What is a ‘richcession’? And will it spare the economy from a full-blown downturn?

Forecasters have had an eye out for a recession for months, but it has yet to happen as the Canadian economy has proven resilient in the face of high inflation and rising interest rates. 

A technical recession is often defined as two straight quarters of negative gross domestic product (GDP) growth.

But the country may be facing a different type of recession as some sectors, like tech, have been feeling the pinch.

A string of high-profile tech layoffs, including at Google Canada, Dell and Shopify, have led experts to ask – is Canada in the midst of a “richcession”?

“A ‘richcession’ occurs when the wealthy get hit more than usual. And this is uncommon because normally in a recession, we see low-income households and, to an extent, the middle class hurting a lot more, whereas for the wealthy it is just a minor inconvenience,” Tu Nguyen, economist and ESG director at RSM Canada, told Global News.

One forecaster said all recessions usually have some sectors that tend to do worse than others, but noted the pendulum might be swinging in the other direction.

“For example, the pandemic had a severe effect on the service class of workers as restaurants and retail establishments were closed down. A lot of workers that tended to be in the lower income categories were laid off and therefore had to be supported by other government measures,” said Ted Mallett, director of economic forecasting at the Conference Board of Canada.

2:08
Economy grew in May, slowed in June: StatCan

 

Nguyen said there is evidence that Canada may already be seeing a “richcession” as workers in higher-paying fields have been dealing with the brunt of job losses.

“Since the pandemic happened, a lot of government support has poured out and is really helping a lot of low-income families to pay off debt, to sack away some savings,” she said.

“In addition, we see that a lot of lower paid workers have been making a lot of strides in gaining wages. Most notably, PSAC (negotiated) a historic 12% increase in wages. And that is that is huge. Now, in contrast, we see that a lot of layoffs that have been happening in the economy are concentrated among the higher paid workers, like in tech, for example.”

Mallett said if one observes the tech layoffs in the United States, an interesting trend emerges.

While there have been significant cutbacks and layoffs, tech employment overall has not declined.

“People let go from either Meta or Google or what was known as Twitter, tend to have been reabsorbed into the workforce in some of the smaller, perhaps less high-profile businesses out there,” he said. “It looks like those skills are still being needed and absorbed into the sector.”

He added that Canadian companies may have similar needs.

Nguyen said this phenomenon of high-paid workers taking a pay cut may reduce income-inequality and, in turn, save Canada from a full-blown recession.

“We are seeing minimum wage workers, low wage workers, blue collar workers gaining higher wages, getting more power thanks to the labour shortages while we’re seeing higher paid workers maybe not gaining as much,” she said. “In the end, we have less income inequality, which is not necessarily a bad thing.”

Nguyen said Canada might also be facing what is a “rolling recession” – where different sectors of the economy take a hit at different times.

“We’ve seen housing taking us some earlier this year, but that is recovering. The real estate market is incredibly active. We see that manufacturing was having some difficulties last year due to supply chain disruption, but they are doing very well right now,” she said.

“Now, tech, in contrast, is still going through layoffs and restructuring and not doing as well. And we see other industries like services that haven’t taken any reduction at all.”

Mallett said this phased slowdown would soften the blow of the recession.

“The slowdown will be more gradual and be softer,” he said.

He added that while Canadian employers may slow down their hiring efforts, they may be unwilling to part with highly skilled employees. That may prevent mass layoffs.

“We’re not predicting anything close to the financial crisis of 2008 because in that case, it hit the financial sector in the States, which immediately brought almost every other sector to a halt. It was a very much a big deal. In this case, we’re dealing with sectors that are not quite so connected to each other as implicitly as finance,” he said.

Mallett said they are predicting a recession for later in the year.

“We think that the last half of the year is going to be pretty weak,” he said.

“We think that there’s a good possibility it’ll be negative, but mildly negative. For most people who have secure employment, they will not necessarily feel the effects.”

Some economists have also forecast a downturn later this year.