A Made In Canada Recession Story!

The Canadian economy lost 7,500 jobs last month (May), and unemployment was still at 5.8%. This, despite analyst forecasts that the country would likely add roughly 22,000 jobs to the economy. Rewind to the previous monthly jobs report (April). Analysts had predicted that we would add approximately 20,000 jobs to the economy, yet we ended the month losing 1,100 of them instead. Could this be a precursor to what recessions are made up of – gradually snowballing unemployment?

Telling Stats

While pundits watching these statistics through rose coloured glasses tell us not to worry because unemployment is still just at 8.5%, other predictions paint a different picture. Current Canadian unemployment forecasts for the immediate future indicate that things are likely to get bad, before they get worse. Unemployment is expected to tick up to 6% in Q3-2018, and balloon up to 6.7% in 2020.

What Canadian’s should be more concerned about is the Labour Participation Rate – a number that tells us what percentage of individuals continue to actively participate in the workforce. After maintaining a steady pace of 65.5% in Jan, Feb and March 2018, the participation rate has seen a steady decline to 65.4% and 65.3% in April and May.

What’s even more telling is the fact that there was a decline in steady, stable full-time employment. It was part-time workers that filled the void and brought our unemployment rate to where it is today. Those part-time positions are “precarious” at best, and that could evaporate at any time. And that would add to the already stressful state of our economy.

Taking Stock

Stock markets of any country are considered bellwethers of the economy. A booming stock market indicates prosperity, while a slump in the stock market usually spells trouble.  Most recessions in the past have been heralded via massive declines in stock indices. So far, Canada’s premier stock market index – the S&P/TSX Composite Index – is up by 5.85% on a Quarter-to-Date (QTD) basis. So, this bodes well for Canada, doesn’t it?

Not really! There seems to be more bad news coming that could shock the Canadian economy – possibly indicating that a recession might be in store for us. This time around, the statistics are about the TSX’s performance over the coming quarters. At the time of this writing, the TSX closed at 16,265.82 points.

Economists predict that over the next 4 quarters (Q2/20118 through Q1/2019), the country’s stock index is expected to decline to 14877, 14580, 14288 and 14003 respectively. The predictions for 2020 are even dire – where the TSX sinks down to 12916. That’s a slump of nearly 21% - in just a mere 2 years time! If stock market declines are a precursor to a recession, Canada’s leading stock market index has just served us notice!

Trade War Looming

There was some good news in April 2018 on the trade deficit front. Canada’s trade deficit narrowed to $1.9B CAD. This was much better than the $3.9B CAD figure reported in March 2018, and a $2.69B CAD deficit in Feb 2018. However, if we cast our eyes back, our deficit grew to $3.2B CAD in Dec from $2.7B CAD in November.

Clearly, at best, these figures point to an erratic trade relationship between Canada and the rest of the world. However, it is the trade relationship between Canada and it’s largest trading partner – the U.S. – that’s of concern in terms of what could push us over the edge and trigger a made in Canada recession.

The two countries continue to split hair over who has the upper (or lower!) hand when it comes to trade. Both sides claim they are running a deficit with the other partner. And both partners point to “credible” facts and figures to back up their claims. The truth, however, is that each of these two neighbours and long-time allies are singing from a different hymn book. Neither of their versus rhyme, and there is no harmony in their tune…and there lies a dreadful sign!

With the rhetoric of tariffs rising high over the past month or so, and stalled NAFTA talks, there is every indication that Canada’s trade with its biggest trading partner is set to take a body blow in the near future. And here’s why that could send ripple effects across our economy:

  • In any fight, whether it’s on the school playground or a wrestling ring, it’s the bigger, stronger opponent that usually wins. Trade wars are no different!
  • In a comparison of all leading economic indicators, whether it’s budget, deb to GDP, unemployment indicators or investment activity, the U.S. dominates Canada in every respect
  • When the impact of tariffs and NAFTA-pushback starts to kick in, both nations will suffer, but Canada is likely to hurt worse than its larger neighbor

It’s even more clear that, when a trade war does eventually break out between Canada and the U.S. – if it’s not already underway – Canada isn’t prepared to deal with the consequences. For instance, the Federal budget announced earlier this year, did not offer Canadians any hope of balancing the books – something that could have put us in a much better position when war does come.

But it’s not just the government of Canada that’s ill prepared to deal with the ugly fall out of a trade war. Most private businesses aren’t well equipped to deal with such a situation either. With NAFTA talks down to the wire, Canadian business owners have yet to draw up plans for a NAFTA demise, or even to create contingencies to deal with a potentially bad NAFTA deal for Canada.

The Writing on The Wall

The writing is on the wall for anyone to see it and pretty easy to search for:

Canadian consumers are heavily in debt, and the country’s employment rate isn’t exactly what one might call recession-proof. With the Bank of Canada widely expected to increase interest rates shortly, indebted consumers will have to pay more to service their debt burden.

Rising trade tensions between Canada and the US, and even between other trading partners like India, who have slapped tariffs on Canadian lentils, will further put pressure on Canadian household budgets. Add to that the “significant” exodus of foreign investment from Canada in recent months, and you have a perfect recipe for a made in Canada recession brewing!