Canadians should brace for a recession because the odds are “not zero,” says Stephen Poloz. Former Bank of Canada Governor Stephen Poloz has expressed concerns about current economic conditions, citing a divergence between population growth and economic growth, alongside shrinking household spending. Poloz, now a special advisor at Osler, Hoskin & Harcourt LLP, highlighted the significant gap: while the Canadian population is expanding at a 3.5 per cent rate, the economy is only growing by approximately one per cent. This imbalance, coupled with declining household expenditures – a characteristic of recessionary periods – suggests a potentially challenging economic outlook. Poloz emphasized that without the population growth, the economy would be experiencing a contraction of approximately two per cent, indicating a recessionary state.
The concerns are further compounded by elevated unemployment rates, reaching levels nearing “worrying” proportions, and a persistent issue with relative productivity compared to the United States. Labour productivity has declined for two consecutive quarters, and GDP per capita shows a five-quarter decline. This represents a significant disadvantage, particularly as the United States has responded to economic challenges through investments aimed at bolstering economic capacity, primarily via the Inflation Reduction Act. Canada’s fiscal response has largely focused on supporting the Canadian consumer, potentially contributing to the diverging economic trajectories.
Furthermore, preliminary estimates from Statistics Canada indicate that gross domestic product remained flat in July, with economists predicting annualized growth of just 0.5 per cent for the third quarter – well below the Bank of Canada’s forecast of 2.8 per cent. This underperformance reinforces Poloz’s assessment and suggests a period of slower growth. The situation is further complicated by the significant mortgage renewal strain currently experienced by households, contributing to ongoing consumer spending constraints, particularly given the fact that renewal rates are higher than previous levels.
Poloz’s views align with a broader trend, noting that "this year is kind of a turning point," and that forecasts presented by the Bank of Canada may not materialize. He pointed to the differing approaches of the Canadian and United States governments, with the latter’s investments in economic capacity potentially offering a more robust path to a “soft landing” than Canada’s consumer-focused strategy. The former governor’s warning is not a forecast, but a sober assessment that the probability of a recession remains, stating, “odds are ‘not zero.’”
The situation is further highlighted by the challenges Canadian businesses face in adapting to changing global economic circumstances. While U.S. and Canadian governments are both capable of utilizing tools to stimulate their economies, they are doing so with different priorities. This underscores the delicate balance between supporting consumer demand and fostering long-term economic productivity. Poloz’s perspective reflects a cautious approach, urging businesses and consumers to prepare for potential economic headwinds.
