Recession talk could rein in consumer spending in Alberta
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As many economists prognosticate a recession is about to hit Canada, it is still unclear just how much Alberta will be sucked into it.
The province continues to be buoyed by a surging oil sector, but as gross domestic product (GDP) gains are slowing overall, the question is whether it will begin to shrink, as is predicted in other parts of the country.
The potential of a recession carries with it the risk of future job losses and Taz Rajan, a community engagement partner at Bromwich and Smith, is concerned with the ability of Gen Z and younger Millennials in being able to handle what could be their first such economic crisis. This has been exacerbated by the last two and a half years of pandemic and has led to what she refers to as “revenge spending” — looking at the doom and gloom and defaulting to partying and buying what they can while they can.
“I think for some people (recessions) are like this urban myth, and I think feel like ‘Oh, like that was something ages ago, that doesn’t happen today,'” she said.
Rajan added it is critical for this younger generation to understand the importance of being prepared financially, as a recession is a matter of when, not if, even if it doesn’t hit in the next 12 months.
Alberta has a long-standing consumer debt problem, and it only got worse over the pandemic. Instead of saving, many overspent on ordering delivered meals or online retail therapy. It was not just young adults doing so, although they generally have less of an established financial base to begin with.
A recent survey by Bromwich and Smith showed 23 per cent of Canadians between 18 and 34 do not see a point of saving or investing. It’s a live-for-now mentality with financial storm clouds on the horizon.
Rajan said they are seeing an increase of Calgarians come through their door already looking for help in dealing with debt due to high levels of inflation and interest rates that have shot up 300 basis points to 3.25 per cent since March. She said one client had a mortgage jump from $900 per month to $1,700.
“It is like this death by a thousand cuts,” she said. “It’s this constant layering effect and unfortunately inflation is still high, even though the Bank of Canada has increased interest.”
Many people are still digging their way out of the pandemic and job loss, while others do not understand the importance of saving or how to properly save.
Rajan noted there are a number of steps that can be taken to get the books figured out, even if it’s as simple as making coffee at home instead of daily trips to a café or eating out less. She also said it’s important to pay off credit cards and other variable interest rate debt to give yourself a better financial footing in case there is a job loss or even to manage inflation.
Gas in Calgary has shot up 32.1 cents per litre over the last month, according to GasBuddy.com, to more than $1.70 per litre. Groceries continue to increase and interest rates are expected to be hiked up again before the end of the year.
Whether or not a recession is in Alberta’s cards, however, is still up for debate.
“It is quite common for people to very boldly predict either a recession or not,” said Trevor Tombe, an economics professor at the University of Calgary. “We forget when they’re wrong and then we remember and attribute to them great insight if they end up being correct, and I think it’s really just random luck of the draw.”
He said there are two key factors to consider regarding a potential recession and they would impact Alberta differently. If a recession is caused by rising fuel prices, Alberta would be buttressed against it because the province benefits from high oil prices. But if it is caused by a continued sharp increase to interest rates from the Bank of Canada, it would adversely impact Alberta’s economy.
The increase to interest rates has slowed the formerly white-hot real estate sector, but the cost of living continues to skyrocket. In many cases this has been exacerbated by the higher interest rates which requires more money to service debt on all variable rate loans and lines of credit.
He said it usually takes 18 to 24 months for these increases to get inflation under control across most sectors.
Anupam Das, a professor of economics at Mount Royal University, said the hit to cost of living is not just being driven by interest rates, as in past recessions, but in this case it is also about supply chain issues which continue to push the costs of goods higher. It is an issue that began to build prior to the pandemic, spiked during COVID and continues to be exacerbated due to the war in Ukraine.
Das also said it was too early to say if Alberta would experience a recession, but noted there is a point where we could be looking at job losses again, though it is difficult to pinpoint when the camel’s back will break.
“Inputs are now more costly,” he said. “As the cost goes up, eventually businesses will shrink their activity, output activity and so on so forth, and eventually employment will decrease.”
The other edge of the sword regarding the rising interest rates is that the increases make it more difficult for businesses to borrow money to expand, and this could cause a stagnation in scaling up, he said.
Twitter: @JoshAldrich03
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