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Canada Recession Odds a "Coin Flip" - Conference Board of Canada

Economy Aug 17, 2022 13:46
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By Ketki Saxena 

Investing.com -- A recent analysis from The Conference Board of Canada predicts a 50/50 chance of a recession in Canada over the next 12 months. 

Pedro Antunes, Chief Economist at The Conference Board of Canada writes, “Although it’s challenging to assess the different risks facing Canada and the global economy, our modelling shows that the probability of Canada entering a recession in the coming year stands at about 50 percent.”

On the positive side, the report notes that the Canadian economy remains relatively cushioned from the worst of the downturn, stating that “Key factors that could prevent Canada from entering a recession include the high job vacancy rates, high commodity prices and continuing high consumer savings levels.”

The Board notes that slowdown expectations stem from worries the Canadian central banks will “overshoot” the mark in its fight against inflation, “bringing about a hard-landing scenario that sends the economy into recession.”

The report also points to recession risks indicated by “reading the tea leaves in yield curves”. 

What do Canadian Yield Curves Indicate? 

Last week, the yield on the 10-year Canadian government bond fell over 50 basis points below the two-year yield - as per Reuters the largest and deeper inversion of the Canadian yield curve going back to 1994, and more pronounced than the U.S. Inversion of the Treasury yield curve.

The inverted yield curve in Canada essentially warns that investors worry that the Bank of Canada may hike interest rates to a point that triggers a recession.

Bank of Canada Still Hopes for Soft Landing Despite Narrowing Path 

In an OpEd for the National Post yesterday, Bank of Canada governor Tiff Macklem reiterated the Bank’s goal of achieving a soft landing, writing that “Our goal is to cool the economy enough to get inflation back to the two percent target. We don’t want to choke off demand — we want to slow its growth.  That’s what we call a soft landing.”

However, following the BoC’s surprise 100 bps hike in July, Mr.Macklem has previously noted that while bank policymakers “think there’s a path to a soft landing… that path is narrowing.” 

Despite yesterday’s easing inflation figures and growing concerns of a recession in Canada, the Bank of Canada appears unlikely to be deterred from its policy tightening path. In yesterday’s OpEd, Mr. Macklem warned that the BoC’s “job is not done yet — it won’t be done until inflation gets back to the two percent target”, and indicated that more outsized rate hikes can be expected as the Canadian central bank front-loads its monetary policy.

Mr. Macklem who has conceded that the Bank likely waited too long to begin raising rates ( having maintained until the beginning of 2022 that inflation was likely transitory) now seems inclined to err on the side of caution. And that will mean sharply higher interest rates, even at the cost of a contracting economy. 

The Canadian central bank has indicated rates will need to be beyond three percent by the end of the year to begin controlling price pressures. The benchmark rate is currently at 2.5 percent.

Canada Recession Odds a "Coin Flip" - Conference Board of Canada
 

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