According to the Bloomberg business news site, economists have now reached a consensus: the Canadian economy will continue to slow down this year, possibly to the point of entering a recession. If that happens, what can we expect? 

A concise guide to help understand what it’s all about. 

What is a recession?  

A generally accepted definition of a recession is two consecutive quarters of negative GDP growth. This period of overall decline in economic activity is likely to be reflected in consumer spending, as well as employment levels and investor confidence.  

Nonetheless, recessions are a normal part of the business cycle, to be followed by recovery (when the economy regains its previous level), and expansion (renewed economic growth).  

How many recessions has the Canadian economy endured? 

Canada went through 13 recessions of various sizes between 1929 and 2022, with an average duration of 11 months. In the past 50 years, recessions have become less frequent… but more severe.  

Speaking of which, analysts from the C.D. Howe Institute have developed a 5-level scale, inspired by the one used for hurricanes, to categorize recessions according to severity. A Category 1 recession, for example, is a short, mild drop in economic activity, while a Category 5 recession involves dramatic economic upheavals leading to prolonged instability.  

As we can see here, the past three recessions have been Category 4. 

When was our last recession? 

In 2020. By definition, the decline in GDP caused by the COVID-19 pandemic was too short to qualify as a recession, but it was the steepest drop on record since the Great Depression of 1929: down 17.7% for the months of March and April. So it had the same impact as a true recession, and we are still feeling the effects. 

What can we expect from the next one?  

Economists generally feel that if we do have a recession in 2023, it isn’t likely to be very long or deep. It would mainly be driven by the successive increases in the Bank of Canada’s key interest rate in 2022, a measure to curb inflation that the central bank is expected to maintain for part of this year. A recovery should begin between now and the end of 2023, once inflation and interest rates are back to normal. 

Protecting yourself 

IN TERMS OF PERSONAL FINANCE 

In 2023, a potential recession could hand Canadians three main challenges – the first two with which they are already familiar: constantly rising consumer prices due to inflation; similarly high borrowing costs; and a potentially tighter outlook for the job market. In this kind of scenario, it might be appropriate to consider bringing the following approaches into play. 

• Limit non-essential expenses  
  Although price increases are expected to moderate in 2023, inflation will remain at a historically high level. 

• Use less credit  
  In their most optimistic scenario, economists expect the Bank of Canada to start easing its monetary policy in the third quarter: until then, interest rates could continue to rise. 

• Establish an emergency fund  
  In case of the unexpected, an easily accessible cash reserve might let you avoid having to dip into your longer-term savings, or even make withdrawals from a registered retirement savings plan (RRSP), with the associated penalties.  

IN TERMS OF INVESTING 

Stock markets react negatively to a recession because corporate profits may suffer from a slowdown in demand. On the bright side, however, these same markets tend to anticipate economic developments, which makes them a “leading indicator.” So it’s possible that the markets will recover before the economy does. In this context, the following approaches would be recommended: 

• Stay invested  
  No one can predict the moment when the markets will rebound. So it might be better to stay in the stock market instead of trying to guess when things will start to recover. In fact, the bear market that often accompanies a recession might even provide an opportunity to invest while prices are more accessible. 

• Count on diversification 
  A recession affects every sector of the economy… but it doesn’t affect them equally. That’s why, now more than ever, portfolio diversification could be a good hedge against volatility.  

• Stick with your game plan  
  If the possibility of your portfolio losing another 10% or 15% of its value – or more – makes you break into a cold sweat, the first thing you might want to do is reassure yourself that this kind of fluctuation was anticipated in your financial game plan. If so, you’ll probably want to stay the course.  

On the other hand, if your game plan is making you nervous, or if you would like advice that is tailored to your specific situation, your advisor can help you navigate this period of economic instability with confidence.