Canada’s economy is eroding at an unusually fast rate, and financial conditions are tightening. Oxford Economics, a global macro research firm, has warned that its recession index now shows that a recession is almost certain in Canada now.

Canada’s recession indicators are flashing a code red, according to the firm. “Our new Canada Financial Conditions Index (FCI) shows a sharp, broad-based worsening of financial conditions and is yet another worrying sign that the economy is on the cusp of recession,” said Tony Stillo, the director of economics at Oxford Economics. 

The index has a track record of identifying periods of economic stress, notably surging in 2007, preceding the Great Recession. At the onset of the pandemic in March 2020, it also indicated the incoming stress would be more serious than thought at the time. Now with the tightening of financial conditions in 2021, it indicates a recession is coming - and that it won’t be mild.

Many people are expecting the erosion to translate into rate cuts, but that’s not an option this time. “Such a noteworthy tightening of financial conditions might normally give the Bank of Canada (BoC) reason to pause its most aggressive rate tightening campaign in decades. But the BoC is steadfast on quelling inflation and preventing a wage-price spiral, meaning we don’t think a dovish pivot is likely,” Stillo added.