Everything you should know about recessions in Canada

As an advisor to thousands of Canadian businesses from coast-to-coast for more than 60 years, we understand the concerns and challenges for entrepreneurs that come with economic uncertainty. These are stressful times, filled with more questions than answers. And MNP is here to help.

On this page, we’re answering the foundational questions about recessions and highlighting some strategies you could use in your business to overcome challenges. Weathering the storm is a team effort and we’ll be with you every step of the way.

What is a recession?

A recession is an extended period of significant decline in economic activity. Recessions are identified by significant economic decline impacting many sectors over an extended period of time.

Another common definition is when an economy experiences two consecutive quarters of negative GDP growth. This definition is not universal as using GDP as the only factor can be inaccurate.

Ahead of a recession, economists examine a series of variables and raise concerns about the state of the economy. When these variables are tracked, experts can make projections about the Canadian economy. A combination of these variables usually serves as warning signs to help all parties to prepare.

Rising inflation

Inflation is the term used to describe the rise in prices for consumer goods. A steady or significant rise in inflation can lead the government to raise interest rates to restrict economic growth.

High unemployment levels

A significant rise in job losses and unemployment over a long period of time can indicate an impending recession.

Declining industrial production

A plunge in industrial activities, such as manufacturing, mining, electrical, gas, and energy, because of economic conditions can indicate a recession. This is monitored by gauging the Industrial Production (IP) index of the economy over a period of time.

Are we in a recession?

Canada is experiencing some of the events that are typically associated with a recession.

The Bank of Canada has a target inflation rate of two percent and inflation has remained above four percent at least for the past year.

In response, the Bank of Canada has increased policy interest rates and it may continue to raise rates. Economists project increased interest rates and elevated inflation to negatively impact consumer spending activity for the foreseeable future, although spending habits have remained surprisingly resilient throughout 2023.

According to Statistics Canada, the country saw a 3.1 percent GDP growth in the first quarter of 2022 and 3.3 percent in the second quarter. Canada’s GDP has grown for four consecutive quarters.

Recessions usually come with high unemployment rates and a low number of job openings. But unemployment in Canada has remained low, creating a unique economic environment.

What can business owners do to navigate a recession?

With the economic slowdown and possibility of an impending recession, business owners need to prepare for a range of outcomes. It is important to lay panic aside, look into economic forecasts for Canada, and seize the opportunities associated with recessions.

Here are some steps you can take:

Revisit your business models

Set up a meeting with your leadership team to discuss how the recession could impact your business. Determine what drives your costs and margins, and the relevance of your business model to the current state of affairs.

Identify how the current labour shortage can impact your company’s output

Prepare to solve staffing challenges that may be on the horizon with technology. This will require extended time and processes so start early.

Focus on products and services that give you the highest margins

Identify products that are not worth restocking and services that are not worth reinvesting in. This is also the best time to evaluate your supply chain.

Consider paying off high interest loans sooner than originally planned

Rising rates could make debt more expensive and it may no longer make sense to carry that debt.

How does a recession impact business owners?

During a recession, small business owners can face numerous challenges and uncertainties that can significantly impact their operations and financial stability.

1. Decline in customer spending: Consumers have less money to spend as prices rise and their wages likely won’t keep up. In turn, people tend to cut back on discretionary spending. Look at your business and identify how much of your revenue is from a good or service that people need to have vs. what’s nice to have.

2. Reduced access to credit: Lending institutions and investors become more cautious during economic downturns, making it harder for small businesses to secure loans or investment capital. This limited access to credit can hinder growth opportunities and restrict the ability to fund day-to-day operations.

1. Cash flow challenges: Decreased sales combined with longer payment cycles from customers can lead to cash flow problems for small businesses. Inadequate cash flow makes it difficult to cover expenses, pay employees, and invest in necessary resources, potentially pushing some businesses to the brink of closure.
2. Workforce and cost-cutting measures: To mitigate the impact of reduced revenue, small business owners may need to make difficult decisions regarding their workforce. Layoffs, reduced work hours, or salary cuts might be necessary to control costs. These measures can also impact employee morale and overall productivity.
3. Increased competition: During recessions, businesses across various sectors face challenges, and competition intensifies as companies vie for a smaller customer base. Small business owners must find creative ways to differentiate their offerings, retain existing customers, and attract new ones to stay afloat.
4. Limited marketing budgets: Small businesses often have to reduce their marketing budgets due to financial constraints. However, maintaining a visible presence and effectively communicating with customers becomes crucial during a recession. Exploring cost-effective marketing strategies such as social media, email marketing, and targeted advertising can help reach potential customers without significant expenses.
5. Importance of financial planning: A recession highlights the necessity of sound financial planning for small businesses. Analyzing and managing cash flow, reviewing and adjusting budgets, and exploring cost-saving measures become essential for weathering the economic storm. Seeking professional guidance from accountants or financial advisors can provide valuable insights during these uncertain times.
6. Opportunities for innovation and adaptation: Recessions can also be a catalyst for innovation and change. Small business owners who adapt their strategies, explore new markets, diversify their offerings, and find innovative solutions can emerge stronger when the economy recovers.
7. Government assistance and support: Small business owners should stay informed about government programs and initiatives designed to provide financial support during recessions. These may include loans, grants, tax relief measures, and other forms of assistance. Staying up to date with relevant policies and programs can help small businesses navigate challenging times more effectively.
8. Resilience and perseverance: Finally, small business owners must maintain resilience and perseverance during a recession. Adapting to the changing circumstances, remaining agile, seeking opportunities amidst the challenges, and staying committed to their vision are crucial for long-term success.
9. Government assistance and support: Small business owners should stay informed about government programs and initiatives designed to provide financial support during recessions. These may include loans, grants, tax relief measures, and other forms of assistance. Staying up to date with relevant policies and programs can help small businesses navigate challenging times more effectively.
10. Resilience and perseverance: Finally, small business owners must maintain resilience and perseverance during a recession. Adapting to the changing circumstances, remaining agile, seeking opportunities amidst the challenges, and staying committed to their vision are crucial for long-term success.

How long do recessions last?

The circumstances that led to past recessions across countries of the world have varied. Because no two recessions are alike, it is impossible to accurately predict how long a recession will last.

Since 1970, Canada has experienced five recessions. Their length and impact depend on the industries that are affected. The most recent one in 2008 lasted seven months, but the climb back up from the recession can be challenging.