Labor shortages, pandemic savings to soften blow from short-lived recession: report

Nojoud Al Mallees, The Canadian Press

Posted Wednesday, September 28, 2022 5:52 am EDT

A tight job market and high savings during the pandemic will cushion the impact of a recession on Canadians, says a new Deloitte report.

Deloitte’s most recent economic outlook report forecasts that Canada will enter a short-lived recession by the end of the year.

The report says that while rising interest rates will cause a significant economic slowdown, the build-up of inventories will push the economy into a technical recession.

However, because the job market has been so tight, Deloitte chief economist Craig Alexander said unemployment may not rise as much as it normally would during a recession.

For Canadians, that’s what will matter most, he said.

“No one eats GDP. From the point of view of Canadians, what really matters is what happens to their jobs and their income,” Alexander said.

According to Deloitte’s forecast, the unemployment rate will rise to as high as six percent in the third quarter of next year before falling again.

Canada’s unemployment rate was 5.4 percent in August, down from a record low of 4.9 percent.

Alexander said the companies he has spoken with are still concerned about the current labor shortage.

Given existing hiring challenges, he said employers won’t be willing to lay off workers, even if there’s an economic downturn, as long as it’s expected to be temporary.

“If a recession comes, [businesses] they likely still want to stockpile labor because of how difficult it has been to find workers who have the skills they need,” he said.

While economists are divided on whether Canada will enter a recession, an economic slowdown is expected due to rising interest rates.

The Bank of Canada has raised its key interest rate five times since March, taking it to 3.25 percent. Although inflation slowed to 7.0 percent in August, the central bank is still expected to raise interest rates again in October.

As the Bank of Canada works to bring the inflation rate down to its two percent target, higher interest rates will translate into higher borrowing costs, which should slow economic activity.

There have been some early signs that a slowdown is already underway, including falling house prices and three straight months of job losses.

The Deloitte report says that household consumption will fall as the slowdown continues, but for households that built up savings, their spending will not be as affected.

According to Statistics Canada, households saved more than a quarter of their disposable income during the second quarter of 2020. By comparison, the savings rate was just two percent the year before.

While the household savings rate has since fallen, it remains high compared to pre-pandemic levels.

Households with higher incomes are generally considered to have higher savings rates.

“The inflation environment that we find ourselves in right now is absolutely punishing low-income Canadians. So, there is a very large dimension of inequality for [it]Alexander said.

“But in middle and upper income households, what we’re probably seeing is the cost of living is going up for them, but they can easily afford it and still spend.”

This report from The Canadian Press was first published on September 28, 2022.

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