Hold those good vibes from the end of 2023 close. After spending the better part of two years trying to talk ourselves into a recession, we might actually experience one in 2024. The margin between a soft landing and a hard one could be razor-thin, so the stories we tell ourselves will be important.

A popular theme for year-in-review articles last month was how the recession that everyone thought the central banks would cause with all their interest-rate hikes never happened. Instead, jobless rates in Canada and the United States stayed near record lows, and the S&P 500 stock index surged by about 24 per cent in 2023. At the same time, inflation slowed to the point that the Federal Reserve and the Bank of Canada were openly contemplating interest-rate cuts by the end of the year. 

It was a remarkable change of mood. Recall the pessimism this time a year ago. One example: Fifty-eight per cent of respondents to the Bank of Canada’s quarterly Business Outlook Survey in the autumn of 2022 said the odds of a recession over the next 12 months were at least 50 per cent. Almost a quarter of respondents put the likelihood of a downturn at between 80 and 100 per cent. 

Canada’s business owners and managers should have had more confidence in themselves. Demand slowed, but it didn’t crater. The economy added 477,900 jobs in 2023, down from the pandemic catch-up that occurred over the previous two years, but otherwise the biggest annual increase on record, according to data Statistics Canada released on Friday. 

It will take more time to sink in, but households are winning the cost-of-living battle.  

The consumer price index was 16.4 per cent higher in November than at the end of 2019. It was a massive shock. The cost index increased by about eight per cent over the previous four-year period. 

The price level was pushed higher by the fastest rates of year-over-year cost increases since the early 1980s. The Bank of Canada answered by increasing the benchmark interest rate by 4.25 percentage points in 2022, and then by another half point in the first half of 2023. It was one of the fastest interest-rate spikes in Canada’s history. That’s why so many people thought a recession was inevitable.

An explosion always gets more attention than the aftermath. The story that took hold was that Canadians were being crushed by inflation and higher interest rates. And while that was true for many households, it was never the case for many others. 

The average hourly wage for workers 15 years of age and older was $34.45 in December, an increase of about 20 per cent from the same month in 2019, according to Statistics Canada. That’s huge. The gain between December 2015 and December 2019 was only nine per cent. 

A big increase in wages was necessary to keep pace with the inflation shock that followed the end of the pandemic, and that’s what we got. Based on a comparison of the price level and average hourly wages, Canadian households—in aggregate—are better off today than they were ahead of the pandemic. 

It would help if that became the economic narrative in 2024. As Nobel laureate Robert Shiller has shown, the stories we tell ourselves about the economy influence its trajectory the same as textbook variables such as interest rates and the value of the dollar. So clinging to the good vibes from the end of 2023 might offset harder data that will raise doubts about Canada’s prospects for the next few months, if not longer.

Statistics Canada’s Labour Force Survey showed that employment was essentially unchanged in December from the previous month, and the unemployment rate held at 5.8 per cent. The employment rate, which measures the percentage of the working age population that has a job, dropped to 61.6 per cent from 62.5 per cent at the start of 2023, as immigration increased the size of the labour pool while hiring stagnated. 

Those are all decent numbers by recent historical standards. But the downturn is only getting started. The next few months will test Canada’s economic resilience. 

Charles St-Arnaud, a former Bank of Canada staffer and Wall Street analyst who is now chief economist at Alberta Central, published research last year that suggests the interest-rate hikes are only now starting to bite. 

Because the benchmark rate was near zero when the Bank of Canada started raising interest rates, it took a long time to reach a level that would slow demand. St-Arnaud reckons monetary policy became a serious headwind in September 2022, when the benchmark rate reached 3.5 per cent—well clear of the Bank of Canada’s estimate of the rate at which monetary policy is neither encouraging nor discouraging growth. 

St-Arnaud’s analysis of business cycles going back to the 1970s shows that once the benchmark rate crosses that threshold, it generally takes about five or six quarters for a downturn to begin. Applied to current circumstances, that means the slowdown that Bank of Canada governor Tiff Macklem orchestrated to cool inflation has only just begun. 

“Today’s Labour Force Survey data points to a continued softening in Canada’s labour market, with job gains remaining weak,” St-Arnaud said in a separate analysis on the latest hiring data. “Whether the country experiences a soft or hard landing depends heavily on the health of the evolution of the labour market, i.e. whether we see a hiring freeze or broad-based layoffs as the economic activity slows further.” 

The monthly unemployment rate averaged 6.9 per cent between December 2010 and December 2019. Remember that as you form your narrative about the economy. Things will get worse, but there’s still a big gap between where we are now and what you used to consider normal. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.