Toronto Economic experts are currently assuming an economic downturn in Canada. The Canada-based trade expert Daniel Lenkeit from the foreign trade agency Germany Trade and Invest (GTAI) expects stagnation at the end of 2022 – and he thinks a recession in the course of the first three quarters of 2023 is likely.
Tony Stillo, director for Canada’s economy at analysis firm Oxford Economics, predicts a moderate recession as early as the fourth quarter of 2022. He estimates that Canada’s gross domestic product (GDP) will contract by 1.8 percent at the end of this year through the second quarter of 2023.
The slump was mainly due to the effects of higher interest rates by the Bank of Canada, according to the experts. As well as longer-lasting higher inflation and weaker foreign demand, which can be traced back to looming recessions in the US and other advanced economies. “If the US slips into recession, Canada’s economy will be affected,” says economist Lenkeit. Because the Canadian economy is very closely linked to the American economy. Three quarters of Canadian exports go to the US, half of Canadian imports come from the US.
Reasons are supply chain problems and high energy prices
The US economy is currently being slowed down by a number of developments, including high inflation and the Federal Reserve’s (Fed) sharp hikes in interest rates. Oxford Economics expects a slight recession in the US at the beginning of next year.
Top jobs of the day
Find the best jobs now and
be notified by email.
The purchasing manager indices – an indicator for the development of the manufacturing sector – in the USA and Canada have been trending downwards for months, Lenkeit analyses. In the US, the negative trend started in August last year, in Canada in June 2022.
>> Also read here: Wall Street is gripped by recession fears
This means that companies expect fewer orders and no improvement in supply chain problems in the short to medium term. “The persistently high prices for energy and intermediate goods as well as rising interest rates are having a negative effect,” says Lenkeit. As a rule, companies would pass on the high prices for primary goods and raw materials to consumers, or they would have to live with lower margins or reduce costs in other ways.
Canadian consumption will decline significantly in the coming quarters. “Consumers will be less and less able to pay the persistently high prices. Purchases of durable consumer goods are then likely to decline first,” says the GTAI economist.
Exporting more energy is difficult
Canada ranks fourth among the world’s top oil producing countries and was the fourth largest producer of natural gas in 2020 with 165 billion cubic meters. But although the country has such large energy resources at its disposal, it will hardly be able to avert the impending recession.
The reason for this is that the global energy crisis is mainly concentrated in Europe. “Due to distribution bottlenecks, Canada has little potential to supply or export more oil to Europe,” says economics expert Stillo.
The country also has no domestic infrastructure for exporting liquefied natural gas (LNG). The only LNG export terminal under development will not be completed until 2025 on the country’s west coast.
>> Also read here: Why a fast energy deal between Germany and Canada is unrealistic
The high world market prices increase the income of Canadian oil and gas producers and increase incomes in regions that are heavily dependent on oil and gas production. “However, longer-term capital investment would require continued high prices, which we do not expect,” says Stillo, “especially as recessions in Canada, the US, the European Union and other advanced economies are leading to weaker global energy demand.”
Most of the crude oil exported from Canada goes to the United States. In 2021, the US received more than 187 million tons of oil from Canada, while Europe received 4.1 million tons.
But the USA will demand less energy in a recession. Overall economic demand then falls: less investment, less production, less energy demand.
The price of Canadian oil has now fallen from $100 a barrel in March to $59 now – and is likely to fall further in a downturn. A falling future oil price on the market for long-term supply contracts, the so-called futures market, is another indicator of a recession, says GTAI expert Lenkeit. For November 2023, the prices for oil on the futures market are currently around twelve percent below the contracts for November 2022.
Public debt is increasing
Adding to the recession is the fact that the Bank of Canada has raised interest rates since March to a 14-year high of 3.25 percent in September. However, the Canadian economy reacts much more sensitively to the high interest rates than other countries because of the record debt of private households and real estate prices, analyzes expert Stillo. “We expect the recession to hit Canadian households and the housing market hardest.”
The ratio of private household debt to disposable income in Canada is still at its highest level and in relation to economic output is significantly higher than in the USA before the global financial crisis of 2008/2009.
In the second quarter of 2022, the average Canadian household owed CA$1.80 for every dollar of disposable income. And public debt will continue to increase, Lenkeit predicts.
Rising interest rates drive up borrowing costs. Households have less and less money to finance consumption. “Furthermore, lower real incomes due to persistently high inflation will continue to weigh on households and lead to cuts in private spending,” says Stillo. The inflation rate was seven percent in August.
A slowdown can also be observed on the labor market. In August, 39,700 jobs (down 0.2 percent) were lost – the third straight monthly decline – and the unemployment rate rose 0.5 percentage points to 5.4 percent. Oxford Economics expects the burgeoning layoffs to push the unemployment rate to a peak of 8.2 percent in early 2024.
More: Canada’s cannabis companies are hoping for the German market