Economic Growth Stalls: Brace for a Recession

Is a recession around the corner? A March 1 Statistics Canada economic report shows negligible economic growth for the fourth quarter of 2018, due to a decline in oil export prices and decreased investment spending. Now just might be the right time to implement tax and financial planning strategies to brace for a prolonged slowdown.

Why should we be concerned about the potential for another recession? The Statistics Canada report showed that Gross Domestic Product (GDP) grew by just 0.1% in the fourth quarter, or 0.4% - a stark contrast to the 2.9% growth the U.S. experienced during the same time period.

The biggest factor was Canada's terms of trade—the ratio of prices of exports to prices of imports—fell 3.6% in the fourth quarter, primarily because of a 34.3% price decline in crude oil and crude bitumen exports. This was the largest terms of trade decline since the first quarter of 2009. Lower export prices reduced corporate earnings, and gross operating surplus fell 5.4% (nominal terms), mostly in oil and gas industries. Lower export prices led to a 1.0% drop in real gross national income (GNI).

There was also a 2.7% drop in investment spending; exports of goods and services edged down by 0.1%; while household spending slowed for the second consecutive quarter. Overall, business investment in non-residential structures, and machinery and equipment fell 2.9% which was the sharpest drop since the fourth quarter of 2016.

Why is now the time to put more emphasis on your financial planning strategies? This recent economic report highlights many concerns, but it’s not all bad news. Statistics Canada does point to a couple of positive aspects that will help Canadians brace for further economic volatility. The labour market remains strong and Canadians are making more money thanks to a 1.2% increase in compensation. This increase lead to a boost in household disposable income levels, making it an opportune time to use that increase in cash flow to plan for the future.

Recession-proof tips. Although economists are on recession watch, we’re not there yet – and with planning and preparation, you’ll be in a better position to weather the storm if things get worse. Here’s some simple ways to do so whether you’re a taxpayer, or an advisor working with clients concerned about this bleak economic forecast.

1. Focus on increasing savings – build your emergency fund. If you’re expecting a refund this tax season, consider saving rather than spending it. Also, revisit investment strategies and risk comfort levels that take this economic volatility into consideration, so you have money to fall back on today or in the future.

2. Pay down debt – free up cash flow by paying down debt. A specialist in debt and cash flow management can help you prioritize and establish an approach that will help ease you from the debt burden.

3. Improve your tax-efficiency – reduce what you’ll owe, or increase your refund for the 2019 season by taking advantage of and maintaining the documentation for your eligible credits and deductions. Also, ensure that you apply for the federal or provincial benefits available to you when you file your 2018 taxes, including the new Climate Action Incentive Payment. This is available in four provinces only, however: Manitoba, Saskatchewan, Ontario and New Brunswick.

4. Pay attention to the upcoming Federal Budget. This is always a source of great economic data for the next five years. KBR will be reporting on what those numbers are and how the Finance Minister addresses concerns about recessionary trends in the foreseeable future. It will also be interesting to see what tax incentives will be announced to help Canadians prepare for further economic shocks down the line.

Here’s what we know about the Federal Budget now. On February 22, Finance Minister Morneau met with economists to prepare for his final budget before the October election. Many urged the Finance Minister to decrease spending and reduce the federal deficit further. Though, it is already coming in lower than anticipated, according to a new report from The Parliamentary Budget Office. Income tax revenues were higher than anticipated, resulting in a federal deficit that is $2.1 billion lower than previously predicted. It will come in at $16 billion, versus the $18.1 billion originally expected.

Be sure to join us on March 20 for our Special Budget Report. Also, stay tuned next week for a special report on the Manitoba Provincial Budget -  we’ll be reporting after the lockup on March 7.

Additional educational resources:

For novices and individuals: the Debt and Cash Flow Management certificate course online today!

For tax and bookkeeping advisors: become a Real Wealth Manager ™

For financial advisors, and all professionals: come to the Distinguished Advisor Conference (DAC), this November, too! Day two’s theme is Economic Resilience in Creating Family Wealth. Check out the new agenda, and come back often as new speakers and topics are added.

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