Front Burner - Are we in a 'hidden' recession?

Episode Date: July 31, 2024

After the Bank of Canada hiked interest rates at an unprecedented pace the last couple of years, there’s been a lot of talk about whether we’ll be tipped into a recession. Now, as rates have finally started to come down, a lot of people are struggling. Unemployment’s gone up, people are accumulating debt, and despite inflation cooling, everything still seems really expensive. So, it can start to feel like we’re in a recession. But most experts aren’t calling it one. So what is it? BMO Financial Group’s chief economist Doug Porter joins us to talk about the state of the Canadian economy and how to make sense of it.For transcripts of Front Burner, please visit: https://www.cbc.ca/radio/frontburner/transcripts

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. Hi, I'm Jamie Poisson. So for the last few years now, really, we've been talking about the possibility of a recession. As the Bank of Canada moved at this unprecedented pace, hiking interest rates to get inflation down,

there was a lot of hand-wringing. When you move that fast, is something going to break? Well, here we are in the summer of 2024. And while we may not technically be in a recession, for a lot of people, it sure feels like one. Unemployment is high. People are spending less and struggling to pay their debts. Everything remains fantastically expensive. There's a lot going on here that looks and swims and quacks just like a recession. BMO chief economist Doug Porter is back on the show today to talk about what's happening in the economy right now and where it could go in the future. In other words, are things going to get better or could they actually get worse?

Doug Porter, thank you so much for coming back onto FrontBurner. It's a pleasure to have you. Well, thank you for inviting me. So last week, the Bank of Canada moved for its second time in as many months to cut interest rates by a quarter of a percentage point. The governor, Tiff Macklin, said that they are now putting more emphasis on, quote, downside risks. Downside risks are taking on increased weight in our monetary policy deliberations. We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2% target. And I saw an interview he did with the National Post last week

where he said the, quote, balance of worries is shifting. So translate that for me. What does he mean when he says that and how significant is it? So first of all, for us market watchers, this is actually a very big, important statement that he's made. For most of the past three years, the biggest concern for the Bank of Canada has been that inflation has been too high for comfort and that if anything, the growth was too strong, the economy was operating well above what they call potential.

Now, as he says, the balance has shifted. They're actually concerned about growth being too weak and believe it or not, inflation at some point falling too low for comfort. Now, you know, I would say don't tell that to anyone in a grocery store or lining up to pay for something these days. But yes, the bank actually is concerned that inflation might not just drop to 2%. It could actually go below that and then stay there for a while. Right. And why would that be bad for people who might hear that and think that would be great? Yeah, and it's a reasonable question. We're like, why, why would we care if inflation was a little bit below average for, for a while? And for a while it would not be a bad thing. The concern

is that we might get stuck there and that, you know, once inflation starts moderating, it might actually get too low. Like it might even drop down to zero or negative. If we think way back to before the pandemic, we were actually in a situation where the bank and many central banks, not just here in Canada, were actually struggling to get inflation up to their 2% target. Inflation was just too low for comfort. And you may ask, well, why is that a bad thing? And the concern is that you could actually get into a situation of what they call deflation, where prices actually start to decline. And that is not a positive. That's the rut that Japan was stuck in for about 30 years. And they've only really just emerged from that recently. So that's not quite as bad a situation as inflation, but it's a challenge as well.

That's something they want to avoid. I think I want to spend some time with you today looking at or going through some of the data that the Bank of Canada is obviously looking at and some of the data that is giving them that pause or shifting their worries, right? And I think probably the most important one, if you agree, is unemployment, right? The unemployment rate rose to 6.4% in June, the highest it's been in nearly seven years, aside from that, of course, initial pandemic spike. How does this labor market compare to other times where there's been a recession or an economic downturn? How concerned are you by that number, 6.4%? First of all, there's no doubt that it's the weakness that we've seen recently in the labor

market that's really got the bank into concern. That's been the biggest change. And I suspect that they've been a bit surprised at how quickly the unemployment rate has risen. So just to put it in context, it was 5.4 a year ago. It's risen by a percentage point a year. That's a pretty steep increase, but it's not comparable to what we've seen in recessions. If you think back to the early 1980s or even the early 1990s, which were really serious recessions, we saw the unemployment rate get up in the double-digit territory. At one point, it actually got up to 13% back in the early 1980s. 6.4% historically is not a particularly high unemployment rate, but the rate of change does matter and clearly it is deteriorating and it can snowball to some

extent. In other words, once the unemployment rate starts rising, you get some concern among the typical household that, hey, maybe my job isn't safe. And they might start to pull in their spending and it can kind of cascade on itself and weakness can beget weakness. So that's what they want to avoid at this point. The bank itself says that it takes 18 to 24 months for rate hikes to really be felt, right? And the last rate hike was just a year ago.

So do you think that the unemployment rate will continue to rise? Do you think that that's an inevitable factor? I wouldn't say inevitable, but I do think it's likely, simply because we've still got very strong labor force growth. The population is still growing very quickly. The economy actually is still creating jobs. We're actually creating jobs at a reasonably good pace, but it just cannot keep up with the population growth we've seen. So I actually would not be surprised at all if the unemployment rate rises to around 7% by the end of the year. And who is it hurting the most?

It's interesting. The rise in the jobless rate, usually during a recession, what you see is a lot of layoffs. We're not really seeing that. Who it's hurting is basically new entrants of the labor force, whether it's young people or new immigrants who are really struggling to catch on and to find jobs. And even when they do find jobs, they might not be of the highest quality or the best paying. But yeah, I think there's no doubt about it. It's essentially new entrants to the labor force. And I would imagine that this is particularly stressful for them because they don't have the same kind of safety nets that perhaps you and I have,

like the fact that we've been paying into unemployment, or like they wouldn't have any of that, right? That's more than likely the case, that they wouldn't be eligible for employment insurance, for instance. We know that Canadians are spending less. In May and June, people spent less on cars. Fewer Canadians have renovated their homes. There was weak growth in food services.

Of course, if people aren't employed, they aren't able to spend. But what else does this data say to you? So when the Bank of Canada first began to raise interest rates, the main goal of that was to take some steam out of the economy and, and which would ultimately bring down inflation pressures. And I would say to, to some extent, this is almost textbook. Uh, the fact that, uh, consumer spending has, has cooled alongside the rise in interest rates over the past couple of years. And it's in many of the sectors, exactly what you would expect, you know, so-called discretionary items, things that you don't have to have today, or you can put off for a year or two years. You know, we are seeing a little bit of a cooling in auto sales. We're seeing some cooling in things like clothing and furniture

and appliance sales. And like I said, to some extent that's textbook. What's interesting is consumer spending overall is not declining. The growth rate is slowing a lot. We're still seeing some modest gains if you look at it on where we were a year ago, but it's very modest. And again, it's not in the discretionary items. It's basically in things you have to buy. Right. We know Canadians are highly indebted. Our household debt is the highest in the G7. And what do we know about how people are doing when it comes to paying their debts right now, be it credit cards, car payments, mortgages? I mean, these are things that I would assume they kind of have to pay, right? It's not

like going to a restaurant. And I would say actually the surprise has been how well households have managed to handle it. I'm not saying it's easy, but if you look at say things like consumer bankruptcies, insolvencies, delinquency on debt payments, it's certainly deteriorated over the last year, not surprisingly, but nothing close to abnormal levels. For instance, if we looked at consumer insolvencies, we're essentially back to where we were before the pandemic began, which it wasn't a great place to be, but it wasn't bad. Canadians are managing. It's been a struggle, but I think part of it has been explained by the fact that A, people haven't lost their jobs to a great extent. And also they put aside a lot of savings during the pandemic. Even now,

the savings rate is higher than it was before the pandemic. And to me, that says that people were preparing for the higher mortgage rates they might have to face or their higher debt service costs. Talking about those higher mortgage rates, we know, obviously, that an enormous chunk of our debt is tied up in our households, is tied up in our mortgages. This year and next year, so many people are going to renew mortgages that they got at really low prices in and around 2021. It's about half of all mortgages. I understand like more than 2 million people. So when they renew at higher rates, which will be more expensive, what do you think is going to happen? Do you think people have prepared enough or do you think the last

couple of years has diminished their savings so much that they're not going to know what hit them? So I think there's a whole spectrum of possibilities here and, you know, different experiences out there. I do suspect that a lot of people are prepared for it. I mean, they've known this is coming for a couple of years now. They've had lots of time to prepare. I suppose the good news is the bank is likely to cut interest rates further. I think interest rates will be a bit lower a year years now. They've had lots of time to prepare. I suppose the good news is the bank is likely to cut interest rates further. I think interest rates will be a bit lower a year from now. That's going to give them a little bit more flexibility, a little bit more choice,

but almost anybody who took a mortgage out in 2020 or 2021 is going to be faced with higher payments. Yeah. Do you think a lot higher or, you know, define higher payments for me? So at one point, you know, you could get a five-year mortgage for less than 2% at the depths. And, you know, of course now we're looking at at least a couple of points above that. The, you know, the principal will have been worked down. Like I said, there are different options they can take. They can, you know, they can lock in for one to two years and then hope that rates come down even more and just tide over for that period of time. I think for most people, it will be a struggle,

but it will be manageable. Of course, there's going to be some who will be in a very difficult situation, but I suspect that will be the minority. I think it's more a case of they're going to have to rein in spending in other areas just to get through it until interest rates come down a little bit more. 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 Cups. You do hear people talking about this, you know, wave of mortgage renewals happening and how it's going to crash the housing market and people are going to be forced to sell their homes. Well, could you imagine having to pay off your mortgage for the rest of your life? The potential for things to go wrong is greater than it ever has been.

Canada's banking watchdog is warning homeowners they may be in for a payment shock if they have to renew their mortgages in the next couple of years. It sounds to me like you think that those analyses are maybe a little bit overblown or histrionic. I think they are. For sure, there will be some people who got in over their heads who'll have no choice but to sell. But I suspect what they'll find is that the market,

you know, the housing market is really not that wildly different than what it was back in 20 and 21. Now, after we've been through, you know, a serious blow off and then a, then a come down in prices in the last couple of years. So it, I, I, I suspect that we're not going to see a, you know, for instance, a crash in the, in the housing market. I just don't buy into that, that view. There, there's just so much underlying demand from the very strong population growth from the very tight rental market. I just, I just don't see a situation where, where market would really crack in a serious way. What about the rental markets? We've seen rents go up exponentially in the last couple of years, largely because people are on passing their mortgage costs to renters, I guess. It's really an excellent case of trickle-down economics working. But what do you think is going to happen there? First of all, I would say they were only able to pass on those rental increases

because the market was incredibly tight, because the vacancy rate was at levels that we haven't seen in much of the country in decades. And in some cases, we've never seen such a tight rental market in many cities. And again, I would tie that back to very strong population growth is what really tightened the rental market to such a degree. With more people than ever before and millions on the way in the years ahead, Canada is growing faster than comparable countries. The population now 40 million and counting. Canada grew by 1.5 million people. It's the biggest jump, as you say, in all

the G7 countries. A growth right now for the country of 2.9 percent. And we haven't seen it be higher in Canada since 1957 when it was 3.3 percent. I'm not sure I can offer really soothing words on the rental market. It's still incredibly tight. Even with a cool down in population, you've got such a fundamental mismatch between supply and demand on that front that I'm not sure that there's a lot of relief coming on the rental side. We have seen some indications that the rent growth may have peaked and the pace of the rental increases might start coming off a little bit, but that's not equal to a decline in rent. So I still think it's going to be a really tough market. And in terms of the overall

broader inflation picture, I do think that this is going to be one thorn in our side, the fact that rents are still going to be pretty sticky and continue, I think, to add into inflation. Listening to you today, it's clear you don't think that we are in a recession. Obviously, that is your position. It is. There's no question that the economy has been struggling, but I don't think it quite rises to the level of what we would call a recession. You do hear people make the argument that we are in a kind of recession because population growth has essentially masked or hidden this recession that we're in. And I wonder if you could flesh out that argument for me and then tell me why or why not you agree with it. that argument for me and then tell me why or why not you agree with it. Yeah, some folks have made the case that we're almost in a stealth recession if you look at it on GDP or income per capita or even consumer spending per person has actually declined and

declined pretty heavily in the last year or two. And really the only other periods in history when we've seen GDP per person drop as much as it has in the last year has been in full-on recessions. I guess the reason why I push back a little bit against that is, you know, recession is defined as a broad-based decline in the economy that goes on for a long period of time. And by most measures, things are not declining. You know, as I said, we're still adding jobs. Consumer spending, even though it's weak, has managed to see some increases. We're not seeing broad-based layoffs, for instance.

So a lot of the sort of check marks that would suggest that we're in a recession are just not there. Having said that, there's no question that an outright decline, a serious outright decline in per- person GDP is not something to be ignored. But I guess, so if we put it in relatively simple terms, if we think of income per person, so let's use an example where you and I both make $100 a day, for instance, just to pick a number. And so the average income between us is $100 each. And then we get a third person who then enters the economy, who's maybe not as skilled, doesn't have as much experience, and they can only make $70 a day. Well, the per person income between the three of us is now

dropped to $90 per person. That doesn't make your eye worse off. It doesn't mean that the economy is necessarily weaker. And that's basically what's happened on a much larger scale. We've increased the population very rapidly over the last few years. And many of these folks, they're having to take a relatively low wage or low skilled jobs. And it actually has mathematically brought down the per person income or the per person GDP to some extent, but that doesn't make the rest of us per se worse off. Right, right. So people feel worse off. And I just wonder if you could speak to that. How much of it do you think is really founded? Oh, it is real. There's

no question that the economy, even when you strip out what I just talked about, there's no question that it is struggling to grow. And as I said, it's tougher to find a job now. There's no doubt about it. And frankly, some of this is exactly what the Bank of Canada ordered up by raising interest rates as much as they did. They knew they were going to have to find this very narrow path that led to a pretty serious slowdown in the economy without quite tipping us into recession to bring down inflation. I'd say to this point, they've mostly managed to walk that tightrope. If we go back to the very first question, what they're concerned about is causing too much weakness and actually tipping us into

recession. That's something they want to avoid. They don't want to knock us into a needless downturn. And that's one of the reasons why they're pulling back now. And do you think that they've done it soon enough? Or is there a scenario here in which they waited too long? There is definitely a scenario. This could play out, you know, it could get much worse in the months to come.

And if so, what could that look like? It definitely is a risk. And that's exactly why they are starting to cut interest rates and cutting them, I think, a little bit faster than some expected. And still, you know, basically talking very dovishly, as we like to say. In other words, they're looking to cut rates, you know, probably at the next meeting and then the one after. And I think some of this is they are worried that maybe they did wait a little bit too long. And just for a little bit of a longer view here, what do you think this is going to look like in several months from now, in six months from now, a year out potentially?

So most are pretty much convinced now that the bank is likely to cut two more times before the end of the year. It's possible they might even do a little bit more than that, but I'm on board with two more quarter point rate cuts before the end of the year. And then I don't think it stops there. I think they'll probably slow down the pace of rate cuts in 2025, assuming the economy doesn't weaken a whole lot further. And if you think of their overnight interest rate as being four and a half percent now, we see it getting down to three percent by the end of next year. And then I think they'll probably stay around that level. So we're not going to go back to the really low interest rates

that we saw before and during the pandemic, but we do think we're going to be a fair bit lower than today's levels. Okay. Doug Porter, thank you very much. Thanks for having me. All right, that is allbc.ca slash podcasts.