Money123: Welcome to the ‘me-cession’

Why is the mood so… recessionary?

Fears about job losses, stressing over finances at the kitchen table, putting aside more savings for a rainy day: it sure does feel like a recession for many Canadians, never mind what the data might say.

Indeed, Canada has not technically fallen into a recession this cycle, avoiding two consecutive declines in real GDP despite slowing growth and plenty of economic malaise.

So to explain the strange moment many households find themselves in these days, Alberta Central chief economist Charles St-Arnaud has dubbed it not a recession, but a “me-cession.”

While rapid population growth over the past two years has kept Canada’s economy out of a steep contraction, on a per capita basis, the country has seen declines in six of the last seven quarters.

RBC economist Carrie Freestone explains it this way: if Canadians are treating themselves to fewer coffees at the cafe on the corner, but there are more of us overall, the local coffee shop likely won’t notice much of a dent in sales, even as most households rein in their spending.

But are there any risks that this me-cession becomes a full-blown recession? Economists who spoke to Global News say a lot’s riding on how the labour market unfolds in the months ahead.

Read more to find out where Canada’s economy might be headed.

Signs of debt stress

Even as the Bank of Canada embarks on a rate-cut cycle, one of the lingering risks in the Canadian economy is household debt load.

Statistics Canada data released this week shows that, after a brief dip during the pandemic, non-mortgage debt levels last year had risen back to where they were before COVID-19.

Rates of arrears, or payments that are late for more than 90 days, are also back above pre-pandemic levels when it comes to credit cards and auto loans.

StatCan pointed out that lower-income households in particular might have had to turn to credit cards to handle everyday costs as inflation ballooned to decades-high levels in 2022.

The uptick in debt levels since then had the effect of “wiping out” progress made in paying down loans while we were all hunkering down at home during the height of the pandemic, the agency said.

But on the mortgage side of things, payment levels are holding near historic lows. Here’s why.

‘Friendlier’ fall coming for the housing market?

July data from the Canadian Real Estate Association shows the housing market hit “pause” last month despite the Bank of Canada’s rate cuts spurring hopes for lower borrowing costs to come.

But experts who spoke to Global News this week said that following a “spotty” summer, housing markets might be “friendlier” to buyers in the months ahead.

Recent expectations for accelerated rate cuts from the central bank could feed into lower fixed-rate mortgages in the market, lowering a barrier to entry for many would-be buyers who have struggled to qualify as of late.

Shaun Cathcart, senior economist at CREA, said the popular five-year fixed mortgages are likely to fall further in the months ahead, making it a “slam dunk” that activity should heat up in the fall.

“There’s a record amount of demand out there on the sidelines waiting to come back. The main thing they’re waiting for is lower borrowing costs, and they’re about to get that. So, it’s pretty much a no-brainer,” he said.

Read more about what that means for home prices in markets across Canada this fall.

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– THE QUESTION –

“We have been saving up an RESP for my 16-year-old son for the past 10 years. He is a talented young baseball player who is hoping to head to play for a college in the U.S. after he’s done high school, studying kinesiology while he plays for a team there. We are hoping for scholarship opportunities but want to make sure we have a fallback. Is there any harm in continuing to contribute to his Canadian RESP funds; will they be applicable for a U.S. school? Is there some kind of alternative we should convert the RESP into for the U.S.? Is that even possible?”

— A Money123 reader

“That is a great question! In this situation, assuming your son is not a U.S. citizen, he will most likely move to the U.S. on a student visa, such as an F-1 visa. This visa will allow him to stay in the U.S. as long as he remains a student. For tax purposes, your son will continue to be considered a Canadian resident, even while living and studying in the U.S. Generally, he will be treated as a non-resident alien for U.S. tax purposes, meaning he will only be taxed on U.S. sourced income.

The RESP grants will remain available as long as he is attending a college or university approved by Employment and Social Development Canada (ESDC). Most U.S. colleges and universities qualify. Continuing to contribute to the RESP is beneficial, as the account is flexible, and withdrawals can be used for any education-related expenses, including room and board. There is a maximum withdrawal limit for Educational Assistance Payments (EAP) in the first 13 weeks of enrolment (first semester), which is $8,000 for full-time students or $4,000 for part-time students.

The EAP is taxable to the beneficiary — your son — and he will need to declare this income on his Canadian tax returns. This income is Canadian-sourced and, therefore, not subject to U.S. taxation.

It is not possible to convert the RESP into a U.S. equivalent education plan, such as a 529 plan, nor would your son be eligible to open a 529 plan under an F-1 visa.”

– Irina Matco, co-founder and financial planner, i2 Wealth Cross Border Planning

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