Is Canada Headed for a Recession in 2023? Here’s What the Experts are Saying

If you read the news these days you’re bound to see the word “recession” come up again and again. Most people have a basic understanding that a recession means smaller budgets, job losses and a slower economy overall, but what does it mean for you, exactly? And is Canada about to enter into a recession in 2023?

It can be tough to make sense of all the info and voices chiming in about the state of the economy, but this article is a good place to start. Read on to learn what a recession is, some background info on previous recessions in Canada, and what the experts say about the future of our economy. Plus we have some helpful tips for preparing for an economic downturn.

What’s a recession?

Before we dig into where the economy is going, let’s start by describing what a recession is. While definitions can vary, generally speaking a recession is a decline in Gross Domestic Product (GDP) for two consecutive quarters. GDP is the monetary value of all finished goods and services made within a country during a defined period. GDP is commonly used to estimate the size of a country’s economy and how fast it’s growing.

During a recession you’ll see reduced spending, lower production, increased unemployment and declining prices. Recessions can be caused by weak consumer demand, global events such as war or terrorism, a decrease in the money supply, or an increase in interest rates. 

Recessions can sometimes happen when too many individuals and businesses borrow and spend beyond their means. During a recession, spending and investment activity slow significantly, leading to job losses and reduced incomes for households. This reduces consumption further while at the same time reducing government tax revenues which can lead to budget deficits. Businesses may also have difficulty keeping up with their debt payments and may choose to reduce production, lay off workers or even go out of business entirely. 

What’s the Difference Between a Recession and a Depression?

While some people might use the terms “recession” and “depression” interchangeably, they refer to two different things. While both terms describe periods during which the economy shrinks, they differ in severity, duration, and scale.

A recession involves a period of slight economic decline with some reduction in production and employment (two quarters of declining GDP), whereas a depression is a far more extreme and long-lasting downswing in the economy, although the exact definition of a depression is less clear. 

Depressions tend to have a more significant impact on the economy, leading to increased poverty and unemployment, devalued currencies, higher inflation, decreased wages and even banking crises. The effects of a depression can reach a global scale, whereas a recession can more easily be contained within a country’s borders. Furthermore, a recession typically lasts for two quarters or more, while a depression can last for many years. In Canada, an example is the Great Depression of the 1930’s when the unemployment rate was 30% (compared to about 5.1% today).

The Great Depression

The Great Depression was the most prolonged and deepest economic downturn in modern history. It began in the United States in 1929 with a stock market crash that led to reduced spending, production and employment, and widespread declines in asset values. 

While the impact of a recession doesn’t typically spill over a country’s borders,the Great Depression caused a ripple effect throughout the world economy, leading to depressed markets and increased poverty, unemployment and deflation. In response, governments around the world implemented stimulus measures such as tariffs and trade restrictions to protect their economies, although these ultimately proved ineffective. The effects of the Great Depression were felt for decades.

When Was the Last Recession in Canada?

In 2008, Canada experienced a recession caused by the global financial crisis of 2007-2008. This recession saw a significant decline in economic activity: GDP dropped 3.6% the unemployment rate rose from 6.3% to 8.6%. Inflation and interest rates also rose, while housing prices declined significantly in many areas of the country. This had a ripple effect throughout the country's economy, leading to widespread job losses and reduced consumer spending. 

What Caused the 2008-2009 Financial Crisis?

The 2008-2009 financial crisis was caused by a combination of factors, including excessive risk-taking in the US housing market, inadequate government oversight of the banking and finance sector, and the bursting of the global credit bubble. The Canadian economy recovered slowly from the 2008-2009 recession and it did take several years. 

Is Canada Headed for Another Recession?

At this time, it’s hard to say whether Canada is heading for another recession. In an October 2022 news conference, Bank of Canada Governor Tiff Macklem replied to the question of whether or not a recession was possible saying this: "Yes, a couple -- two, three quarters -- of slightly negative growth is just as likely as two or three quarters of slightly positive growth. That's not a severe contraction, but it is a significant slowing.”

In an interview with BNN Bloomberg, David Doyle, head of economics at Macquarie Group said "I don't think that we're in a recession just yet, but I do think that one is on the horizon," He went on to say that he predicts Canada will experience a recession in the first quarter of 2023.

This perspective is echoed by Former Bank of Canada and Bank of England governor Mark Carney in his comments before a Senate committee in October: "I think a recession is both likely globally and most probable in Canada.” Deputy Prime Minister and Finance Minister Chrystia Freeland predicts “difficult days ahead for Canada’s economy and for the economies of all of our friends and allies around the world.” 5.1% today

While the outlook according to the experts might sound bleak, ultimately, only time will tell how the Canadian economy fares in the months and years ahead. It’s important for individuals to stay informed and make sure they’re financially ready to face various scenarios.

How Should I Prepare Financially for a Recession?

Thinking about a looming recession can be stressful, but there are steps you can take to prepare your finances. 

Set Up an Emergency Fund

If you don’t already have an emergency fund, now is the time to start putting money aside for a rainy day. Ideally, your emergency fund should cover 3-6 months’ worth of expenses, so if your household income does take a hit during a potential recession, you’ll be able to cover your essential outgoings.

Your emergency fund should also be kept in a cash or savings account so you can easily get to it when needed. You don’t want to lock this money up in a GIC or put it into risky investments.

Pay Off High-Interest Debt

If you have any debt, it’s a good idea to get on top of it now, as it might be hard to make your repayments if your income suffers during a recession. There are different methods you can follow to pay off debt, such as the avalanche method, which involves paying off your highest-interest debt first, then your second-highest, and so on until you're debt-free. The advantage of this method is that you save the most money in interest charges.

There’s also the snowball method, where you tackle your smallest source of debt first, then work up to the biggest. The benefit of the snowball method is you get more quick wins, which can help you build momentum and motivation to keep going!

If you’re really struggling to keep on top of debt, you might want to think about debt consolidation. With debt consolidation, you take out a loan to pay off all of your existing debts, then you only need to make one monthly payment to repay the loan. Debt consolidation loans often have lower interest rates than credit cards so it’s also a great way to save money on interest charges.

Avoid Taking on New Debt or Making Unnecessary Purchases

With a recession looming, now is not the best time to be taking on any additional sources of unnecessary debt or making big, non-essential purchases. You want as much wiggle room in your budget as possible so that you can cope with any reductions to your household income that might occur during an economic downturn.

Be Prepared for a Job Hunt

Unemployment can tend to spike during a recession, so it might be a good idea to get ahead by updating your resume now. You may also want to look into some ways to gain some new skills to help you stand out in a competitive job market, like online courses or certifications.

The Bottom Line: Always be Prepared

In conclusion, while no one can predict the future with certainty, it’s important to be aware of the current economic and political environment in order to prepare for a potential recession. Taking proactive steps such as setting up an emergency fund, reducing unnecessary expenses and building up your skillset will help you remain financially secure should a recession hit. By being prepared and staying informed, you will be better able to weather an economic downturn.