Disclaimer: More so than the rest of my posts to date, this one is almost entirely opinion. There are many other equally valid views.
I'm an avid CBC Radio 2 listener, and was dismayed to hear their recent news programs focus on Canada's risk of a recession. My disappointment grew as I headed over to the CBC's web site and found several prominent articles on the subject.
Canada's economic fundamentals are sound. Not perfect (no country's are), but sound. Unfortunately, this does not make Canada safe from the antics of panicked investors.
At any given time, in a healthy economy, a lot of money is in motion. Not all of it moves at the same rate. Some money, such as that in chequing accounts, moves quickly. Other money is temporarily frozen in the form of bonds, or tied up in loans that cannot be called in on short notice. These days, foreign money that is invested in Canadian capital tends to be surprisingly mobile. Trading in Canadian assets is brisk; not a big surprise given our strong focus on commodities.
This system can be gummed up by a trusted source crying 'recession', just like the exits to a crowded theatre can be gummed up by someone crying 'fire'. It doesn't matter in the least whether the cry is actually true. All that matters is that it is believed temporarily.
Suppose, for the sake of argument, that Canada's economy is doing just fine, and that investors (domestic and foreign) trust the CBC as a news source about Canada. What happens if the CBC starts saying, loudly and often, in print, on the air and online, that Canada is entering a recession?
Domestic investors may delay their investments. If a bakery was thinking of buying a new bread machine, they may decide to put off that purchase. In a recession, people buy less of everything, including bread. They may also reduce new hires, for the same reason. Result: lower investment and unemployment. The announcement causes the very symptoms of a recession.
Foreign investors may, using similar reasoning, decide to pull out of Canada, or at the very least invest less in Canada than they would have otherwise. That's another induced slowdown in growth.
If (I admit this is a stretch) fears of recession in Canada are tied to fears of US-style bank failures, this may lead people who can afford it to pull their money out of Canadian accounts and into bank accounts in other countries. This may be enough to start a general bank run, causing banks to fail, even if these banks were perfectly healthy beforehand. Generally, banks only keep 10% or less of their deposits on hand as ready cash. The rest is out as loans. Many of these loans take time to call in, so a bunch of depositors asking for their money back at once will break the bank.
There's some evidence that the general public is losing confidence in Canadian banks. The stock value of Canadian retail banks has fallen drastically in the last few days. The timing is consistent with the start of news stories about a possible Canadian recession.
The prediction of a recession or a bank run is too often a self-fulfilling prophecy.
In the CBC's own words, "The mere mention of the word can cause serious jitters for Canadians who have a job, invest in mutual funds or are thinking about making a big purchase."
Exactly. So it'd be really nice if they'd stop mentioning it until it actually happens.
Talking about a recession once output has actually fallen - that is, during the recession itself - is just fine, and may actually prove quite helpful.
Talking about specific, well-defined economic issues that may lead to a recession is also great (e.g. 'Hey, maybe unregulated credit-swap markets aren't the way to go...').
Merely lumping together the punch lines of gloomy forecasts? Not so much.