11/23/2017 10:28 EST | Updated 11/23/2017 10:28 EST

Scotiabank Long-Term Outlook Warns Canada At Risk Of Recession

Rising interest rates and fading government stimulus could drag down the economy.

Ben Nelms / Reuters
A Scotiabank logo is pictured at the company's annual general meeting in Kelowna, B.C., April 8, 2014. A new forecast from the bank says Canada is at heightened risk of a recession in the next several years.

Canada is at risk of a recession over the next several years, Scotiabank predicts in a new report, due in part to rising interest rates and the removal of the federal government's stimulus spending.

For the time being, the bank says, Canada's economy is humming along nicely and is expected to clock 3.1 per cent growth for all of 2017.

But the bank's long-term outlook, released this week, sees the North American economy slowing down in 2018 and beyond, with "an increased risk of low growth or recession (i.e. two quarters of negative growth) in 2019–22."

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Scotiabank sees Canada's economy slowing to 2.2 per cent in 2018, and then slowing further to 1.5 per cent in 2019-22, the result of "weak productivity and modest labour input growth."

In other words, businesses are investing too little into becoming more profitable, and the workforce is growing slowly, limiting Canada's economic potential going forward.

Scotiabank sees the U.S.'s long-term economic growth as being slightly stronger than Canada's, at 1.8 per cent per year.

An aging economic expansion

The bank is not the only voice out there warning of a risk of recession these days.

Some analysts point out that the North American economy has been growing for nearly nine years since the financial crisis of 2008, making the current economic expansion already one of the longest on record.

They point to a number of signs suggesting the economic cycle has peaked — including the fact that central banks are raising their interest rates.

As they do so, it will put downward pressure on stocks, bonds and other assets such as real estate.

The Bank of Canada raised interest rates twice this year, and is widely expected to raise rates again early next year.

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The Scotiabank report sees the Bank of Canada's key lending rate rising to 2.5 per cent by 2020, from its current one per cent. That's enough of a hike to act as a headwind to asset prices, and — according to some — enough to cool Canada's housing markets.

Scotia notes there is some "uncertainty" in its forecast, including the outcome of NAFTA negotiations.

"On the upside, Canada's labour productivity ... has been relatively strong. If this strength were to continue, trend labour productivity could be higher than we have assumed, raising the long-run growth rate of the Canadian economy," Scotia economists René Lalonde and Nikita Perevalov wrote.

"On the downside, increased trade protectionism can disrupt North American supply chains, leading to slower productivity growth in Canada and the U.S. going forward."

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