Understanding a ‘Technical Recession’ and Its Implications for Canada’s Economy

The Canadian economy has experienced contractions in recent quarters, leading to discussions about the possibility of a “technical recession.” This article explores what a technical recession entails, how it differs from a full-blown recession, and its implications for Canada’s economic landscape.

What Is a ‘Technical Recession’?

A technical recession is defined as two consecutive quarters of declining economic output, primarily measured through Gross Domestic Product (GDP). It is a straightforward definition that doesn’t consider the depth or breadth of the contraction. Even small declines, such as negative 0.1% growth in two consecutive quarters, meet this definition. The term “technical recession” is often used when the downturn is expected to be less severe.

Key Distinctions:

  1. Depth of Contraction: A full-blown recession involves more substantial contractions in GDP, leading to significant economic challenges. In contrast, a technical recession may affect smaller, less painful declines.
  2. Duration: A genuine recession is characterized by a prolonged and persistent decline in economic activity, whereas a technical recession may be shorter.
  3. The breadth of Impact: A full-blown recession typically affects a broader range of economic sectors, leading to widespread consequences for businesses and jobs.
  4. Unemployment Rate: Recessions often lead to a significant increase in the unemployment rate, while technical recessions may not have a pronounced impact on job numbers.

Current Economic Situation in Canada:
Canada’s economy has experienced a shallow contraction, with GDP declining by 0.2% annually in the second quarter. The third quarter is forecasted to see a 0.1% decline. However, the unemployment rate has increased by only 0.7 percentage points to 5.7%, which is relatively modest. Additionally, the economic downturn has not affected all sectors, with eight out of 20 tracked sectors showing growth in GDP in August.

The Complex Nature of Labeling a Technical Recession:
Labelling the current situation as a technical recession is complicated. GDP figures need to catch up on indicators, and revised data can alter previous assessments. Several factors, such as transitory shocks (e.g., wildfires and strikes), can impact GDP figures. Additionally, the arbitrary division of time into quarters can result in unexpected developments.
Ultimately, whether Canada is technically in a recession depends on the interpretation of the available data and adjustments for external factors. Despite weak growth, the situation does not align with the traditional characteristics of a recession.

Implications for the Bank of Canada:
The current economic situation offers the Bank of Canada a degree of relief. It indicates that the central bank’s rate-hiking efforts are achieving their intended goals. The Bank of Canada has raised interest rates to cool down the economy, reduce borrowing demand, and mitigate inflationary pressures. With rates increased from 0.25% to 5%, a recession is not the explicit goal but could result from these significant rate hikes.

In conclusion, while discussions of a technical recession persist, the economic landscape in Canada remains nuanced. The term may not accurately describe the current situation, and the central bank’s efforts to manage the economy are closely tied to this narrative.


About Post Author