How a recession can be avoided in 2020

Canadian and U.S. economic growth will remain slow through 2020, but a recession can likely be avoided with the right policy moves, says Avery Shenfeld, managing director and chief economist at CIBC Capital Markets.

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“Typically about one year in 10 is a recession year, so we certainly can’t rule it out,” Shenfeld said in a Nov. 12 interview.

“Particularly with the global economy looking sluggish and some of our overseas trading partners on the verge of recessions, there is certainly a risk that a slowdown that we’re seeing now turns into recession.”

Still, CIBC’s base case is that a recession will be avoided; Shenfeld put the chances of recession in the coming year at about 25%.

Why? Just because some countries may experience a recession in 2020, it doesn’t automatically mean a recession will occur here. He gave the example of the European recession in 2012, which North America avoided.

“The Bank of Canada still has some tools at its disposal to lower interest rates, if need be, to prevent a recession,” Shenfeld said.

While the U.S. Federal Reserve cut rates for the third consecutive time in October to a range of 1.5% to 1.75%, the Bank of Canada held its key rate at 1.75%.

“Part of this is simply that the Federal Reserve had actually hiked interest rates further than the Bank of Canada,” said Shenfeld.

“U.S. overnight rates went close to 2.5%. The Bank of Canada rightly saw this slowdown coming, and stopped raising rates at 1.75%. We’ve now reached the point where U.S. overnight rates are slightly below those in Canada.”

As a result, Shenfeld predicted the BoC would nudge Canadian rates lower in the first quarter of 2020. Such a move would keep the currency from appreciating and hurting Canada’s exports, he said.

But it would also reflect some expected disappointments in the economic numbers over the coming months and serve “as an insurance move to make sure this soft patch for the global economy doesn’t hit Canada too hard,” he said.

The central bank’s next rate announcement is on Dec. 4. The two interest rate decisions in the first quarter of 2020 will take place Jan. 22 and March 4.

Shenfeld also pointed to fiscal stimulus coming from the federal government. “If the economy started to look weaker, that could be ramped up to provide some additional spending power in the economy,” he said.

When the Bank of Canada held its overnight rate on Oct. 30, it said it would monitor the rollout of federal government fiscal support — in the form of tax cuts promised during the election campaign — ahead of future policy decisions. Parliament returns on Dec. 5.

The BoC also warned that Canada’s economy would be “increasingly tested as trade conflicts and uncertainty persist.”

Shenfeld said a renewed trade war would pose a major risk to Canada.

“The biggest risks are if a trade war breaks out more heatedly between the U.S. and China, or between the U.S. and Europe, that we put another dent into the global scene,” he said. “That will be tough for Canada to avoid. But at this point, the most likely scenario is that we escape through this soft patch.”

Shenfeld predicts the Canadian economy will grow by about 1.5% next year, compared to 1.7% growth in the U.S.

With both countries near full employment, this “tightness” in the labour market “puts a ceiling on economic growth,” he said.

However, there are some bright spots.

“We’re hoping that 2020 brings some healing to the global economy catching up to the benefits of lower interest rates around the world, and some settling of the trade frictions that have slowed growth in 2019,” he said. If this occurs, it could boost Canadian growth for 2021.

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