Economic slowdown south of the border would have a big impact in Canada
Recent market volatility has reignited concerns about a potential recession in the US financial landscape – but while market turbulence often precedes economic downturns, it does not always signal an imminent recession, BMO’s top economists have highlighted.
In a new analysis, economist Doug Porter and senior economist Robert Kavcic explored whether current indicators are genuinely alarming or just transient disturbances.
August’s financial market turbulence, influenced by geopolitical tensions, the unravelling yen carry trade, US election uncertainties, and tech sector jitters, has been particularly pronounced. Porter and Kavcic underscored that a notable trigger was the US jobless rate’s unexpected rise to 4.3% in July, combined with Fed Chair Powell’s recent comments on the labour market’s health.
This increase renewed concerns over a possible recession, especially after markets had previously been optimistic about a soft landing.
Historical patterns reveal that while severe market volatility often precedes recessions, it does not guarantee one is on the horizon. For instance, significant volatility occurred before the 1987 crash and during various other economic disturbances, but not all led to recessions.
Recent market conditions, including the VIX index spiking to levels seen only 15 times in 30 years, suggest heightened nervousness but not necessarily impending doom.
Current US economic indicators paint a mixed picture. Although the Sahm Rule, which links rising unemployment rates to recession risks, has been triggered, other data points offer a more optimistic view. The US job market, despite a recent hiccup, continues to show resilience, with payroll growth averaging close to 200,000 in recent months and GDP growing solidly at 3.1% year-on-year.
Outlook of the US economy
Forward-looking indicators, however, are less reassuring. According to the analysts, the inverted yield curve, a reliable recession predictor for the past 50 years, remains a concern. Historically, a recession has followed yield curve inversion within 18 to 20 months, and despite some speculation that current conditions might differ, this indicator warrants caution.
In light of these factors, BMO’s economists forecast that while the US economy may avoid a full-blown recession, growth is likely to decelerate, averaging just under 1.5% over the next year. The probability of a downturn over the next 12 months has increased, with recent estimates suggesting a 35% chance of recession.
A preview of the Canadian economy
For Canada, the situation appears more fragile. With growth struggling to surpass 1% over the past year and a significant rise in the jobless rate, Canada is experiencing a softer economic environment. However, the Bank of Canada’s proactive easing measures might help mitigate recession risks, though the economy remains vulnerable to external shocks.
While recession risks have heightened, the US economy is not necessarily on the brink of a downturn. Investors and policymakers will likely remain vigilant, balancing current economic signals with historical patterns to navigate the uncertain terrain ahead.
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