Recessions: We Don’t Always Know Them When We See Them

As central banks raise interest rates aggressively to fight inflation, there has been increased attention given to the possibility of an impending recession in the US and Canada. Indeed, a decline in US real GDP in the first quarter of 2022 and the likelihood of another negative print in the second quarter has caused some commentators to all but call a recession already. So, was the US in recession in the first half of 2022? The answer is likely not, at least as defined by the National Bureau of Economic Research – the US recession arbiter. And Canada is even less likely to have been in recession so far in 2022. But what is the likelihood of a recession going forward? Based on healthy economic data so far this year, the odds are pretty low. However, this data doesn’t account for the lagged impacts of interest rate hikes on the economy, and therefore underestimates the likelihood of a recession down the road. Instead, based on the forecasts in our most recent Economic and Financial Outlook, we are of the view that the likelihood of a recession in 2023 is elevated but still less than 50 % in the US. In contrast, due to its weaker economic outlook, greater sensitivity to interest rates, and higher historical volatility of real GDP growth, the odds of recession in Canada in 2023 are close to being even.