Before Russia’s Feb. 24 invasion of Ukraine, the outlook for the U.S. economy was stressed but hopeful. Pandemic pressures appeared to be peaking, inflation was widely expected to normalize, and the Fed stood a credible chance of engineering a “soft landing.”
But an enormous humanitarian atrocity in Europe has triggered an unpredictable global financial and economic conflict that will see consequences ricochet. Though new risks have emerged, and uncertainty is higher, at present the main impact of the crisis on the U.S. economy is the exacerbation of existing pressures and risks. The path of inflation, and the policies to contain it, remain the main threat to the cycle. While that risk has gone up, it need not be a recessionary outcome.
How the Stimulus Bet Played Out
As we wrote here last year, policy makers placed an enormous bet at the start of 2021 that extraordinary stimulus would transform a strong recovery into an even stronger expansion. The payoff would be a “tight” economy — one that delivered broad-based real wage gains that firms paid for with higher productivity growth, not by raising prices. A win-win-win for workers, firms, and politicians.
That preferred scenario has not materialized. The tight economy did arrive with strong nominal wage gains and signs of productivity growth. But inflation has grown faster, as firms discovered pricing power and used it widely to protect their profit margins. In February, year-over-year price growth stood at 7.9%, a 40-year high.
But it would be wrong to blame only the stimulus. Inflation was also driven by supply-chain bottlenecks — exacerbated by waves of the virus that interrupted production and slowed inventory recoveries — and a labor market scrambling to hire back workers, while labor supply sluggishly continued to normalize.
Pressures Appeared to Have Peaked
Despite this, there was clear evidence that the U.S. economy had passed peak economic pressure. In product markets, demand was normalizing, even slowing in many overheated areas, such as consumer durables, while inventories were growing. In the labor market, the frenetic pace of hiring had eased, while labor supply was finally normalizing.
February’s job reports, released on March 4, underlined all this. Firms were broadly able to hire workers in large numbers (+654K private payroll), which was facilitated by a continued strong uptick in labor participation. Meanwhile, wage growth, though still high year over year, was flat month over month. All this would have been a bullish signal that the economy remains strong and pressures were easing.
How the War Drives up Recession Risk
Russia’s conflict has made those markers of economic strength nearly irrelevant as higher-order risks are taking center stage. The prospect of sustained conflict and an altered geoeconomic reality have yet to sink in. But it’s not too early to think about how the impact could play out. Is a recession now in the cards?
The impact of an economic shock is delivered through one — or several — of three transmission channels. Let’s see where risks are highest and why.
Financial recessions remain the pernicious kind. They unfold when a shock cripples banks, either through liquidity or capital concerns that force them to deleverage. In their wake, they leave lasting asset price damage, impaired investment plans, and slow recoveries. This was the story of 2008 — but it was successfully averted in 2020.
The U.S. banking system was in strong shape before the war started and continues to exhibit very limited stress. The capital position of U.S. banks is strong, profitability is the best it’s been in years, and liquidity is extremely flush. Exposure to Russian assets is limited, and live data on credit spreads are reassuring.
Yet, there remain unknowns. Banking is an extremely interlinked ecosystem, which can hide vulnerabilities. A novel risk that stands out is a debilitating cyberattack on western financial infrastructure, a clear reason never to dismiss the financial sector as a source of serious surprise.
Real economy recessions are typically milder and driven by sudden demand or supply shocks that can tip an already vulnerable economy into recession. Has the Ukrainian conflict triggered enough headwinds to deliver such a shock? On the negative side of the ledger a few stand out:
Energy prices (direct effects): In 2021, oil prices in the U.S. (WTI) rose from just below $50/barrel to more than $75/barrel. If prices had stayed there, the impact on inflation (and real incomes) would have waned, as inflation measures the change in prices, not price levels. However in the wake of the Ukraine invasion, prices have as high as $130/barrel, i.e. similar price growth to last year’s and hitting real incomes again.
Energy prices (impact on confidence): Energy prices also have a clear — inverse — relationship with consumer confidence. Consider that confidence didn’t recover strongly in the last expansion until oil prices collapsed throughout 2014. High oil prices flowing through to the gas pump are likely to diminish household confidence.
Wealth effects: Falling asset prices mean households feel less wealthy and make them pull back from expenditures and save more.
Supply-chain disruptions: Russia’s invasion is another blow to globally integrated supply chains that have repeatedly gummed up economic output over the last two years.
Despite this litany of headwinds, it’s not clear as of today that they outweigh the tailwinds the U.S. economic cycle continues to experience:
Growth, though decelerating, has momentum and is running above trend growth in 2022, providing some insulation from shocks.
Household sector remains healthy, as balance sheets are still very strong across income cohorts, including elevated cash balances.
Labor markets are very tight, with record job openings, strong hiring, and strong wage gains providing a robust domestic tailwind to continued consumption.
Firms remain highly profitable and interested in investing, as they look to build resilience and new capacity.
Direct U.S. trade linkages to Russia and Ukraine are modest overall, and potential disruptions will come as Americans continue to reemerge from Covid shutdowns.
These tailwinds and headwinds are not exhaustive, nor is it possible to confidently net them against each other. But the backdrop of the U.S cycle remains one that suggests the expansion can continue.
A Policy Error Remains the Central Recession Threat
This means the most plausible source of risk remains a so-called policy error recession. Even before the war, a policy error was the key risk to the expansion: Hike interest rates too little or too slowly and inflation may spiral out of control; hike rates too high or too fast and an unnecessary recession occurs.
The war has made the Fed’s high-wire act even more precarious. To get the balance of headwinds and tailwinds right, policy makers have to interpret all the drivers we discussed so far — energy, labor markets, product demand, supply chains, etc. — without having full visibility or timely data. The impact of energy prices, for example, was difficult enough to gauge before the war. Now it’s gotten a lot harder, and so the risk of a policy error is also a lot higher.
Before the invasion, markets saw the Fed delivering seven interest rate hikes through the beginning of 2023 to bring inflation under control. Many observers feared that would be too much for the cycle to survive. Today, the market still sees about seven hikes — basically unchanged despite the massive increase in uncertainty. The key question is not if the war derails the expansion, but if the Fed can negotiate a soft landing with that degree of tightening.
What Executives Can Do
As the shock of the invasion reverberates through the economy and cycle risk builds, executives will strive to position their businesses to minimize impact. Here are a few do’s and don’ts.
Don’t rely on forecasts as extreme uncertainty prevails; flimsy in the best of times, they remain out of reach.
Do build the capabilities to analyze and model the transmission of shocks and stress test using scenario planning.
Don’t assume that shocks deliver structural change – they can, but in the fog of the moment the bar for inflection often appears deceptively low.
Don’t assume that pricing power persists. As growth moderates and inventories build, firms may well return to defending market share.
Do think of productivity growth as a sustainable source of competitive advantage.
Russia’s invasion of Ukraine occurs just as pressures in the U.S. economy peaked, and prospects of a soft landing were good. The days, weeks, and months ahead will bring more clarity about how it impacts the U.S. economic cycle. A recession is not a foregone conclusion, and companies should stay flexible, reassessing their outlooks and tactics as events unfold.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
