Concerns about a potential global recession continue to weigh on financial markets. Kim Parlee speaks with Beata Caranci, Chief Economist at TD Bank, about the potential for slowing growth in the year ahead and the implications for Canada.
Welcome to MoneyTalk. I'm Kim Parlee. Great to have you with us. Santa might have taken one look at the polar vortex and said, I'm going to skip the Santa Claus rally this year, sending equity markets down to the end of 2022. The markets have rebounded a little bit in '23. But everyone's focused on what's happening with the economy, with rates, with central bankers. Here to give us her thoughts on what she thinks 2023 could bring, specifically from an economic perspective, Beata Caranci, Chief Economist at TD Bank. It's always lovely to see you.
Thank you, Kim.
And belated Happy New Year.
Oh, and to you too.
Let's start-- I wouldn't mind just kind of going through all the big factors for 2023. Let's just cut to the chase, recession. Are we headed there? I know you said jobs have been unusually strong going into this. Are we headed there? Will one happen? How long will it take?
Yeah, so this is the challenge because the job market has been very strong. However, the job market's not usually a leading indicator of a recession. So coincident at best sometimes lagging. But what it is telling us is that we probably have not entered the recession cycle, at least when you have this degree of jobs being created, 100,000 in the last monthly count for Canada, which is 10 times more than what we were expecting literally. And in the US, no signs of cracking, none.
And then you can also observe other statistics, like just a lot of high demand still out there. So it tells us we're not there. In terms of are we headed there, how deep, that is the 2023 story. And it's very likely we're going to have very poor growth this year and a lot of debate on the recession side. I would say when we look at the forward indicators, they're starting to give us a little bit of signal happening that we could be about six months out. It gives you no indication of depth. It's something you only really in hindsight. Given the fundamentals of the US and Canadian economy with high savings rates happening and good starting point on the job market, this is why a lot of people are calling for a mild recession.
But we really won't be able to answer that till we get through it. And I think Canada has more risks than the US, which is opposite to the last two cycles we've had. Really? Yeah. Why?
And that's related to the debt service ratio and the high leverage that we have in Canada. So when the US went through their deleverage cycle post global financial crisis, they really deleveraged. It was painful. It went on for about five years. But they got their debt levels significantly below where we see in Canada. And likewise, the high interest rates have a more muted impact on them now because they're just carrying less debt than they were.
Canada went the other way. We not only never went through a deleverage cycle, we releveraged up. And then we went to a higher risk product, like variable interest rate mortgages or you have to renew effectively every five years. So very susceptible to the interest rate cycle and higher debt loads. And that combination does leave us more at risk for either a deeper recession or maybe more stagnation, depending on which way it plays out.
It's fascinating. There's so many crosscurrents. I mean, that's why you get paid to do what you do is figure them all out and where they land. The other crosscurrent I think that people are trying to figure out is China. With a zero COVID policy, everything shut down. Now it's starting to open up. I'm going to put aside the COVID risks for a moment, but just the economic opportunity of opening up again, more demand for stuff, more demand for commodities and those types of things. So does that counter? Does that does that help the global picture when that happens?
Yeah, the timing is not great because we're so worried about inflation. And to your point, the demand on commodities puts at risk that you get a resurgence in commodity prices that feeds through to inflation, just as inflation is now coming off peak. So that's the concern that maybe they start to pressure the global economy at a time when you're actually trying to take pressure off of it. I would say that's a second half 2023 story.
I think the first half, they're going to continue to struggle on in terms of their healthcare system and making sure supply chains don't get disrupted due to illness rates. And then when we get into the second half, knowing what we've observed so far on this disease that you go through these waves and then it calms down as a population infection rates get higher, that we think the second half of the year we could see some significant pressure start to re-emerge inside commodity prices to the point that demand coming back up.
If that timing works out, it wouldn't be the worst timing at that point in the cycle because that's probably where the Canadian and US markets are going to be bottoming out. And it might give a little bit of a lift in terms of export demand and other factors. So that's a possibility. But a lot of very precise elements happening in terms of timing, which makes the forecast quite difficult to call at this stage.
So let me ask you when you look out to 2023, we do see a slowdown. And again, we don't know how much or by when. And we're starting to see job cuts from more public companies. [INAUDIBLE] announced them too. What data points are you watching beyond-- I'm going to say obviously inflation-- obviously central banks? But what else are you watching to understand how 2023 is going to unfold?
Yes, if you think through what you would think of leading indicators, typically you want to pay attention to the order books of companies. How are their orders firming up or weakening? That's actually been weakening, especially in the US. And so the reason you're paying attention to that, that's your future production, future inventories, future everything.
How are they looking?
So they have been getting to the point where you're in contractionary territory, meaning more companies saying that they're softening or not as strong as they previously were. And so that's something we're paying attention to. And that's also something we're paying attention to on the service side. Typically when you go into a weak economic period, the manufacturing side leads you into the cycle. But everything's been upside down in this post-pandemic world. So services have weakened more than we expected in the US in terms of the sentiment and surveys, like that soft data as opposed to the hard data.
So we're paying attention if the soft data materializes into the hard data. We need to be concerned about it. At this point, no on the hard data. But the soft data could be our leading indicator there. So that's an element we're paying attention to. Again, the job market, you just have to pay attention to it. It's really hard to say, oh, we're going to be in recession, but yet everybody's keeping their jobs. That would make no sense. There's no financial strain.
Well, the wages are coming down, are they not?
Yeah, but they're still pretty good. They're tracking inflation effectively. So people's incomes are not-- the real income side is not being hurt as much as one would expect. And that's typically what causes you to pull back on spending. And then the spending profiles are going to be really important here. If people start to just lose confidence or because they're hearing so much about recession risk just become conservative by nature, that would not be unusual. And then that's where you get into the argument of something becomes self-fulfilling because you hear about it so much you just naturally move towards cautionary behavior.
I would not look at this point the housing market. The housing market kind of led the cycle. It's very interest rate sensitive. It's not really going to be our clue at this point in the cycle of where we're headed. It's more what's happening on the business side and on the job demand side. [AUDIO LOGO]