Why isn't Canada in a recession and what does it mean for our long-term prosperity?

Professor Walid Hejazi joins the Executive Summary to explain the macro-economic trends keeping the economy chugging along and kept us out of a recession (so far), and why they might be detrimental to our economic health.

Show notes:

[0:00] In 2022 and 2023, talk of recession was everywhere.

[0:20] Historically, when central banks raise rates to fight high inflation, recession follows – though this hasn’t been really tested since the 1980s, according to professor Walid Hejazi.

[1:17] And as of October 2023, despite numerous predictions of a recession, none have come to pass. So does that mean we’re economically in the clear? And why is that potentially a bad thing for Canadian prosperity?

[2:45] Important caveat: We interviewed Walid in August, recorded the rest of the episode in mid-September, and it airs in October, and while the economy moves slowly, it can sometimes move quickly and in unexpected ways.

[3:27] What is the technical and practical definition of a recession?

[3:47 Does Canada meet either of those definitions? No – we saw growth in GDP and jobs in the first quarter, a small contraction in the second quarter, and net gain in jobs in that same time period.

[4:20] Why did everyone think we were headed towards a recession? Because history tells us that’s the way it is.

[4:47] And the leading indicators have all been pointing that a recession is imminent.

[5:30] But there’s growing optimism that the central banks will have achieved a soft landing.

[6:15] Economist are surprised. They predicted the rate hike cycle would slow the economy. It did, but not as drastically as expected.

[6:38] Walid believes there are four reasons we haven’t tipped into a recession yet: low interest rates for too long, the unexpected war in Ukraine, the government’s COVID stimulus and Canada’s immigration policy.

[8:41] Are those sources of resilience a good thing? Maybe. But that resiliency might be detrimental to the long-term prosperity of Canadians.

[9:13] Why do we have a hot labour economy?

[10:03] How might our current approach to immigration cause a problem?

[10:50] The heavy debt load as a result of COVID-19 means focus on growth spending takes a back seat to interest payments.

[11:35] this is an opportunity for governments to think about the long term, but Walid doubts they’ll be able to think beyond the short-term.

[12:11] 50 years ago, Canadians were third wealthiest by household, globally. Today, we’re 15th, and our PPP is about 30 per cent lower than the U.S.

[12:45] This is a problem as we look to repay our debts. The wrong way to pay back debt if you want a prosperous economy, is to raise taxes; the right way is to make the existing workforce more productive and wealthier.

[13:20] Walid believes Canada needs to fundamentally become more innovative and productive, and diversify into higher-valued industries.

[13:48] To do that, we need to first remove protectionism;

[14:03] Second, we need to decrease the burdens or credentialing on new immigrants;

[14:25] And third, we need to remove the bureaucratic red tape that hinders innovation.

[15:18] What we need, Walid says, is bold leadership.

[15:49] “Bold leadership is thinking about what's best for Canada's future when it comes to prosperity, and implementing the policies despite the opposition or pushback they get from special interest. Without that bold leadership, a lot can change in 50 years. What kind of a country are we going to leave to our children?”