Recession Risks Revisited: What’s a Recession and Is Canada Headed for One?

Following quarterly declines in Canadian real GDP in 2023, it came as little surprise that we received plenty of questions from members and clients on the risks of a recession.

First and foremost, what is a recession? It is a “pronounced, persistent, and pervasive decline in aggregate economic activity.” (CD Howe Institute, 2017) What it isn’t is just two consecutive quarterly declines in real GDP— known colloquially as a “technical recession.” There are examples when two quarters of negative real GDP growth were found to not be recessions as they were highly concentrated in a few sectors. Also, a recession in the US does not imply a recession in Canada. In fact, far from it.

Is Canada in a recession now? As of the end of the third quarter of 2023, Canada was likely not yet in a recession. The data were particularly revision-prone last year, with a drop in Q2 2023 real GDP having been re‑estimated to a respectable move higher. We think a positive revision of similar magnitude could occur in Q3. And while the monthly data have been mixed in the second half of last year, Q4 real GDP growth is tracking a modest positive print. That said, the trend has been toward a general softening in economic indicators, with monthly real GDP showing broad-based weakness and the ongoing decline in real GDP per capita accelerating in recent months.

Is Canada likely to experience a recession in 2024? We think so, probably starting in the first half of the year. Canadian households are highly leveraged, particularly when it comes to housing. Residential investment also makes up a disproportionate share of economic activity in Canada. As such, the Canadian economy is particularly interest rate sensitive. And as monetary policy is known to act with long and variable lags, there is more pain to come even as rate cuts likely begin around the middle of the year. Hence, consumption should be weak this year as well.