David Olive
Aug. 15, 2024
Recession fears are mounting in the U.S.
A significant U.S. economic slowdown would migrate to Canada, whose economic growth has already been weak for the past year.
But it doesn’t take a brave soul to declare that a recession is unlikely in either country.
An official recession, to remind, is two consecutive quarters of negative growth.
Canada is expected to finish this year with between 1.0 per cent and 1.5 per cent GDP growth.
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That’s below what the economy is capable of, but not the negative growth of a recession.
And both Canada and the U.S. are forecast to post higher economic growth next year, of about 2 per cent — a solid performance for economies the size of Canada and the U.S.
Growing weakness in the U.S. labour market has stoked recession worries.
But U.S. GDP, real household income, consumer spending and industrial production have increased in recent months, albeit at a slower pace than the torrid growth of the immediate post-pandemic.
And U.S. corporations are forecasting continued profit growth.
Those are not signs of recession.
And so, dramatic events like Black Monday, the one-day sell-off of $6.4 trillion (U.S.) in financial assets on Aug. 5, can be sound and fury signifying not much in the real economy.
And those losses have been largely recovered. The S&P 500 remains higher than it was at the start of the year.
But severe if brief market reversals do send a message. And this one looks like a cry for help on behalf of all Americans.
Like their Canadian cousins, American consumers, businesses and investors are probably suffering more pain from high interest rates than at any time since central banks started raising rates in 2022.
Higher borrowing costs to fight inflation have a lagging impact, both in subduing inflation and suppressing economic vitality.
We’re now in the period of most acute pain from the higher rates.
Alert to that reality, the Bank of Canada (BoC) started lowering its policy rate in June and has since cut the rate to 4.5 per cent from a historically high 5 per cent.
The BoC is expected to continue reducing its policy rate at each of its three remaining rate-setting meetings this year.
That would bring the policy rate down to a 3.5 per cent average next year and 2.5 per cent in 2026 and the years that follow.
That’s the normal, or neutral, rate that neither stimulates nor inhibits economic growth.
By contrast, the BoC’s American counterpart, the Federal Reserve Board, has not transitioned as the BoC has done from fighting inflation — a victory that both central banks have won — to economic stimulus with lower rates.
And so, the financial markets’ latest tumult does matter. It sent a message that Americans have suffered high interest rates long enough.
For months, U.S. economists have been calling on the Fed to commence a rate-cutting cycle. They want the Fed to shift its priorities from preventing a resurgence of inflation to economic stimulus.
But for now, the Fed’s policy rate remains at its decades-high range of 5 per cent to 5.5 per cent.
A dismal U.S. jobs report on Aug. 2, suggesting an abrupt downshift in the economy, is seen by many as the trigger for Black Monday and the heightened recession fears that have followed.
To be sure, Black Monday was also a classic “correction” in overpriced stocks, especially in a tech sector that drives the entire market.
But doomsters have a point that the U.S. jobless rate has increased in each of the past four months, to July’s 4.3 per cent compared with 3.4 per cent a year earlier. The rate is expected to rise to 5 per cent next year.
Strong immigration flows in the U.S. and Canada are temporarily creating more job-seekers than job openings until immigrants help power future economic growth.
U.S. employment levels are in fact at a healthy level. During the Great Recession, the U.S. jobless rate peaked at about 10 per cent.
What concerns economists is the current trajectory, which is down.
If the forces causing a slowdown in job creation continue, there could be a sharp decline in the general economy.
That would prevent the “soft landing” of low inflation without high unemployment that central banks have been trying to achieve — and so far with considerable success.
That downward trajectory can be reversed, however, with the 1.5 per cent cut in the Fed’s policy rate widely called for by year’s end.
When mainstream U.S. economists like Paul Krugman and Claudia Sahm, who are generally optimistic about the U.S. economy, describe America as “pre-recessionary” and “uncomfortably close to recession,” respectively, it’s time the Fed embraced large rate cuts and soon.
And it’s time for North Americans to enjoy a return to normality, after a pandemic, supply shortages, historically high inflation and a spike in borrowing costs.
Four years of weird pandemic economics have been more than enough.
