Vice-President, Chief Economist and Strategist
The economic world remains obsessed with recession risk. The Chinese slowdown, the erosion of consumer purchasing power in most developed countries and expeditious monetary tightening are the main culprits. But a recession wouldn’t necessarily be fatal. While much of the chatter has been around whether a recession can be avoided, little has been said about how a potential recession would be managed. And this is where drawing parallels with previous episodes has its limits. How policymakers handled recessions 30 or 40 years ago offers little valuable insight into how they’ll handle the next one. Policy approaches and toolkits have evolved, thanks in part to lessons learned from prior downturns.
The pandemic recession was a testing ground for a number of policies that are likely to be reintroduced in the next recession. Wage subsidies are one example. They helped employers hold on to staff despite severely curtailed revenues. At their peak, these subsidies supported the wages of over 5 million workers across Canada and allowed job markets to recover quickly when lockdowns were lifted. The key lesson is that the best way to foster a robust labour market recovery is to keep people from losing their jobs in the first place.
Demographics can also limit job losses. The baby boomers entered the work force in the 1970s and 1980s and now they’re leaving to retire. Today’s acute, widespread labour shortages pre-date the pandemic and are likely to be with us for at least a decade, having a lasting impact on employer psychology. Our business members and clients are always telling us how difficult and expensive it is to attract and retain workers and how that limits their expansion plans. If we do see a growth recession, many employers will likely do all they can to retain their staff as opposed to laying them off and scrambling to re-hire them when the skies eventually clear. Temporary wage subsidy programs will help them do just that, and the pandemic is the proof of concept.
And for those who do lose their jobs, the government has enhanced the employment insurance system during the pandemic. This, along with various income support measures, was key to preventing financial hardship. The decline in bankruptcies and delinquencies during the pandemic shows that these programs had the intended results.
Bottom line: because of policy innovations introduced during the pandemic, job loss may no longer be synonymous with income loss. The severity of a recession depends on what happens to incomes. That said, there’s one big wildcard: the Bank of Canada. The debt incurred to fund these policy innovations would have been more expensive to service if it weren’t for the BoC’s heavy involvement in bond markets. But given the Bank’s current focus on taming inflation, it may respond more conservatively to the next recession. This would largely leave it to private investors to decide how much it will cost to borrow the money to fund these programs. Chances are borrowing costs will be higher than they were during the pandemic, forcing the government to pick and choose its policies more carefully. But the strength of the labour market recovery suggests that job retention programs would make the cut.
Read the full commentary: The Case for a Soft-ish Recession (If There Is One)