That bitter winter wind you're feeling might just be a recession

50 bp BoC rate cut may signal a weaker economy

If you’re in the market for a new 2024 Ford Edge, GTA car dealers are sitting on almost 250 models for you to choose from. You can bask in every colour and option package possible, it seems, with a $7,000 “delivery allowance” discount already on offer. That represents an unusually high 12% pre-tax discount — before you try to dicker for an extra $500 off.

Production of the Edge ended in April, leading to the lay-off of 3,179 workers at the Oakville plant. These Ford employees know all to well that the Edge’s U.S. sales swooned following a peak in 2017. Badges come and go, and that particular Ford plant may land another line for its Super Duty pickup truck in 2026, but the promised EV platform has been delayed until at least 2027.

Things aren’t moving any faster over on the Jeep sales lot, which forced Stellantis to indefinitely lay-off 1,100 workers at one Ohio plant last month. Most Canadian-based automotive part suppliers must be on tender hooks these days. Even fancy brands, such as Mercedes, seem to have cut back on U.S.-based production volumes: you’re welcome to design and build your own new car, as long as you don’t mind waiting five or six months, rather than the more traditional 90 day window.

Macy’s Department store has just lowered its sales forecast for the second time in six months, which is consistent with the Christmas shopping traffic you’ll see (or not) at Toronto’s Hudson’s Bay anchor store. Canada’s high end retailers are still chipper, which has more to do with their wealthy clients being prepared to drop $30k in a 20 minute period, rather than having to rely on mainstream customers spending just a bit extra versus last year. That said, online sales remain high, so be wary of executing sell orders solely on Peter Lynch-type anecdotes about quiet Christmas shopping traffic.

Former Bank of Canada Governor Dr. Stephen Poloz said last week that Canada was already in a recession, and not just a “technical one.”

Poloz said the Canadian consumer has suffered a 30 per cent increase in the cost of living following the recent inflationary period, which has reduced spending. Additionally, inflation has fallen faster than was predicted, which Poloz argues only happens during a recession.

I don’t think his statements got enough attention, but you can see why the Prime Minister’s Office was reportedly pushing Finance Minister Chrystia Freeland last month to take immediate steps to stimulate the economy, in the hopes of artificially boosting consumption for even a few months while Mr. Trudeau gauges the viability of his Run Against Trump re-election strategy (see prior post “One big winner of the U.S. election: Justin Trudeau” Nov 6-24).

Dr. Poloz believes that Canada had avoided a recession earlier “because we’ve been swamped with new immigrants who buy the basics in life, and that boosts our consumption enough.” I guess that respite has now ended, despite the fact that Mr. Trudeau’s recently “slashed” permanent resident target is still 30 per cent higher than it was in 2016, which was a high watermark at the time (see prior post “Immigration headlines distract from what's really broken” Oct 30-24).

Liberal MPs must be hearing the same rumblings that I am from small and medium-sized business owners, which I’ll summarize this way:

“Things weren’t great in the first half of the year, and never really got any better.”

Interest rates have come off in 2024, which reduces the monthly cost of an entrepreneur’s floating rate bank line. Lower rates will eventually trickle into the housing market, but they didn’t prevent our nation’s unemployment rate from “jumping to an 8 year high.”

Minister Freeland was mocked for saying Canada was in a “vibe-cession,” but I get her point. If families think times are tough, or if a bread-winner is worried about keeping their job in 2025, they’ll cut back on discretionary spending. The Minister likely thought her quip might sound better than Dr. Polo’s clear-cut use of the “R.” The reality is that Ottawa can temporarily reduce the HST on certain discretionary items, but most entrepreneurs won’t be making additional business investments in the absence of increased confidence about the trajectory of our country.

Which, in a word, continues to suck (see representative prior post “Where's the plan to fix Canada's "grim" business climate?” July 2-23). And that was before President-elect Donald Trump started talking tariffs.

Uncertainty isn’t good for business, and while Ontario Premier Doug Ford was right to remind American legislators that if tariffs are going to put his constituents out of work in late January, his Province can always cut off the electricity to the 1.5 million U.S. homes in Michigan, Minnesota and New York that rely on our hydro exports.

It was a great line, but with electricity-producing coal plants as one of the U.S. East Coast’s swing generation elements — and the fact that Mr. Trump carried neither Minnesota nor New York in the Electoral College — he might not be too fussed by such threats. More business for West Virginia’s coal mines would be billed as an early win for the new Trump Administration, and the Michigan taxpayers who voted for Mr. Trump will have to be mollified by the fact that Canada was forced to front the entire cost of the soon-to-open $6 billion Gordie Howe bridge.

One CIO reminded the Bloomberg TV audience this morning that Canada’s 200 bps interest rate cut path (100 bps is already behind us, with another 100 bps forecast for 2025) had only happened twice before in this century: i) in the wake of the dot-com crash, and ii) the 2008-09 global financial crisis.

Those were two very tough periods. If all of the datapoints call for similar dramatic action once again, times are not good.

CIBC Economist Avery Shenfeld knows more about this than I do, and his forecast still calls for 1.8% of real economic growth for Canada in 2025:

With inflation fears behind it, the Bank of Canada’s task is to deliver enough interest rate relief to accelerate growth and begin to narrow the slack that has opened up in the labour market. The result is that the uncertainties for US trade policy arising from Donald Trump’s election will have more bearing on the requisite interest rate path and the composition of growth, than on our projections for overall GDP, inflation and unemployment.

I take that to mean “we’ll know when we know,” which is a fair assessment during an unpredictable period. I’m with my fellow Western grad, Dr. Poloz — 2025 will bring what it brings, but the bitter wind has already arrived.

MRM

(this post, like all blogs, is an Opinion Piece)

(photo credit: Deep-Sea Diver (A), New York, 1951 by Irving Penn)