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Are We on the Brink of a Recession?

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The COVID-19 restrictions didn’t prevent Canada’s economy from posting an annualized growth rate of 9.6% in the last quarter of 2020. Still, it was the worst year on record due to massive layoffs, mandated lockdowns, and travel cancellations.

The two months (March and April 2020) of consecutive decline in gross domestic product (GDP) was steep, and it placed the country on the brink of a recession. In May the following month, economists declared the recession official. The federal government made headway with its vaccination campaign in Q1 2021, although business activity remained slow for much of the economy.

Telltale signs

A high unemployment rate is one of the signs an economy is in recession. Canada reflected strong employment growth as the unemployment rate declined for the second consecutive month in March 2021. While the 7.5% rate is the lowest since February 2020, about 1.5 million people or 32.4% more than in the same month, are still out of jobs.

The global pandemic left a big hole in Canada’s economy. Its 5.4% GDP contraction in 2020 was the biggest collapse since 1961. If you were to pinpoint which sector had a recovery story, it would be the housing market. The resiliency of the real estate market is controversial because the labour market is still weak.

According to the Canada Mortgage and Housing Corp. (CMHC), a recession could crush the insatiable demand for houses. Small businesses continue to struggle, while many business owners believe profitability will not come until 2022. Lower consumer spending likewise indicates a red flag.

Most abnormal recession

Overall consumer spending in April 2021 was above the pre-pandemic 2019 levels. The resurgence in coronavirus cases and the reimposition of lockdowns make the future uncertain. But an interesting growth not seen in the previous seven years combined is the 15.1% surge in the savings rate.

Statistics Canada reported that households hoarded salaries and benefit payments instead of spending them. For CIBC Capital Markets Deputy Chief Economist Benjamin Tal, today’s recession is the most abnormal one the country has ever seen, saying that the main economic victim has been the low-paying service sector.

Inflation risk

Bank of Canada Governor Tiff Macklem predicts the inflation rate to hit 2.2% in late 2022 instead of 2023. He also warns that the deadly third wave of COVID-19 threatens the pace of the economic recovery and jobs growth, particularly in highly affected sectors. Savvy investors seek safer grounds in recessionary periods.

Fortis (TSX:FTS)(NYSE:FTS) is the top choice when the going gets tough because it’s recession-resistant. Similarly, its bond-like features offer capital protection. The TSX may correct due to inflation risks. However, the high-quality utility stock should hold steady as it did in recent years. Fortis will not reward investors with a 1,101.42% total return (13.22% CAGR) in the last 20 years if it wilts during recessions.

If you invest today, the share price is $55.53, while the dividend yield is 3.62%. The business of this $26.17 billion electric utility company is low-risk. It derives revenues from highly regulated assets. Management even plans to raise dividends by 6% annually through 2025.

Brighter days

Governor Macklem believes brighter days are ahead due to the vaccine rollout. However, he admits it will take some time to achieve a complete recovery. Some households will hold on to their savings to have a safety net during this recession.

Speaking if Canada is on the brink of a recession...

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.

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