay for this. I could not but notice when I was writing all those stories about tech layoffs this summer, the CEO's letter were all the same. Oh, you know, this is a tough day. I haven't had to do this. Like, you know, our hearts go out to you. Like, we're all suffering with you. But at the end of the day, the CEO is the one who's still worth zillions of dollars. And the people at the bottom are the ones who got laid off for this. So yeah, the pain of this inflation flight is already and is going to be borne by the people who can least afford it.

So it's perfectly fair to start wondering if maybe there are some things you could do that aren't rate hikes that might sort of dull that pain, you know, to use the finance minister's parlance of a soft landing. Soft landing sort of depends on your perspective. It's feeling pretty hard if you're the one who lost their job. And yeah, maybe there are a few other better tools to sort of make that feel not quite so hard. And I also just can't help but think, I've been thinking about this all week, that these are the same people who carried us through the pandemic. Primarily women, primarily people of color.

These are the ones that they sort of bore the brunt of the layoffs. And the data still shows now, like they're the ones who haven't been hired back. If they've retrained and got a new career, that's great. But like for the most part, they're the ones who are't been hired back. If they've they've retrained and got a new career, that's great. But like for the most part, they're the ones who are long term unemployed, like they got left behind in sort of early 2020. And they're they're back there somewhere. Yeah. Okay, Pete, thank you. Thank you very much for this. It's always great to have you. Always fun to be here.

All right. That's all for today. I am Jamie Poisson. Thanks so much for listening to Frontburner. And if you caught our pod with Fred Van Fleet yesterday, we also have a piece with Fred on The National tonight. So you can catch that at 10 o'clock. Thanks so much for listening, and we'll talk to you tomorrow.