How do you prepare for grayer days?

Quebec’s risk of falling into recession has increased recently, although this is not the most likely scenario at the moment. But it’s never too early to warn. The press sought advice from economists on how governments, businesses and households should respond in anticipation of a possible prolonged economic downturn.

Posted at 5:00 am

Andre Dubuc

Andre Dubuc
The press

The fight against inflation

In the United States, gross domestic product fell in the first quarter and consumer confidence is at an all-time low. This is not yet the case in Canada. Export Development Canada (EDC) forecasts real growth of 3.7% in 2022 and 2.2% in 2023. RBC is more pessimistic with lower growth forecasts but still in positive territory.

Indeed, fighting inflation would trigger a recession, explains Serge Coulombe, professor emeritus of economics at the University of Ottawa.

“The possible recession is a side effect of the medicine that central banks have started to use to fight inflation,” he said. They fight inflation by raising interest rates. The goal is to raise the cost of borrowing to create an economic slowdown that could also be a recession. The aim is to calm down the currently booming economy. »

A recession is negative economic growth for at least two consecutive quarters.

As we wait to find out whether or not the country will slip into recession, the experts we spoke to are urging governments to rein in spending.

Premier Legault’s $500

“Governments must stop increasing spending in real terms so as not to hamper central bank efforts to put out the fire,” argues economist Olivier Rancourt of the Montreal Economic Development Institute (IEDM), a think tank that advocates economic liberalism.

Scotiabank, in a report released last week, along with economists we spoke to at the University of Ottawa, Serge Coulombe, and RBC’s Robert Hogue, taught essentially the same thing.

The classic example of what not to do is the $500 we got in Quebec. It is pure and simple money disposal in business. From an individual perspective, it may help temporarily, but it creates more money in the economy, which feeds inflation.

Olivier Rancourt

On the left of the political and economic spectrum, Yvan Duceppe, accountant and treasurer of the Confederation of National Trade Unions (CSN), takes a different view.

He asks the Bank of Canada to act with judgement. Similar to the zero deficit, the 2% inflation target should not become a religion.

In anticipation of the recession looming on the horizon, Mr Duceppe would like governments to prepare an investment plan focused on the sectors of the future, particularly the decarbonisation of the economy.

Instead of sending $500 checks to everyone, the accountant is campaigning for new targeted aids, such as extending housing benefit entitlements to low-income households.

boost supply

From a very different perspective, senior investment adviser Allan Small recommends the government stimulate supply, believing inflation is primarily caused by a lack of supply.

“Governments need to find a way to increase supply everywhere: energy, labor and food,” says the financier, whose Toronto firm is part of iA Private Wealth Management.

In this sense, he would support the conclusion of an agreement with Ukraine that would allow agricultural production to leave the region. On the workforce, Mr. Small proposes removing all restrictions on unvaccinated personnel. When it comes to energy, he believes the answer must come from the United States because the lack of new pipelines limits Canada’s ability to get its oil and gas to the markets that need it.

Lowering the gas tax

President Joe Biden has announced a temporary federal gasoline tax cut in the United States. Professor Serge Coulombe would advocate that the Canadian provinces follow suit. “A temporary gas tax cut or a temporary sales tax cut is one possibility,” he said.

“Reducing the gas tax would be one way to mitigate the impact of inflation on the population,” adds MEI’s Olivier Rancourt.

For his part, Robert Hogue, RBC’s deputy chief economist, disapproves of this approach because it would run counter to Canada’s efforts to reduce its greenhouse gas emissions.

indebted households

Households, for their part, seem breathless even before the onset of a possible recession, stresses Mr Rancourt. They are highly indebted and vulnerable to increases in interest rates, especially mortgage rates; hence the idea to adjust the budget now in anticipation of an increase in borrowing costs.

In addition, inflation undermines the purchasing power of workers because wages do not rise at the same rate as prices, regrets Mr Duceppe, treasurer of the CSN.

“The biggest enemy is inflation,” claims Serge Colombe. It affects everyone all the time. The effects of a recession are more limited. It affects fewer people, but those people are more affected. He expects less fortunate households to protect themselves by cutting discretionary spending in the event of a recession.

RBC’s Robert Hogue envisions households will seek to increase their income to balance their budget. “People who have bought their homes at a high price in recent years may want to earn extra income by renting out their basement or part of their home and doing renovations to prepare their home appropriately. »

Invest or not?

Despite seeing all colors during the pandemic, Canadian companies generally have healthy balance sheets, says Stuart Bergman, an economist at EDC. The structure of the Canadian economy, which is based on energy and the extraction of natural resources, has a positive impact on the country. A concern, “our businesses depend on a more indebted consumer than south of the border,” he notes.

“When companies see a drop in demand for their products, they need to adjust quickly and clean their balance sheets as much as possible to get through a tougher period,” advises Robert Hogue.

RBC’s deputy chief economist would be surprised to see a massive shift in investment. “As a rule, investments are not influenced by very short-term economic cycles; most of the time, an investment responds to long-term trends,” he argues.

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