Recession or soft landing? Economists divided amid resilient economy

While some think we’ll avoid recession, others say there’s no way economy can escape aggressive policy tightening cycle

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A few months ago, the only question about a looming recession was how bad it would be. But with the economy and labour markets showing surprising resilience, talk of a soft landing is making a comeback.

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The latest hints of optimism come as recent data on jobs and growth have come in stronger than expected. In December, 104,000 new jobs were created in Canada, while preliminary figures showed the economy grew by 0.1 per cent in November, following an identical gain in October. The picture south of the border has been similar, with jobless claims unexpectedly falling in January.

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Is it now possible that North American economies, once thought destined for a stark downturn under pressure from rising interest rates, may avoid tipping into recession altogether?

“It’s definitely possible,” said Doug Porter, chief economist at BMO Capital Markets, noting the strength in U.S. economic data.

“And of course, CPI just the other day showed that underlying inflation does seem to be moderating without a recession,” Porter added. “That’s definitely good news. My odds that I’m putting on a soft landing have been slowly rising over the last three months, and the fact that energy prices have backed off, not just here, but in Europe, as well, that’s playing a big role.”

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In December, 104,000 new jobs were created in Canada.
In December, 104,000 new jobs were created in Canada. Photo by Carlos Osorio/Reuters

Six months ago, Porter had put the odds of a soft landing at around 20 to 25 per cent, with a 50 per cent chance of a mild recession and a 20 to 30 per cent chance of a hard landing. While the bank’s base case is still for a mild recession, the prospect of a sustained downturn is starting to dissipate, in Porter’s eyes.

“Well, now I think it’s flipped,” he said. “It’s more like there’s about a 30 per cent chance of a soft landing and about a 15 per cent chance of a very hard landing with the sort of middle mild recession in between being about 50 to 55 per cent.”

The BMO economist isn’t alone in taking a more optimistic tone. South of the border, Goldman Sachs Group Inc. chief economist Jan Hatzius cited factors such as China’s economic reopening, falling inflation and a milder European winter, which is taking some of the strain off that region’s energy crisis, as potentially opening a path to a soft landing. The growing chorus of voices betting that a worst-case scenario has been averted also includes German Economy Minister Robert Habeck, who said a complete European economic meltdown had been averted, and Apollo Global Management chief economist Torsten Slok, who said the U.S. economic picture looks more like a soft landing.

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Bank towers in Toronto's financial district.
Bank towers in Toronto’s financial district. Photo by Nathan Denette/The Canadian Press

The heads of Canada’s biggest banks also talked down the risk of a severe recession during the RBC Capital Markets 2023 Canadian Bank CEO Conference on Jan. 9. Toronto-Dominion Bank chief executive Bharat Masrani said while he couldn’t say with 100 per cent certainty that no recession would come to pass, he pointed to the jobs market, which continues to be remarkably strong.

“Are we seeing a depression here with some of the questions you’re asking me, saying, ‘Oh, my God, the world is coming to an end?’” Masrani said to the moderator of the event. “We don’t see that.”

To other economists, however, recent optimistic data may be a red herring distracting from the hard reality that the economy cannot emerge unscathed from the most aggressive policy tightening cycle in decades.

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David Rosenberg, founder of Rosenberg Research & Associates, Inc., pushed back on the soft landing narrative during a Breakfast with Dave live event in Toronto on Jan. 19.

Rosenberg said he’s noticed the definition of soft landing start to creep out to include mild recessions.

“A soft landing is slower growth, which we’ve already had,” Rosenberg said, adding that he now expects a recession is either here already, or coming up quickly.

Our view is that you’ll see a relatively severe recession in Canada

David Doyle, head of economics, Macquarie Group

Rosenberg pointed to Canada’s overheated housing market and its sensitivity to interest rates in particular, noting that the vulnerabilities in the sector are now worse than before the country was plunged into a recession in the early 1990s.

“I have my concerns because there’s a lag of this (tightening cycle effect),” Rosenberg said. “That has me really concerned and nobody talks about it that the Canadian housing bubble, the price bubble, and the debt bubble was bigger than what John Crowe was dealing with in the late 1980s.”

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David Doyle, head of economics at Macquarie Group, also pointed to housing as a significant risk weighing on Canada’s economic outlook during a broadcast interview with BNN Bloomberg.

“Our view is that you’ll see a relatively severe recession in Canada,” Doyle said in January, adding that Macquarie Group is expecting a U.S. contraction of 1.5 per cent of real gross domestic product in 2023.

“In Canada, we think it’ll be about twice that, so about a three per cent contraction and that’s because we’ll feel the effects of that U.S. recession, but we think it’ll be amplified in Canada, of course, because of our economy’s dependence on housing and the relationship the labour market here has with the housing market,” Doyle said.

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Randall Bartlett, Desjardins’ senior director of Canadian economics, said he’s looking at the economic data in its totality, in which indicators such as gross domestic product and the housing market have been weakening. Despite the softening, Bartlett pointed to pockets of strength, most notably in the labour market.

“The question is how much stock can we put in the labour force survey, seemingly as the only real bright spot in the Canadian economy now?” Bartlett said. “It’s not that the economy’s tanking elsewhere, it’s just that it’s very, very weak.”

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However, Bartlett noted that the labour data had some contradictions. While the labour force survey pointed to an increase of more than 100,000 jobs, the payroll employment survey saw a drop of about 5,000 positions. Bartlett expects the economy to continue its slow grind and anticipates a 25-basis-point hike at the next Bank of Canada meeting on Jan. 25.

“This is going to continue to weigh on economic activity in Canada and points to further weakness as we go into 2023, and we continue to expect that we’re going to tip into a recession in the first half of this year,” said Bartlett.

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