The Canadian economic system is headed for a tough patch. Progress has already slowed significantly. Job progress has moderated. Inflation stays stubbornly excessive. However the ache households are feeling right this moment is simply going to worsen.
“The trail ahead seems to be bleak,” Tiago Figueiredo, a macro technique affiliate with Desjardins, mentioned in a observe.
For some time there, the economic system proved extra resilient than anticipated. The Financial institution of Canada’s rate of interest hikes piled up one after one other. Even so, the roles market boomed, GDP continued to broaden.
However financial ache was inevitable. Hovering inflation has eroded buying energy, and climbing rates of interest have clobbered households. Now, cracks have begun to seem within the information, and economists count on these cracks to develop. GDP contracted within the second quarter of this yr.
Subsequent week, new information is anticipated to point out financial progress flat-lined in July and maybe contracted once more in August. A few of that may be chalked as much as particular elements, together with labour actions just like the port strike in B.C. or wildfires.
However earlier than any of that, momentum was clearing being sapped out of the Canadian economic system.
That will put Canada on observe for 2 consecutive quarters of destructive progress, which might meet the technical definition of a recession.
Frances Donald, the worldwide chief economist and strategist at Manulife Funding Administration, says we must always spend much less time debating what to name this downturn and focus extra on the way it will influence folks.
“Even when there are technical elements that avert two quarters of destructive GDP, this economic system will really feel like a recession to most Canadians, for the following yr,” she advised CBC Information.
How dangerous are issues, actually?
Consultants say there are a number of elements masking simply how dangerous the economic system actually is. The primary is that it often takes a few yr and a half for the complete influence of rate of interest modifications to get absorbed into the economic system.
The Financial institution of Canada started its rate-hiking cycle 17 months in the past. Which means the influence of the quickest, most aggressive rate of interest climbing cycle in Canadian historical past remains to be to return.
Second, consumption patterns modified throughout the pandemic and have not totally reverted to regular, predictable ways in which make financial modelling simpler. Throughout pandemic lockdowns, Canadians purchased lots of “stuff.” We snatched up electronics, health club tools, family wares. Now, those self same households are primarily spending on experiences.
So, retail gross sales figures simply launched present an uptick in July however a slowdown in August. How a lot of that’s seasonal or cyclical is not as straightforward to find out when all of those different elements are pushing and pulling shoppers in several instructions.
“Discretionary shopper spending is getting held again by inflation and surging borrowing prices. One other signal of sluggish progress for the Canadian economic system whereas the Financial institution of Canada, on the similar time, grapples with above-target inflation,” Robert Kavcic, senior economist at BMO, wrote in a observe to purchasers.
Hovering above all the numbers and all the modifications is an unprecedented surge in immigration. Greater than one million folks moved to Canada final yr alone. That has pushed consumption however masked some underlying weaknesses.
Donald says all of these elements have mixed to make the economic system look more healthy than it truly is.
“We’re within the second between when the Titanic hit the iceberg, however the ship has not sunk. When it appears as if we have skilled a shock, however not a problematic one,” Donald mentioned.
“The excellent news is that, not like the Titanic, we are able to heal the economic system if we have to by reducing rates of interest.”
The place are rates of interest headed?
The Financial institution of Canada paused its collection of charge hikes earlier this month. However the central financial institution mentioned that was contingent on seeing additional progress within the combat to rein in inflation.
Since then, inflation got here in a lot hotter than anybody anticipated. And this time it wasn’t simply gasoline and mortgage curiosity prices. The so-called core measures of inflation, which strip out the extra risky elements, corresponding to the worth of gasoline, all rose or held their floor.
Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank, says the breadth of the worth pressures in August is “astounding.” He says 52 per cent of the patron value index basket is up by 4 per cent month over month at a seasonally adjusted annual charge. Practically two-thirds is up by greater than three per cent.
He says the latest information challenges essentially the most fundamental assumptions folks have been making in regards to the economic system.
“Inflation’s cooling, they are saying. It is solely gasoline and mortgage curiosity prices which are driving it, they are saying. The federal government’s (fairly unclear) ‘plan’ is working, they are saying. The Financial institution of Canada is clearly executed elevating charges, they are saying. All of which is full, utter, garbage,” he mentioned in a observe to purchasers.
Holt says the re-acceleration in final month’s inflation information “positively ups the chances of a charge hike” when the central financial institution meets once more in October.
In a speech this week, Financial institution of Canada deputy governor Sharon Kozicki highlighted the dilemma the central financial institution is going through.
‘We’re a great distance from charge cuts’
“We all know that if we do not do sufficient now, we are going to probably must do much more later. And that if we tighten an excessive amount of, we danger unnecessarily hurting the economic system,” she advised a luncheon in Regina.
She mentioned some volatility in inflation was “not unusual,” that previous charge hikes “will proceed to weigh” on financial exercise.
None of that’s new. The central financial institution has spent a lot of the final yr and a half speaking about balancing the danger between doing an excessive amount of and inflicting extra ache than was vital and doing too little and letting inflation get entrenched.
However economists corresponding to Donald say there’s been a shift because the financial institution begins to consider when and the way it should begin taking a look at bringing charges again all the way down to ease the burden on households.
“We’re a great distance from charge cuts,” she mentioned. “However you could possibly see the off-ramp within the very far distance. And the Financial institution of Canada is attempting to widen that off ramp to offer them some optionality” ought to they want it.
She’s forecasting charges will begin to come down once more throughout the first half of subsequent yr.
“However for lots of Canadians, there’s … lots of ache to get by,” Donald mentioned.
