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Varcoe: Unknown if Canada in for ‘soft landing’ or turbulent recession

The Canadian economic system is in a robust place right now, however additionally it is ‘flying too excessive,’ Poloz mentioned

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Is Canada going through a smooth financial touchdown or a tough recession on the journey forward?

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It’s a query weighing on the minds of customers, enterprise operators and economists as inflation in the nation takes off and rates of interest head larger.

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As enterprise leaders gathered Thursday in Banff for the Global Business Forum, one of the vital urgent points is whether or not Canada — and Alberta — can skirt a full-blown financial contraction.

“I’m going to say nobody knows that,” mentioned Stephen Poloz, former governor of the Bank of Canada.

The dialogue comes as central banks dial up larger rates of interest to chill down red-hot costs and search to maintain inflation expectations at bay.

The Canadian economic system is in a robust place right now, however additionally it is “flying too high,” Poloz instructed journalists on the sidelines of the convention earlier than talking on the annual summit.

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He equates the scenario to a pilot who has soared too excessive and must throttle again the engines to descend.

“You don’t have to land the plane on the ground or crash the plane or any of those things to achieve that. But there are constraints,” he mentioned.

“We know we’re going to have slower growth. The pressures in the labour market will need to go away; that means the excess demand has to come out of the economy.

“Now, do you get to go there in a nice smooth, straight line? Or do you have to dip below and have a recession along the way? No one knows the answer to that.”

The path forward is essential for customers and enterprise operators as rates of interest proceed to rise all over the world.

On Thursday, the Bank of England boosted its essential fee by half a share level to 2.25 per cent, its highest stage since 2008. The U.S. Federal Reserve elevated its key fee by 75 foundation factors on Wednesday.

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Many economists anticipate one other fee hike is coming from the Bank of Canada in October, following 5 hikes in the previous seven months which have pushed the coverage rate of interest as much as 3.25 per cent.

The Bank of Canada, which has an inflation goal of two per cent, notes it might take as much as two years for such rate of interest will increase to achieve their full impact.

Poloz, the financial institution’s governor from 2013 till 2020, mentioned it’s too quickly for rates of interest to have a widespread influence, though they’ve cooled housing markets. Higher costs for gadgets akin to gasoline are already slowing client spending.

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“It is certainly possible for us to have what is called a soft landing,” he mentioned.

“But I don’t even like that as a metaphor, because we’re not trying to land. We are just trying to downshift. In behind all of that, if inflation expectations are still pretty well anchored at two per cent or thereabout … then it will be easier.”

Inflation in Canada elevated by seven per cent in August from a yr earlier, cooling considerably from July’s 7.6 per cent leap, as pump costs dipped.

Since hitting greater than US$120 a barrel in early June following Russia’s invasion of Ukraine, benchmark U.S. crude costs have dropped sharply, closing at $83.49 on Thursday.

At the identical time, virtually a million jobs in Canada had been unfilled in the second quarter and lots of corporations are going through extreme labour shortages.

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Can the financial engine shift right into a decrease gear with out stalling?

“It’s about a 50-50 possibility and perhaps with the new (inflation) numbers coming in, it’s a little higher than that,” Ted Mallett, head of financial forecasting for the Conference Board of Canada, mentioned Wednesday in an interview.

“A recession may or may not happen, but what is pretty well assured is that we’re in a growth pause, at the very least, for the next two or three quarters.”

The Royal Bank of Canada has projected a recession will hit the Canadian economic system subsequent yr, as rising rates of interest, excessive inflation and the continued labour crunch pull the nation right into a “moderate and short-lived” contraction in 2023.

As for Alberta, RBC forecasts the province will see financial development sluggish to 1.8 per cent subsequent yr from round 5 per cent in 2022.

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High oil costs stay a constructive financial power for Alberta; the provincial authorities is anticipating a $13.2-billion surplus for the fiscal yr ending subsequent March.

Pumpjacks northwest of Calgary were photographed on Tuesday, March 8, 2022.
Pumpjacks northwest of Calgary had been photographed on Tuesday, March 8, 2022. Gavin Young/Postmedia

“Alberta is in a good, a pretty solid, position. With that in mind, of course, there are factors at play that will impact all residents of Canada, regardless of where they live,” mentioned RBC economist Carrie Freestone.

Another rate of interest hike from the Bank of Canada of fifty foundation factors is predicted in October, and probably a smaller improve in December, mentioned Alberta Central’s chief economist, Charles St-Arnaud.

He locations the chance of a recession at even odds and worries that with excessive ranges of family debt and wages falling behind bills, a “great consumer squeeze” might occur.

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“The Bank of Canada is hoping for a Goldilocks situation where we don’t slow too much, yet we slow enough to keep inflation down,” he mentioned.

“The question is not do we get negative quarters of growth — it’s how far into negative territory we go, and for how long?”

Business Council of Alberta president Adam Legge, who moderated a convention panel on Thursday with Poloz, mentioned the results of inflation and better rates of interest, labour constraints and provide chain disruptions are the highest issues for corporations planning for 2023.

However, excessive commodity costs also needs to assist the province climate a few of the turbulence forward.

“Everybody’s preparing for an economic slowdown in order to get this inflation under control,” Legge added.

“The world is short oil and gas and those prices are going to, I expect, remain elevated, which will keep Alberta’s economy faring better than our other peer provinces.”

Chris Varcoe is a Calgary Herald columnist.

[email protected]

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