What Canada’s next recession could look like and why it might be harder to get out of than we expect.

Recessions suck. The palpable sense of economic uncertainty and desire to hide under your pillow seems to permeate your very soul. They’re also notoriously unpredictable – it always seems obvious in hindsight that the end of a boom was coming, but seeing the forest for the trees is hard when you’re busy trying not to get lost in the woods (i.e. it’s hard to see what vulnerabilities are being created when you’re busy taking advantage of current opportunities). But since the last recession in 2008, financial professionals and policymakers have been mildly obsessed with the idea that another recession is coming. In fact, a recession has been predicted to be six months away by smart people for the last two years and counting – and while it does seem like it could happen soon, it’s gotten hard to tell when someone is making succinct predictions or has been watching too much Games of Thrones and are just yelling that a financial winter is right around the corner. But on the off-chance that smart people might have a point here, it’s worth trying to figure out what this next recession could look like and what the impacts might be.

The best place to start is by looking at what happened last time. If you live in Canada, the most recent cold spell of recession has come and gone. Canada was pretty sheltered from the deep freeze of the Great Recession from 2007-2009 – it was one of the last big industrial countries to formally enter a period of recession and bounced back in less than a year. Canada was insulated mainly because Canada’s banking sector is far more regulated than that of it’s American and European counterparts, meaning it didn’t have the same consumer debt levels that acted as time bombs seen in other countries. In fact, while a recession in most countries occurred because they collapsed from within, Canada’s recession was more a byproduct of slowed trade with other countries who happened to be collapsing around the same time. Canada remained fairly sheltered from the worst of the Recessions’ impacts, and its growth since then has been slowed by the slower rebound of other trading partners – as an export economy, Canada’s economic fate tends to be pretty tied with that of other rich nations who consume its raw materials.

This has changed trade patterns globally and, as a trading nation, Canada’s economy over the last ten years has experienced some structural changes as well. The majority of investment and wealth creation in Canada over the last decade has actually been centred on only two industries: oil and gas and real estate. The amount of overall business investment poured into oil and gas over the last few decades has grown from 9% to 25%, and households have more debt today than at any point since the mid-1960s. This means that Canada’s once-regionally diverse economy has grown more and more centralized around two key sectors in the last few years. This can partially be attributed to the fact that Canada’s growth drivers over the last few years have stimulated huge demand within these two sectors. Overall economic growth in Canada has occurred due to four factors: favourable demographics that are adding talent to the workforce; rising labour force participation from women (a huge economic boon); a higher number of workers with post-secondary education; and soaring commodity prices. The increase in workforce participation and education levels have been responsible for the growth in household debt and real estate purchases – more people with money are entering the housing market, and because skilled jobs are now more centralized than ever in cities, they’re all driving up house prices and needing to take on more debt to buy property. Commodity prices have been responsible for the surge in oil and gas investment – Canada’s oil is notoriously high cost to produce, so the high oil prices seen in first half of the decade lead to a flood in investment (although the last few years have changed that, as seen by Alberta’s most recent recession).

There are reasons to believe that the boom could change soon: Canada has an aging workforce that is set to retire in record numbers in the next decade, with too few workers to replace all those leaving the workforce. That skills gap could seriously hinder growth in industries who don’t have enough workers to fill empty jobs. The same can be said of lower and more volatile of commodity prices, a trend that is already happening and is expected to continue in the next few decades. Long-term investments in fossil fuel resource sectors don’t look like great investments if companies are uncertain about whether they’ll turn profits in a reasonable timeframe – that means the market is less likely to invest, and Canadian provinces dependent on fossil fuel production will take a larger hit than they already have.

All of this comes together to paint a picture with an ugly theme: Canada avoided the brunt of the last recession because it hit in an area where other countries were vulnerable and Canada wasn’t. But in the last decade, Canada’s economy has become more centralized and the things that have fuelled its growth look like they won’t be enough to keep doing so consistently in the near future. That’s a problem because it means that Canada is more vulnerable to the next recession because it is so centralized. If the downturn on oil and gas gets worse or if there is a pop in the real estate bubbles in major Canadian cities, Canada could take a much bigger hit than expected and have a far harder time pulling itself out of it than people may believe.

There are also reasons to believe that if a recession hits one of the two sectors hard, the traditional bail-out plan for getting the country out of a recession won’t work either. Take the issue of worker retirement – Canada can either take in more immigrants or automate jobs to plug the skills gap. It would likely pose a political problem to take in the number of immigrants needed to fill the number of jobs Canada will require. But with automation, while the overall economy may grow or companies could yield profits, the returns of that investment will be going to fewer people (i.e. robot owners, not factory workers). Innovation and automation mean that the profits that come from building things are going to fewer people than ever, and that can hurt overall growth because it isn’t putting money back into the pockets of workers the way it used to. That would be felt even more pronouncedly in Canada, a nation that usually takes technologies and doesn’t make them – the country wouldn’t even get the benefits of hiring its skilled workers to build new tech to sell externally. Foreign companies might even come in and run operations, meaning less Canadians jobs and more families struggling to pay bills while the economy rebounds overall.

There are a few solutions to this: diversify the economy, focus on developing more vertically-integrated industries to keep more Canadian money in Canada and invest into the growth industries of the future. Politicians could even take a crack at fixing the enormous levels of economic inequity that have popped up in recent years. But the truth is that those have been national priorities for years and effective solutions take time to put in place. If a recession does hit in the next year or so, Canada is going to struggle more than it previously has. Larger trends like the student loan crisis and the cost of catastrophic events from climate change likely won’t be factors until the recession following this next one, but rebounding won’t be as steady as it was last time. Let it be known – A Canadian winter is coming and it will probably be colder than we originally thought.