By Alexander Janczewski
Prepare for the ugliest recession you will experience in a long time. The Covid-19 pandemic has had a drastic impact on all Canadians over the past few years, however, the worst is expected to arrive in the upcoming months. If I were you I would be shaking in my boots if these theories are correct, considering the inflation rates we are experiencing right now are 6.9%, 4.9% above the normal rate (Statistics Canada,2022). The economy before the pandemic was already in a recession with an rGDP value of -0.2%, then COVID hit and everything continued to go downhill reaching a jaw-dropping rGDP value of -10.9%(Statistics Canada,2022). However, according to economists, stakeholders are going to experience an even bigger recession due to increases in unemployment and inflation. How did this happen, and what is going to happen in the future? Lucky for you, I have the answers.
What did economic activity look like when the pandemic started?
Before the pandemic began in March 2021, the Canadian economy was not performing optimally; rGDP fell 0.2% only two months after the start of the year(Statistics Canada,2022). When the pandemic started, the Canadian economy was immediately impacted. Unemployment increased to 4.9% “a level not seen since the 1930’s”(Center on Budget and Policy Priorities). Consumer or household spending decreased, starting at an index of 101.1 on the first day of the pandemic and just one month later plummeted to 67.9(RBC,2022). This led to another fall of 10.7% in the economy’s rGDP in just two months(Statistics Canada,2022). Due to the recession, firms had cut down on their spending, which resulted in workers being fired and unemployment increasing. As unemployment increased, consumers had less disposable income and thus less money to spend, reducing consumer spending. I interviewed Ana Marin, a Canadian consumer about her consumption patterns at the start of the pandemic. How did your consumption patterns change when the pandemic hit? At the start of the pandemic I reduced my spending almost immediately, of course, I needed to continue to buy food(necessity good) but I stopped buying expensive clothing. I also noticed some of my friends reduced their spending on nice clothing and things that we don’t usually buy(luxury goods) as well”. If I was an active consumer during the recession, I would have decreased my spending as well considering my purchasing power decreased so much. Investments by firms decreased by 5.6%, firms had less revenue and therefore weren’t able to invest as much(Statistics Canada,2022). Business confidence decreased as well furthermore reducing investment spending. Some small businesses couldn’t even bear the high costs and were forced out of the market.
What did the government do to fix the recession?
To fix the recession the government increased spending by 33.4% from 2019. It was the largest increase in government spending recorded, surpassing the 1 trillion mark (Statistics Canada,2022). This was a result of transfer payments, a component of aggregate demand, creating the multiplier effect. As government spending increased due to the distribution of stimulus checks to the unemployed, final aggregate demand became greater than the amount originally spent. Shortly after the stimulus checks were sent, consumers were incentivized to spend more and save less stimulating the economy, increasing AD and starting to correct the recession. This led to a large increase in national income where a large portion of the transfer money was present again in the economy. The implementation of stimulus checks increased the purchasing power of consumers increasing consumer spending by 16.7% (Statistics Canada,2022). This caused the price of goods and services to increase creating inflation. In order to achieve the major economic objectives of the government, price stability, full employment and economic growth the central bank implemented a contractionary monetary policy as it comes into effect quickly, has no political interference and effectively reduces inflation. The central bank implemented the contractionary monetary policy where interest rates increased by 3% incentivizing consumers to save more and borrow less decreasing consumption by 5% bringing the economy back to equilibrium in just one month (Bank of Canada,2022).
What is the Canadian economic situation right now?
The Canadian economy is currently going through stagflation, rGDP has decreased by 0.6% since February and the average price level increased by 1% since August (Statistics Canada,2022). Stagflation is stagnation (falling rGDP) and inflation (rising Price Level) both happening at the same time. According to the global news, “the pace of economic growth slows”, similar to the 1970-style stagflation (Bundale, 2022). Stagflation arose from supply chain issues, where the costs of factors of production of raw materials and imported goods increased. Usually, policies are used by the central bank to solve disequilibrium in the economy however it is difficult for government policies to correct stagflation. The implementation of any policy will likely lead to either higher unemployment or a higher price level two outcomes that negatively impact the economy. The government can use fiscal or monetary policy to help mitigate stagflation however another issue will always emerge. If the government implemented fiscal policy and used transfer payments like stimulus checks there will be a decrease in unemployment. However, there will be a further increase in aggregate demand which will cause more inflation. If the central bank implemented monetary policy interest rates could be lowered causing inflation to decrease but unemployment to increase. The main idea is there will always be a trade-off between more unemployment and more inflation. The supply-side policies however are the only policies which could cure stagflation. The supply-side policies will improve the quantity and quality of the factors of production however these changes take too long to be effective in the short run and thus weren’t used by the Canadian government.
If inflation continues elevating and unemployment continues to increase it is said that there will be a very large recession at the start of 2023 due to the magnitude of COVID-19. The pandemic has impacted all Canadians and challenged the government’s ability to respond to an economic crisis and will continue to test their ability to deal with problems, especially the upcoming large recession (Otis, 2022).
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The Blue and White 