What recession? Scotiabank downplays serious risk of economic downturn in Canada

There’s been a lot of talk about the dreaded R-word.

That’s recession, a significant downturn in the economy that leads to a lot of terrible things, like people losing their jobs.

Interest rates are rising, inflation is climbing, the global economy looks shaky, there’s a war in Europe, oil prices have gone up, and so there are concerns about a recession happening.

But if one were to ask Scotiabank economists Jean-François Perrault and Réne Lalonde, it seems that worries about a severe recession in Canada are overblown.

What’s the key here?

“Pent-up demand”, wrote Perrault and Lalonde in a report Monday (July 18).

“Record levels of pent-up demand are expected to keep household consumption spending elevated despite rising interest rates, low consumer confidence, decades-high inflation, and weaker financial markets,” the Scotiabank economists stated.

“This pent-up demand is expected to keep the Canadian economy from going into recession.”

They cited as evidence the rise in “discretionary spending categories”.

“This type of spending is usually the first to be foregone when households watch their expenses,” the economists wrote, pointing to food and travel.

Perrault and Lalonde pointed to reports that seated diners in Canadian restaurants “continued their rebound”.

In fact, diner numbers were 20 percent above 2019 levels as of July 16 this year.

“The pace of rebound has accelerated through all of the BoC’s rate increases so far,” Perrault and Lalonde stated, referring to the interest rate hikes made so far in 2022 by the Bank of Canada.

For travel, they noted a rapid increase this year of air travellers, although volumes from June onwards still only stand at around 80 percent of total passengers in 2019.

“Again, these data suggest no impact yet from higher interest rates or concerns about the cost of living and are all the more striking given the evident hassles and frustration with travels these days,” Perrault and Lalonde wrote.

Because of the “historically high level of pent-up demand on the household side”, the economists predict that the Canadian economy will grow by 3.5 percent in 2022.

They expect growth of 1.6 percent to follow in 2023.

“The strength of this pent-up demand likely explains some of the resilience in consumer spending in the face of a very sharp drop in consumer confidence, the loss of purchasing power coming from higher inflation and of course higher interest costs,” the Scotiabank economists stated.

However, they are not totally discounting risks of a recession.

Perrault and Lalonde stated that a “recession will be avoided but risks of a recession are material”.

“Higher inflation associated with a resurgence of supply chain challenges, weaker equity markets and higher interest rates than forecast are potential triggers,” the economists noted.

As well, “Should a growth recession occur, we believe it would be relatively mild given the historical strength of both corporate and household balance sheets and the incredible strength of the labour market.”

Stated another way, “Our base assumption remains that a recession is avoided in Canada and the United States, but clearly the risks of a recession have risen.”