The Decibel - Where’s that recession? Why it’s still too early to celebrate

Episode Date: August 21, 2023

Fears of a recession have been looming since the worst days of the pandemic. And as inflation continues its slow but steady ascent, central banks around the world have tried to increase interest rates to cool things down. It’s easy to think that all of this means we might actually have avoided the worst.But Report on Business columnist and reporter Tim Kiladze says it’s too early to declare victory: we may not actually have achieved that mythical “soft landing” after all. He’s watching a few warning signs that could spell economic trouble for us later.Questions? Comments? Ideas? E-mail us at [e-mail]

Tim Kaladz is a reporter and columnist for the Globe's report on business. And before he was a journalist, he worked on Bay Street. And there's something else you should know about Tim. Would you consider yourself a pessimist or an optimist when it comes to talking about the health of the economy? Pessimist. I don't say that happily, but I think people are a bit deluded in thinking that we got through everything. Like the storm is over and then it's all sunny skies now because there's a lot of scary data points out there. Tim is a person you go to when you need some

economic analysis. And right now it feels like we need to check in on what's happening with the markets and the economy, because things are weird. I'm Cheryl Sutherland, and this is The Decibel from The Globe and Mail. Hey, Tim, thanks for being here. Happy to be here. So, Tim, so every so often we at The Decibel kind of want to do this kind of check-in on the economy and check in to see what's going on. And we're turning to you this time. So can you kind of paint me a picture of what the economy and the markets are looking like right now? So there's two dynamics going on. There's what's happening in the official numbers, which is the macro view in economics terms. And then there's what's happening on the ground. And in the macro view, things are looking pretty good. Inflation really

has come down from 8% or whatever it was to, let's say, around 3%. We still have GDP growth. Remember, this was the year that everything was supposed to be really painful. That hasn't been the case. If you look at the stock markets, which are somewhat disconnected from the economy at times, but you know, US markets up like 20%, the Canadian markets up a bit, like there has not been this widespread pain. On the ground, though, you know, people who have variable rate mortgages, for instance, like they're really feeling it. And I think there's been this real question of, will the shoe like will something hit and we've waited so long that people have started to think oh no we got through it like we skated through it um and if things do drop the bigger picture is strong enough in a way that it'll all be these kind of

like micro pains not something that's going to collectively hurt us all what i'm worried about and what I think some of the data is starting to really show, and this is not just data, it's anecdotes from CEOs and things of that sort. All those collective micro points can still add up to be something quite big. And so coming into the fall now, I think we naturally, especially in North America, the US and Canada have this view of like a bit of a reset. You know, summer's over. Let's get back to business. Let's grow, grow, grow.

It's like the real new year. Yeah. Yeah. And it might actually be the opposite. All that pain we were talking about before might hit in our like North American New Year. Okay. I want to pick up on something you said earlier there, because last summer we were talking about how a recession might be around the corner and it doesn't seem to have materialized. And there's been a lot of talk

of this elusive soft landing, which is like where the central banks cool the economy without causing a painful recession for people like you and me. So is this what happened here? So far, it looks that way. And I think people are getting extremely excited about that. And they should. It's been legitimately not that bad. But what I think we've lost track of is that the recession may not be passed by or gone. It might just be deferred. And so I think everybody feels like they can exhale. Everybody wants to exhale. Whereas I'm more like Whitney Houston and waiting to exhale. We're waiting to excel. It's like the premature exhalation.

Exactly. Exactly. And I know that sounds so negative and, you know, people kind of want to move on. Yeah. But it just does not. There isn't proof that we can just yet. And I think that part of the reason for that is that all the models, so to speak, the spreadsheets, whatever you want to call them, that are used by economists and financial analysts or whatever to kind of predict how things would go, we are now realizing that those models

don't really make sense in this post-pandemic world, or at least haven't so far. And there's actually a pretty obvious reason for that. It's almost like it's so obvious that we're blinded by it, which is that we had a crazy amount of stimulus money. We literally flooded the market with cash. At the end of the day, that's what it boils down to. And for the longest time, coming out of the financial crisis, the 08 financial crisis, the US in particular did the same. But it didn't really have this massive effect. Inflation stayed really

low. And so there was this view that maybe flooding the market, flooding the economy with cash doesn't actually have as much of an effect as we thought it did. What we're realizing now in this round, because it was so quick and so forceful, it actually has. And so, you know, there's been a bit of research now that's come out and said, well, you know, we've had, you know, five percentage points of rates increases. Like how is this not dramatically slowed the economy or created this recession that everybody thought was going to happen? And then this early research is showing that really the first kind of three percentage points of that increase was actually just getting the economy back to like a neutral state in this post stimulus world. Tying that now into where we are and why I can't exhale just yet.

Some new numbers came out from the San Francisco Fed, which is a branch of the Federal Reserve, the central bank in the US. And they showed that the estimate that the amount of excess savings in the US was likely to run out or be finished by the end of Q3, which is the end of September. And to put that in context, at the peak, estimates have shown that the amount of excess savings was 2.1 trillion in 2021. Okay, so let's connect the dots here. Can you give me an example of how government stimulus can have an impact on the markets? There's multiple ways. The biggest I can think

of would be just the fact that, one, like we've been talking about, there's more money to be spent. The second element of it, and this ties into what we've seen with inflation, is that in these times, no one really knows what things should cost anymore. You know, I'd say this all the time. Like I go to no frills. Okay. Which is like the discount grocer in Toronto. Cause I'm like, I'm not paying more for Kraft peanut butter. You know, like I, my staples are my staples. And I go and like every week bread costs a different amount of money. I'm like, how is this possible? Like I get that there are pressures and whatever, supply chain, whatever, but you can't have bread swing like a dollar in a week.

Like that does not make sense. And so the weeks when it's more money, you're just like, well, I'm not gonna go shop around. Like I'm not gonna care about an extra dollar or whatever. And you multiply that across like multiple types of goods and people will just pay more. And if you have excess cash, which a lot of people have had until very recently, you don't really care. It's annoying, but you don't care. And so tying this back to the markets, how it really impacts companies is that

it can increase their profit margins. Interesting. Because maybe, yes, their costs have gone up a little bit, but we don't really know how much. Meanwhile, there's more elasticity is a term, but they can fluctuate the prices because we're less discerning about our prices. Like they're getting away with maybe higher prices that maybe previously we would have kind of said, hey, wait a minute, what's going on here? Yeah, exactly. And in Canada, we always talk about grocers and the necessity things, but it's the same thing with restaurants, right? Like we don't really know what it costs restaurants

for their food items, you know? And what drives me nuts now is you go to a restaurant, like appetizers is like 22 bucks. And you're like, what? No, you know, like this is cauliflower, you know, that's been dressed up kind of nice. It's got a good sauce. Yeah. And people will still pay it. Like, so nobody has been forced yet to lower prices. So that boosts margins, profits, whatever you want to say. And then tying it back to the market is that, you know,

if you're making more money, the stock's going to go up, you know? Okay. So is the stimulus the reason why it's been so hard for like economists and central banks to predict what's going on right now? It's a huge factor in it. Another major factor, and this is a Canadian element that I don't think we talk enough about is what's happened with immigration. You know, we welcomed a million new people last year and there's a lot of benefits to that, but there are going to be costs to that, that we may not have factored in. If you just bring in more people, like they're going to buy stuff. So the total amount of stuff purchased goes up. So therefore growth goes up, sales go up, you know, the third element, which again, is this big thing hanging over all of us is what i call the you can't tell me not to um which is that we were kind of locked away or

you know had to go through multiple rounds of lockdowns and you're gonna take that extra vacation because it's like two or three years of your life that you kind of missed. And I think, this is personal opinion, but I think that some of it isn't even conscious to us. It's this subconscious urge. I'm like, I got to get out, you know? So you take that vacation or you spend the $20 on the appetizer because you're like, I'm with my friends. I don't care, you know?

It's this real intrinsic urge that will probably erode over time as we return to more normalcy. We'll be right back. All right. So from your vantage point, we're not quite out of the woods when it comes to recession. And you mentioned there are some warning signs out there. What are they? So the big one lately is what's happening in China. And for some reason, we in the, I keep saying the West, but let's just say Canada, don't really pay attention to what's going on in the Chinese economy, which is strange because they're the world's second largest

economy. And in Canada, they really matter because for so many years pre-pandemic, they were gobbling up commodities, energy, metals. And the Canadian economy, whether or not we want to admit it, is extremely resource-based. So it has a huge effect on kind of what our growth potential looks like. And China lately has had some really scary warning signs. Youth unemployment there is a 21%. Another major property developer there is close to defaulting. They warned about it. And on top of that, the Chinese government has basically said they're not going to do stimulus

to help turn things around. That could change. But if they don't, there could be a huge reckoning. And, you know, I think we've all seen the stories or seen headlines over time about how, you know, China was building properties that nobody was even living in. It was all kind of this like real estate bubble or could have been, well, that could crash. And as we saw in 2008 in the US, you know,

when housing bubble crashes, like a really systemic bubble, it has incredible knock-on effects. But on top of that, in the US and in Canada, we're now seeing some companies that are what we call leading indicators. Their CEOs are making public comments about the state of their business. So like railway CEOs, not all of them, but some are starting to make comments about how like, you know,

shipment volumes of the kind of the raw materials that we use in all of our goods, they're really falling off. And they're saying they're not predicting a rebound until 2024. Now, they thought that maybe the second half of this year, things would pick up. Now that's being pushed out. It's a common for CEOs to kind of come out and say these kind of things. They have to give a bit of guidance. Yeah. I think what has been a bit more alarming lately is there was initial guidance in the spring. And it was like, maybe this is just a blip. Maybe this is the kind of scene of like a soft landing, like things slow down a little bit, but we'll get through it. Now that's been extended out. It's like, oh, well, there's something else going on. So we have China.

We have signs from CEOs. What else do we have? The third one is kind of a tricky one because it's financially complicated. There's this thing called the yield curve, which basically just tracks how much a government is paying for its debt. And when the yield curve inverts, it goes upside down. First off, let's yield yield curve we're talking, when we talk about yield curve, we're talking about bonds, right? Government bonds.

Okay. So the government of Canada, you know, issues bonds for like one year, for three years, for five years, for 10 years. Each is at a different interest rate. Normally, a shorter term bond pays a lower interest rate uh and the the thinking behind that is um because you can see kind of into the future for shorter periods of time like you kind of know that in one year the government can't it's not going to get really messed up and therefore it'll be able to pay you back your money but in 10 years you don't know what's going to happen so theoretically the government

has to pay you more for the extra risk you're taking on that thing could go bad over that time. So it's lower, shorter term, higher interest rates, longer term. Right now, we're in this situation where it's inverted, where it's higher, shorter term, and lower, longer term. And it has been that way for a while. And the reason why it's gone so high shorter term is because the shortest term rate is the central bank interest rate. And that's hovering around 5% in Canada and the US. Why is that a cause for concern

that these are inverted right now? Because history has shown us that the last seven times the yield curve has inverted, we have a recession. On top of that, I think people are saying, oh, the bond market is just wrong because look how good the numbers are, right? Inflation has come down. We're good. What people don't realize is that it can just take a long time. So the best example would be in 2006, which was in a pre-08 crisis, yield curve inverted. And then it took until 2008 for like the real, real pain to hit and look how bad it got. And I'm not saying we're going to do anything

like that this time, but it can just take a long time. So again, you still can't exhale. Yeah. And like you said, there have been the last seven times this has happened, there has been a recession. So there's a real strong historical context there. Yeah. And one thing I really wanted to stress is that recessions don't have to be these big, nasty, horrible things like the 08 recession. So our norms are warped by what has happened in the last 15 years.

And so people think that like, oh, the numbers show like we're not going anywhere near 08 and that's a good thing. So then they kind of write it off and move on. Whereas like, no, you could still have a mild recession that can still be painful enough, you know, and we'll have to muddle through for a while. So, you know, that is more my message.

I don't want to be a doomsayer or whatever. But don't think that, you know, it's 08 or nothing. Okay. Yeah. That's a good point to make. Just to wrap here, Tim, I'm going to do the very annoying thing where I'm going to ask you to predict the future, or at least, you know, give us your educated guess here. So, because since you watch the markets and, you know, you used to work on Bay Street as

well, and you have a deep understanding of the economy, we'd love to get your take here. So what are the odds that we will have a recession? I'm going to go with like 80%. Like, I think there's going to be pain. And I'll give more reasoning for this. So I don't just seem like some blowhard out here on a limb being like, yeah, what I say matters. Interest rates are likely going to stay higher for longer. And even if they do start to come down a little bit, they're not going to come down on this massive, you know, full percentage point decrease in a single decision. It'll be like bit by bit over time. So, you know, if they're at like five now, it might be like 4.75 and 4.5, but that's still high, you know? And so, you know, in Canada,

the big thing is that we have all these people with mortgages that are going to renew, and that's going to be a huge bite. Tied to that, using anecdote again, which you're never supposed to do, but I just, I hear them so often now. I think people have really been trying to hold on and just manage it. It's like, okay, I can just, like, if I can just make it to the fall, rates will fall. And therefore, it'll be a bit easier. That's not going to happen. And so I think you're going to start seeing people having to make like real life decisions. And for a while, you maybe, if the money was tight, you could go get a new job that paid a bit more. And therefore, you kind of like were able to kind of make it all work.

It was like whack-a-mole, right? You're just moving things around. I think what people forget is that when you're in a downturn, and again, maybe not a severe downturn, but any downturn, everything is related in the opposite fashion. So like, you know, when things are going up, everything kind of feels good together. When it's going down, maybe the unemployment market gets a bit worse. So therefore, you can't find a new job. Or even at your current job, they're like, no, we're not giving raises anymore because our sales have gone down because the

economy's weakened, you know? So therefore, it can force you into making different decisions. And I think that right now, we aren't appreciating that enough. Tim, I appreciate this reality check. It may not be super rosy, but I do appreciate it. Thanks so much for being here. Always happy to give the real talk. That's it for today. I'm Cheryl Sutherland. Nagin Nia is our summer producer.

Our producers are Madeline White and Rachel Levy-McLaughlin. David Crosby edits the show. Adrian Chung is our senior producer. And Angela Pachenza is our executive editor. Thanks for listening, and I'll talk to you tomorrow.