John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
Most forecasters began 2023 expecting a recession. With central banks having sharply raised borrowing costs across developed economies, economists reckoned it was inevitable that people would tighten their belts, leading businesses to lay off workers. Yet the economies of most Western countries sailed through 2023. Was it just a matter of a recession postponed? Is this the year it finally hits?
Probably not – though that won’t stop it feeling like a recession for a lot of people. Western economies are far from thriving at the moment. Canada has been all but flatlining for the past year, and the risks to continued growth are multiplying. Most recently, the sharp rise in shipping costs owing to the tensions in the Middle East will further frustrate the efforts of central banks to bring down inflation.
Nevertheless, most of the obvious indicators of strain, such as financial conditions or the saving rate, don’t yet point to imminent contraction. Besides, Canada’s fate depends heavily on what happens in the United States, where the omens don’t currently point to a recession. There’s been growing talk there of a soft landing, with inflation levelling off amid a still healthy economy, and the Federal Reserve has begun to concur. In fact, the minutes of its most recent meetings reveal that the governors have stopped pondering the risks of recession altogether. The last employment report fit neatly into this narrative, because against expectations of a drop in employment, hiring actually picked up and the U.S. unemployment rate remained low, at 3.7 per cent.
Still, the economy isn’t exactly buoyant. The overall figures were flattered by government employment, which has remained strong, but the private sector has begun shedding jobs. Moreover, most of last year’s reports have been revised downwards, suggesting the U.S. created fewer jobs than initially reported. Meanwhile, the ISM survey, which captures the hiring plans of firm managers, suggests they’re planning to cut hiring in the coming months.
In that respect the U.S. employment market may mirror the Canadian one, where employment is flat: Not many new jobs are being created, not many are being lost, with employers still reporting difficulties filling vacancies. Yet despite this softness, wages on both sides of the border are continuing their upward march, as workers gradually claw back their losses from the inflation of the past few years.
Assuming those conditions endure, demand in the economy should be sufficient to at least keep it afloat this year. That, and the persistent inflation that exceeds central bank targets, will probably mean the expected series of interest-rate cuts may not come as soon as markets currently expect. That may hurt investors, particularly those in Canadian real estate. However, the economy itself could likely absorb any falls in asset prices.
What emerges from this muddled picture is an economy that is neither sick nor strong. But it’s also possible that our focus on the risk of recession may be asking the wrong question. Growth has long been the standard measure of an economy’s health, at least since the Second World War and the advent of national accounting, which enabled us to measure aggregate growth. It’s a simple metric, but also one that presumes we all rise and fall together.
But as we’ve seen in recent years, that seldom happens. During boom years, some people prosper, others suffer. For instance, the past decade was great for property investors, bad for renters. The same goes for recessions: If you keep your job amid a downturn, you can benefit from all the sales that start when firms need to clear stock.
Bearing those discrepancies in mind, consider the current situation. While inflation is now levelling off, the cumulative increase over the past four years stands at almost 20 per cent, meaning everyone’s bills rose by nearly a fifth. Nobody likes that, but not everyone will have felt the pain. People on fixed incomes, homeowners with variable-rate mortgages or workers who didn’t see pay increases will already be feeling as if they’re in a recession. However, anyone whose income is indexed to inflation, or has paid off their mortgage, won’t have felt much pain at all.
So instead of debating whether or not we’re headed for a recession and what we can do to prevent it, perhaps we should be asking if the current economy is serving everyone. Because what surveys suggest is that despite good news on growth, many people feel glum. In both Canada and the United States, despite reporting their personal conditions to be good, survey respondents say the economy is bad. It appears Canadians may want something from their economy other than just more growth.
John Rapley