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Recession or soft landing? Economists Divided Amid Resilient Economy

by SuperiorInvest

While some think we will avoid a recession, others say the economy cannot escape an aggressive policy tightening cycle

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A few months ago, a single question loomed recession how bad would that be. But with the economy and labor markets showing surprising resilience, talk of a soft landing is making a comeback.

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The latest signs of optimism are coming latest job data and growth was stronger than expected. 104,000 new jobs were created in Canada in December, according to preliminary data the economy grew in November by 0.1 percent after identical growth in October. The situation south of the border is similar, unemployment claims unexpectedly fell in January.

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Is it now possible that North American economies, once thought destined for a sharp decline under the pressure of rising interest rates, have avoided falling into recession altogether?

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

“And of course the CPI just showed the other day that it’s the basis. inflation He appears to be moderating without a recession,” Porter added. “That’s definitely good news. My chances of making a soft landing have been slowly increasing over the past three months, and a big role is played by the fact that energy prices have fallen not only in our country but also in Europe.”

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Six months ago, Porter estimated the probability of a soft landing at about 20 to 25 percent, with a 50 percent chance of a mild recession and a 20 to 30 percent chance of a hard landing. While the bank’s baseline scenario is still for a mild recession, the prospect of a sustained downturn is beginning to fade in Porter’s eyes.

“Well, now I think it’s upside down,” he said. “It’s more like about a 30 percent chance of a soft landing and about a 15 percent chance of a very hard landing with a kind of medium mild recession between 50 and 55 percent.”

The BMO economist is not alone in taking a more optimistic tone. South of the Border Goldman Sachs Group Inc.’s Chief Economist Jan Hatzius cited factors such as the reopening of China’s economy, falling inflation and a milder European winter taking some of the strain off the region’s energy crisis as potentially paving the way for a soft landing. A growing chorus of voices betting on averting the worst-case scenario also includes German Economy Minister Robert Habeck, who said a complete collapse of the European economy had been averted, and Apollo Global Management Chief Economist Torsten Slok, who said the U.S. economic picture looked 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 about the risk of a severe recession during the RBC Capital Markets 2023 CEO Conference on January 9. Toronto-Dominion Bank CEO Bharat Masrani said that while he couldn’t say with 100% certainty that no recession will happen, he pointed to a job market that remains remarkably strong.

“We’re seeing depression here with some of the questions you’re asking me and you’re like, ‘Oh my God, is the world coming to an end?'” Masrani told the event’s host. “We don’t see that.”

But for other economists, the recent upbeat 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 Rosenbergfounder of Rosenberg Research & Associates, Inc., shot down the soft landing narrative during a live Breakfast with Dave event in Toronto on Jan. 19.

Rosenberg said he’s noticed the definition of a soft landing starting to creep up to include mild recessions.

“The soft landing is the slower growth that we’ve already had,” Rosenberg said, adding that he now expects the recession to be either already here or coming quickly.

Our view is that you will experience a fairly severe recession in Canada

David Doyle, Head of Economics, Macquarie Group

Pointing to Canada’s overheated housing market and particularly its sensitivity to interest rates, Rosenberg noted that the sector’s vulnerability is worse now than it was before the country slipped into recession in the early 1990s.

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

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David Doyle, Macquarie Group chief economist, 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’re going to have a fairly severe recession in Canada,” Doyle said in January, adding that Macquarie Group expects US real gross domestic product to contract by 1.5 percent in 2023.

“In Canada, we think it’s going to be about a double, so about a three percent contraction, and that’s because we’re going to feel the effects of that American recession, but we think it’s going to intensify in Canada, obviously, because of the dependence of our economy on housing and the relationship that has the job market here to the housing market,” Doyle said.

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Randall Bartlett, senior director of Canadian economics at Desjardins, said he was looking at economic data as a whole, in which indicators such as gross domestic product and the housing market were weakening. Despite the softening, Bartlett pointed to areas of strength, particularly in the labor market.

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

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However, Bartlett noted that there were some discrepancies in the job data. While the labor force survey indicated an increase of more than 100,000 jobs, the wage employment survey recorded a decline of about 5,000 jobs. Bartlett expects the economy to continue its sluggish growth and expects a 25 basis point hike at the Bank of Canada’s next meeting on January 25.

“That will continue to weigh on economic activity in Canada and points to further weakening as we go into 2023, and we continue to expect to be in recession in the first half of this year,” Bartlett said. .

• By e-mail: shughes@postmedia.com | Twitter:


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