Recession Concerns Loom Over U.S. and Canada
As whispers of an impending recession circulate with increasing frequency, the economic outlook for the United States and Canada remains a topic of intense scrutiny. Despite various recession indicators flashing warnings for nearly a year, the U.S. economy continues to defy expectations with resilient growth. However, caution remains the watchword as sectoral disparities and policy impacts muddy the usual economic signals.
The Property Market Problem
The real estate sector contributes roughly 13% of Canada’s economic output (GDP). Annually, real GDP grew 1.1% in 2023 to C$1,890.43 billion.
If the real estate sector were to contract by 10% in one year, it would subtract 1.3% from GDP.
As things stand, Purchases & Sales are trending low.
As well, the average price of a purchased Canadian property is lower.
Yield Curve and Recession Probability
One of the most reliable recession predictors, the inverted yield curve, has been signalling caution since 2019 in both the U.S. and Canada. Historically, this phenomenon has preceded every recession in the past five decades. The U.S. Federal Reserve Bank of Cleveland’s recession probability model indicates a 68% chance of a recession by mid-2025, based on the spread between the 10-year and three-month Treasury yields.
Every recession in the past 50 years has been preceded by an inverted yield curve, but there have been instances of inverted yield curves that weren’t followed by a recession.
So, an inverted yield curve almost always precedes a recession, but it does not guarantee one.
RBC argues that the current inverted yield curve is the result of high economic uncertainty, post-pandemic, and the influence of government policy on short-term rates rather than market-determined long-term yields. As a result, they believe the current recession signals are a false alarm.
Canadian Economic Outlook
Given Canada’s economic interdependence with the U.S., recessionary trends south of the border often have significant spillover effects. The Canadian economy, which sends 80% of its exports to the U.S., is closely tied to American economic health. The Bank of Canada’s own indicators, including the yield curve, echo similar concerns, though the outlook remains cautiously optimistic.
Typically, the property market softens or enters a correction during a recession. So, even if rates drop in the year ahead, there is a risk that the housing market will not bounce back until 2026 after an economic slowdown or recession has passed.
Navigating Uncharted Waters
The interplay of these economic indicators suggests a period of very slow growth or a recession. The Bank of Canada and the Federal Reserve’s efforts to tame inflation through rate hikes aimed at cooling the economy and executing a “soft landing” have succeeded. This delicate balance is difficult but achievable, given the current economic dynamics.
There is no tried-and-tested “post-pandemic playbook,” so governments and central banks have performed admirably under the circumstances.
While recession risks are elevated, many factors—including resilient consumer spending, strong labour markets, and strategic investments—could stave off an economic contraction. The coming months will be critical in determining whether these positive elements can offset the signals of slowdown and steer the U.S. and Canadian economies through these turbulent times.
The possibility of continued challenges in the property market shouldn’t force people to change their property ownership plans, but it might. Pre-sale purchases are particularly risky in this scenario because the value at completion could be lower than the contract price. Lenders provide mortgages based on market value rather than purchase price, so pre-sale buyers can be on the hook to cover a financing shortfall.
This has already happened to many Canadians, so the risk is real.
CBC: A wave of defaults has real estate lawyers urging presale buyers to be cautious
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