Foreign s is a reporter and columnist for the globe’s report on business and before he was a journalist he worked on Bay Street and there’s something else you should know about Tim would you consider yourself a pessimist or an optimist when it comes to talking about the health of the economy
Pessimist I don’t say that happily but I think people are a bit deluded in thinking that we got through everything like the storm is over and then it’s all sunny skies now because there’s a lot of scary data points out there Tim is a person you go to when you need
Some economic analysis and right now it feels like we need to check in on what’s happening with the markets and the economy because things are weird I’m Cheryl Sutherland and this is the decibel from the Globe and Mail Hey Tim thanks for being here happy to be here so Tim so every so often we at the decibel kind of want to do this kind of check-in on the economy and yeah just checking to see what’s going on and we’re turning to you this time so can
You kind of paint me a picture of what the economy and the markets are looking like right now so there’s two Dynamics going on there’s what’s happening in the official numbers which is the macro view in economics terms and then there’s what’s happening on the ground and in the macro view
Things are looking pretty good like inflation really has come down something you know eight percent or whatever it was to let’s say around three percent yeah you know we still have GDP growth remember this was the year that everything was supposed to be really painful that hasn’t been the case if you
Look at the stock markets which are somewhat disconnected from the economy at times but you know us markets up like 20 percent um the Canadian Market’s up a bit like there there has not been this widespread pain on the ground though you know people who have variable rate mortgages for instance like they’re
Really feeling it and I think there’s been this real question of will the shoe Drop Like will something hit and we’ve waited so long that people have started to think oh no we got through it like we skated through it um and if things do drop the bigger
Picture is strong enough in a way that it’ll all be these kind of like micro pins not something that’s going to collectively hurt us all what I’m worried about and what I think some of the data is starting to really show and this is not just data as
Anecdotes from CEOs and things of that sort um all those Collective micro points can still add up to be something quite big and so coming into the fall now uh I think we naturally especially in North America the US and Canada have this view of like a bit of a reset you know
Summer’s over let’s get back to business let’s grow grow like a real New Year yeah yeah and it might actually be the opposite all that pain we were talking about before might hit in our like North American New Year okay I want to pick up on something you said earlier there uh
Because last summer we were talking about how a recession might be around the corner um and it doesn’t seem to have materialized and there’s been a lot of talk of this elusive soft Landing which is like where the central banks cool the economy without causing a painful recession for people like you
And me so is this what happened here so far it looks that way okay and I think people are getting extremely excited about that and they should like it’s it’s been legitimately not that bad yeah but I think we’ve lost track of is that the recession may not be passed by
Or gone it might just be deferred okay and so I think everybody feels like they can exhale everybody wants to Exhale whereas I’m more like Whitney Houston and Waiting to Exhale we’re waiting to excel it’s like the premature exhalation exactly exactly and I know that it sounds so negative and um you know
People kind of want to move on yeah but it just does not there isn’t proof that we can just yet and I think that part of the reason for that is that all the models so to speak the spreadsheets whatever you want to call them that are used by economists and financial
Analysts or whatever to kind of predict how things would go we are now realizing that those models don’t really make sense in this post-pandemic world or at least haven’t so far and there’s actually a pretty obvious reason for that we’re just it’s almost like it’s so obvious that we’re blinded by it okay
Um which is that we had a crazy amount of stimulus money you know we’ve we literally flooded the market with cash you know at the end of the day that’s what it boils down to and for the longest time you know coming out of the financial crisis await financial crisis
The U.S in particular did the same but it didn’t really have this massive effect like inflation stayed really low and so there was this view that maybe you know flooding the market flooding the economy with cash doesn’t actually have as much of an effect as we thought
It did what we’re realizing now in this round because it was so quick and so forceful it actually has and so you know there’s been a bit of research now that’s come out and said well you know we’ve had you know five percentage points of rates increases like how is this not
Dramatically slowed the economy or created this recession that everybody thought was going to happen and then this early research is showing that really the first kind of three percentage points of that increase was actually just getting the economy back to him like a neutral state in this post
Stimulus World tying that now into you know where we are and why I can’t exhale just yet some new numbers came out from the San Francisco fed um which is a a branch of the Federal Reserve the Central Bank in the U.S and they showed that the estimate that
The amount of excess Savings in the U.S was likely to run out or be finished by the end of Q3 which is the end of September and put that in context um at the peak estimates have shown that um the amount of excess savings was 2.1 trillion in 2021. okay so let’s connect
The dots here can you give me an example of how government stimulus can have an impact on the markets there’s multiple ways um the the biggest I can think of would be just the fact that one like like we’ve been talking about there’s more money to be spent the second element of
It and this ties into what we’ve seen with inflation is that in these times no one really knows what things should cost anymore you know I’d say this all the time like I go to No Frills okay which is like the discount Grocer in Toronto um because I’m like I’m not paying more
For craft peanut butter you know like I my Staples are my Staples uh and I go and like every week bread costs a different amount of money and like how is this possible like I get I get that there are pressures and whatever supply chain whatever but you can have bread
Swing like a dollar in a week like that does not make sense and so the weeks when it’s more money you’re just like whoa I’m not gonna go shop around like I’m not gonna care about an extra dollar or whatever and you multiply that across like multiple
Types of of goods and people will just pay more um and if you have excess cash which a lot of people have had until very recently you don’t really care you know like it’s annoying but you don’t care and so tying this back to the markets how it really impacts companies is that
It can increase their profit margins interesting because maybe yes the costs have gone up a little bit but we don’t really know how much meanwhile there’s more elasticity as a term but there’s they can they can fluctuate the prices because we’re less Discerning about yeah our prices like they’re getting away
With maybe higher prices that maybe previously we would have kind of said hey wait a minute what’s going on here yeah exactly and you know in Canada we always you know talk about grocers and um the necessity things but it’s the same thing with restaurants right like
We don’t really know what it costs restaurants um for their for their food items you know um and what drives me nuts now you go to a restaurant like appetizers is like 22 bucks and you’re like what no you know like this is cauliflower you know that’s been dressed up kind of nice
Um it’s got a good sauce yeah yeah and people will still pay it like so nobody has been forced yet to lower prices so that boosts margins profits whatever you want to say and then tying it back to the market is that you know if you’re making more money the Stock’s
Gonna go up you know okay so is the stimulus the reason why it’s been so hard for like economists and central banks to um predict what’s going on right now it’s a huge factor in it uh another major factor and this is a Canadian element that I don’t think we talk
Enough about is what’s happening with immigration you know we welcomed a million new people last year and there’s a lot of benefits to that but there are going to be costs to that that we may not have factored in if you just bring in more people like they’re gonna buy
Stuff so the total amount of stuff purchased goes up so therefore growth goes up sales go up you know the third element which again is this big thing hanging over all of us is what I call the you can’t tell me not to um which is that we were kind of locked
Away or you know had to go through multiple rounds of lockdowns and you’re gonna take that extra vacation because it’s like two or three years of your life that you kind of missed and I think this is personal opinion but I think that some of it isn’t even like
Conscious to us it’s this subconscious like urge I’m like I gotta get out you know so you take that education or you spend the 22 on the appetizer because you’re like I’m with my friends I don’t care you know um it’s this real like intrinsic urge
That will probably erode over time as we return to more normalcy we’ll be right back all right so from your Vantage Point we’re not quite Out of the Woods when it comes to recession and you mentioned there are some warning signs out there um what are they so the big one lately
Is what’s happening in China and for some reason we in the I keep saying the west but you know let’s just say Canada don’t really pay attention to what’s going on in the Chinese economy which is strange because the world’s second largest economy and in Canada they
Really matter because for so many years pre-pandemic they were gobbling up Commodities energy metals and the Canadian economy whether or not we want to admit it is extremely resource based so it has a huge effect on kind of what our growth potential looks like and China lately has had some like
Really scary warning signs youth unemployment there is a 21 percent another major property developer There is close to defaulting they warned about it and on top of that the Chinese government has basically said they’re not going to do stimulus um to help turn things around that could
Change but if they don’t there could be a huge Reckoning and you know I think we’ve all seen the stories or seen headlines over time about how you know China was building properties that nobody was even living in um it was all kind of this like real
Estate bubble or it could have been well that could crash and as we saw in 2008 in the US you know when a housing bubble crashes like a really systemic bubble it has incredible knock-on effects but on top of that in the US and in Canada we’re now seeing some companies that are
What we call leading indicators they’re CEOs are making public comments about the state of their business so like Railway CEOs not all of them but some are starting to make comments about how like you know shipment volumes of the kind of the raw materials that we use in
All of our Goods they’re really falling off uh change they’re saying that they’re not predicting a rebound until 2024 now they thought that maybe the second half of this year things would pick up now that’s being pushed out is it common for CEOs to kind of come out and say
These kind of things they have to give a bit of guidance yeah um I think what has been a bit more alarming lately is there was initial guidance in the spring um and it was like maybe this is just a blip maybe this is maybe this is the
Kind of scene of like a soft Landing like things slow down a little bit but um we’ll get through it now that it’s been extended out it’s like oh well there’s something else going on so we have China we have signs from CEOs what else do we have
The third one is kind of a tricky one because it’s a financially um uh complicated there’s this thing called the yield curve which basically just tracks how much a government is paying for its debt okay um and when the yield curve inverts goes upside down first off let’s let’s yield
Curve we’re talking we’ll talk about yield curves talking about bonds right government bonds okay so the government of Canada you know issues bonds for like one year for three years for five years for ten years um and each is at a different interest rate uh normally a shorter term bond
Pays a lower interest rate uh and the the thinking behind that is um because you can see kind of into the future for shorter periods of time like you kind of know that in one year the government account is not going to get really messed up and therefore they’ll
Be able to pay you back your money but in 10 years you don’t know what’s going to happen so theoretically the government has to pay you more for the extra risk you’re taking on that things could go bad over that time okay so it’s lower shorter term higher interest rates
Longer term right now we’re in this situation where it’s inverted where it’s higher shorter term and lower longer term and it has been that way for a while uh and the reason why it’s gone so high shorter term is because the shortest term rate is the central bank
Interest rate and that’s you know hovering around five percent in Canada and the US why is that a cause for concern that these are inverted right now because history has shown us that the last seven times the yield curve has inverted we have a recession on top of
That I think people are saying oh the bond Mark is just wrong because look how good the numbers are right inflation has come down like we’re good what people don’t realize is that it can just take a long time um so the best example would be in 2006
Which was you know pre-08 crisis yield curve converted and then it took until 2008 for like the real real pain to hit and look how bad it got and I’m not saying we’re going to give me anything like that this time but it can just take
A long time so again you still can’t exhale yeah and like you said there there have been the last seven times this happened there has been a recession so there’s a real strong historical context there yeah and you know one thing I really wanted to to to stress is that
Um recessions don’t have to be these big nasty horrible things like the 08 recession um so our Norms are warped by what has happened in the last 15 years um and so people think that like oh the numbers show like we’re not going anywhere near 08 and that’s a good thing
So then they kind of write it off and move on where it’s like no you could still have a mild recession that can still be painful enough you know and we’ll have to muddle through for a while um so you know that is more my message I
Don’t want to be a doomsayer or whatever but don’t think that you know it’s 08 or nothing okay yeah that’s a good point to make um just to wrap here Tim I’m going to do the very annoying thing where I’m going to ask you to predict the future
Um or at least you know give us your educated guess here so um because since you watch the markets and you know you used to work on Bay Street as well and you have a deep understanding of the economy we love to get your take here so
What are the odds that we will have a recession I’m gonna go with like 80 like I think there’s going to be pain and I’ll give more reasoning for this uh so I don’t just seem like some blow hard out here on a limb being like yeah when I say matter um
Interest rates are likely going to stay higher for longer um and even if they do start to come down a little bit they’re not going to come down on this massive you know full percentage Point decrease in a single decision it’ll be like bit by bit over time so you know if
They’re at like five now it might be like 4.75 and 4.5 like that’s still high you know and so you know in Canada the big thing is that we have all these people with mortgages that are going to renew and that’s going to be a huge bite
Tied to that using an anecdote again which you never supposed to do but I just I hear them so often now I think people have really been trying to hold on and just manage it it’s like okay I can just like if I can just make it to the fall rates will
Fall and therefore it’ll be a bit easier yeah that’s not going to happen and so I think you’re gonna start seeing people having to make like real life decisions and for a while you maybe if the money was tight you could go get a new job
That paid a bit more and therefore you kind of like were able to kind of make it all work it was like whack-a-mole right and you’re just moving things around I think what people forget is that when you’re in a downturn and again maybe not a severe downturn but any downturn
Everything is related in the opposite fashion so like you know when things are going up everything kind of feels good together when it’s going down maybe the unemployment Market gets a bit worse so therefore you can’t find the new job or even at your current job they’re like no we’re not giving braces
Anymore because our sales have gone down because economy is weakened you know so therefore it can force you into making different decisions and I think that right now we aren’t appreciating that enough Tim I appreciate this reality check it may not be super Rosy but I do
Appreciate it thanks so much for being here always happy to give the real talk That’s it for today I’m Cheryl Sutherland Nagin Nia is our summer producer our producers are Madeline White and Rachel Levy McLaughlin David Crosby edits a show Adrian Chung is our senior producer and Angela pacenza is our executive editor thanks for listening and I’ll talk to you tomorrow
Fears of a recession have been looming since the worst days of the pandemic. And as inflation continues its slow but steady ascent, central banks around the world have tried to increase interest rates to cool things down. It’s easy to think that all of this means we might actually have avoided the worst.
But Report on Business columnist and reporter Tim Kiladze says it’s too early to declare victory: we may not actually have achieved that mythical “soft landing” after all. He’s watching a few warning signs that could spell economic trouble for us later.
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