Recession worries spread as interest rates rise: poll

Canadians are gloomy about the likelihood of a recession as interest rates rise sharply and high inflation continues to erode the purchasing power of wages and savings, according to a new poll.

The Nanos Research poll, conducted in late April and early May, found that four out of five Canadians were concerned or somewhat concerned about the possibility of a recession. The Bank of Canada is rapidly raising borrowing costs in an effort to cool Canada’s overheated economy and rein in runaway consumer price growth.

The Canadian economy remains strong, unemployment is at historic lows and the central bank does not expect a recession in the next two years. Still, bringing inflation down without triggering a painful correction in the housing market and a major contraction in consumer spending will require a “delicate balance,” Bank of Canada Governor Tiff Macklem said in April.

The Nanos poll, commissioned by the Globe and Mail, suggests that a strong majority of Canadians are concerned about this “soft landing”. The poll found that 43 percent of respondents were concerned about a recession, and 38 percent were somewhat concerned.

“Canadians have just come out of a pandemic, there’s war in Ukraine, house prices are going up, interest rates are going up. It’s like being hammered with risk after risk after risk,” pollster Nik Nanos said in an interview.

“There is great concern about going into a recession due to inflationary pressures and interest rates and all the other things that are happening right now.”

Most Bay Street economists do not foresee a high probability of a recession in Canada over the next two years. Canadian households have, on average, built up considerable savings during the COVID-19 pandemic, which could support robust consumer spending even as borrowing costs increase.

Similarly, the global commodity price shock caused by Russia’s invasion of Ukraine actually benefits Canadian commodity exporters and improves the country’s trade balance. This is a key difference from many European countries that import oil and gas from Russia and are at higher risk of a downturn.

Still, the likelihood of a recession in Canada will increase as inflation remains elevated, according to Rene Lalonde, director of modeling and forecasting at the Bank of Nova Scotia. Stubbornly high inflation could force the Bank of Canada to push interest rates higher and faster than currently expected to keep inflation expectations from drifting away from the bank’s inflation target.

“Higher inflation would further erode real incomes and necessitate higher interest rates, both of which negatively affect growth,” Lalonde wrote in a note to clients in late April.

“We estimate that inflation of just over 7% in the second half of this year would lead to a monetary policy-induced recession in the second half of 2023, as the Bank of Canada is expected to raise its benchmark rate to 4.25% to bring inflation back to its target of 2%.

The policy rate is currently 1 percent. Bank of Canada officials have said they intend to raise the rate to between 2% and 3% relatively quickly, and may raise it depending on how the economy reacts.

Along with general worries about a recession, the Nanos poll found that Canadians are particularly concerned about inflation at the grocery store, with nine in 10 respondents saying they are concerned or somewhat concerned about rising food prices.

He also revealed that nearly three out of four Canadians are concerned or somewhat concerned about rising interest rates. Notably, younger respondents were more worried about higher borrowing costs than older respondents.

“For Canadians over 55…the vast majority are at the end of any loan they’ve likely had to take in their lifetime,” Nanos said.

“But for a younger person under 35, they face a situation where only the cost of ownership and the interest cost of owning a house will be a much bigger burden,” he said.

The hybrid phone and online survey of 1,005 people is accurate to within 3.1 percentage points, 19 times out of 20.

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