David Rosenberg: Canadian Recession ‘All Is Well’

Canada’s economic background is weakening rapidly at the fundamental level

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By David Rosenberg and Julia Wendling

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As the COVID-19 pandemic escalated in early 2020, leading to widespread shutdowns and a downturn in economic activity, the Canadian government, like nearly all of its peers, flooded households with extra money to supplement cascading income. As a result, despite a 9.2 percent drop in employee compensation, a massive 30.5 percent rise in government transfers led to a rise in total household income by nearly eight percent from the fourth quarter of 2019 to the second quarter of 2020.

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But with the government now backing off fiscal and monetary stimulus amid rising inflation, income is set to falter, and that will be a drag on consumer spending at a time when job opportunities are slowing and home prices are deflation.

At the height of the shutdowns in 2020, companies were forced to shut down and lay off employees en masse, sending the unemployment rate rising to 13.4 percent by May from 5.6 percent in January. It was no surprise to see employee compensation decline in the fourth quarter of that year to $1.08 trillion (the lowest level since the third quarter of 2017) from $1.19 trillion in 2019. But the federal government stepped in with generous benefits to supplement that income loss, nearly Remittances to the household sector doubled to $609 billion in the second quarter of 2020.

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The influx of cash, in turn, has plunged an additional $906 billion into household hands than would have been the case had financial support remained at pre-pandemic levels over the past two years. This stimulus has since been curtailed significantly, but the government still needs to do more to return to the historical trend.

In fact, if we see the gap between actual income and corresponding income (household income if government support remains at the level of the fourth quarter of 2019) soon, government transfers will have to decline by an additional $58 billion, which translates into another three percent damage to household income from The drop in federal aid alone.

However, the burden on household income in the coming months is set to be much greater as we also have to account for the downward pressure on organic income caused by stagnating job creation within the economy. It is important to note that overall employment growth and employee compensation, as expected, have a correlation of 88 percent. And with employment growth contracting in June, July and August (-0.2 percent per month in each of those months), we can expect to see compensation follow suit, so this dominant source of household income is set to slow sharply.

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If there was a 0.2 percent drop in employment in the quarter, that would translate into roughly $27 billion in compensation, reducing another 1 percentage point of total household income. With more employment losses on the horizon, we expect this trend of slowing income to gain traction.

The combination of the decline in government transfers and damage to organic income is set to separate at least four percent of household income. But remember that this is a very conservative estimate because, as noted above, employment is expected to continue declining and does not explain the decline in rental income that awaits us as property prices erode further.

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All in all, this means that consumption – which accounts for more than half of GDP and is fully correlated with household income – is set to plummet in the coming months – adding more credibility to our plea for recession.

In addition, if we squeeze the downside of spending due to the negative wealth effect from falling home prices and faltering stock markets, the outcome of the Canadian recession is flat.

While the Bank of Canada continued its aggressive course of raising interest rates with a 75 basis point increase last week, it will likely stop in its path at short notice as the central bank deals with the fact that Canada’s economic backdrop is weakening. quickly at a basic level.

David Rosenberg is the founder of the independent research firm Rosenberg Research & Associates Inc. Julia Wendling is an economist there. You can sign up for a free one-month trial at Rosenberg website.


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