How Trump could push Canada to recession 12 months from now

If Oxford Economics is right, there is a 45% chance that Canada will sink into a recession in the next 12 months, and this is mainly the fault of President Donald Trump.

"Taking into account recent economic data, the evolution of financial markets and the risks associated with fiscal, monetary and commercial policies, we believe that the possibility of a recession in Canada is real and increasing", said the report.

<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Economic growth is already relatively under control Real & nbsp;GDP up 0.4%& nbsp; in the first quarter, following a 0.3% increase in the fourth quarter of last year. "data-reactid =" 17 "> Economic growth is already relatively moderate Real GDP grew by 0.4% in the first quarter, following a 0.3% increase in the fourth quarter of last year.

The report's authors still expect economic growth of 1 to 1.2% over the next 18 months. But they say Canada stays in the "danger zone" and that the recession opportunities are just below the thresholds before four of the last five downturns.

The Oxford Economics forecast is based on models that analyze the results of a reverse yield curve.

More

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "" This is not a bold call: it's a call This simply reflects the rates posted by the markets. It follows the market, "said Brett House, deputy chief economist of the Bank of Nova Scotia. Yahoo Finance Canada"data-reactid =" 31 ">" This is not a bold call: it's a call that simply reflects what markets are saying. It's following the market, "said Brett House, deputy chief economist at Bank of Nova Scotia. Yahoo Finance Canada.

That said, House said that the slope of a reverse yield curve was not a fate. He notes that most recession probability models rely on the slope of the yield curve for their forecasts. On the other hand, even briefly, it displays the warning signs of a recession over the next 12 months. But he says that inversion tends to overestimate recessions by a ratio of about two to one.

"Since the mid-20th century, the yield curve has been inverted three times more than the number of months of recession," said House.

"The curve must more than reverse – it must remain inverted for a substantial period of time, at least a quarter, to be close to a predictor or a reliable causal factor of the recession."

House does not see a recession looming. The Bank of Nova Scotia puts the probability at 18% at the end of 2020.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Trump Blame"data-reactid =" 36 ">Trump Blame

"The erratic and unpredictable protectionism of the White House is the real risk to the global economy," House said.

<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "" As & nbsp;Trump's commercial threats& nbsp; go from the risks of one-off events to chronic diseases, they gradually cool down investment decisions and business activity. "" data-reactid = "38"> "As Trump's commercial threats shift from one-time events to chronic diseases, they gradually cool investment decisions." commercial activities. "

Karl Schamotta, chief market strategist at Cambridge Global Payments, agrees with Trump.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "" The probability of recession rises – political troubles Trade wars Donald Trump's surrounding war has spread to the financial markets, which has heightened uncertainty and threatened to weaken economies (such as Canada's) that are inextricably linked to the US, "said Schamotta. Yahoo Finance Canada. "data-reactid =" 40 ">" The likelihood of recession increases – the political turmoil surrounding Donald Trump's trade wars spread to financial markets, heightening uncertainty and threatening to weaken US economies United, "said Schamotta Yahoo Finance Canada.

Schamotta thinks that Trump's barking is bigger than his bite and that a bigger shock than previously announced tariffs is needed to push Canada into a recession. He estimates that the probability of a recession this year is less than 30% and is approaching 50% by the beginning of 2021. According to him, Canada also has its own problems that can not be ignored.

"Canadian households continue to borrow with little attention for the future. Real estate and financing activities still account for a sizeable share of economic activity, "said Schamotta.

"It would be wise to take this opportunity to put order in their homes – to cut spending, reduce debt and prepare for the next wave of volatility."

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Recessions have been rare and spaced"data-reactid =" 44 ">Recessions have been rare and spaced

Canada has only experienced three recessions in the past 35 years. Stephen Brown, senior economist at Capital Economics for Canada, warns against over-reliance on model-based estimates to predict them.

<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "" That said, given the tight real estate prices, increased levels of construction and the fragile financial situation of many households, we have been warning for some time of the risks weighing on the economic outlook, "said Brown Yahoo Finance Canada. "Given this fact, given the high housing prices, the high construction levels and the fragile financial situation of many households, we have warned for some time against the risks to households. economic outlook, "Brown said Yahoo Finance Canada.

"With GDP growing only 0.2% in the last six months, it does not take much to push the economy into recession."

Brown estimates that the probability of a recession in the next 12 months is about 35%.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter & nbsp;@ jessysbains"data-reactid =" 49 ">Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @ jessysbains

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Download the Yahoo Finance app, available for Apple and Android."data-reactid =" 50 ">Download the Yahoo Finance app, available for Apple and Android.