There’s little question that Canada is navigating a “weird” economy right now, says Ken Peacock.
The Business Council of BC’s (BCBC) chief economist points out that inflation is sky-high (seven per cent in August) at the same time labour markets are facing a severe crunch, with Statistics Canada reporting more than one million job vacancies as of June.
“This is an entirely different creature,” Peacock said about the uncertain economic conditions facing Canada heading into 2023 compared with the 2008-09 recession.
Back then, inflation sat at 2.37 per cent and 0.3 per cent, respectively, for those two years as the Bank of Canada (BoC) cut rates, while unemployment hit 8.9 per cent by the end of 2009.
Central banks across the globe are now aiming to cool their domestic economies through interest rate hikes in a bid to tamp down on inflation. But pinning down what any potential downturn might entail during these uncertain times may require some impressive soothsaying powers.
Bryan Yu, chief economist at Central 1 Credit Union, said “abnormal factors” resulting from the pandemic, such as ongoing supply chain issues, are still filtering through the economy during a “period in which labour markets are wildly out of whack in terms of how tight they are.
“These aren’t normal types of environments that we’re used to – we’re not used to this level of inflation.”
Yu added that the country is struggling to hit the BoC’s pre-pandemic target inflation rate of two per cent.
The BoC has hiked its key rate 300 basis points since the start of the year; so, all the cheap capital aimed at stimulating the economy at the outset of the pandemic is no longer in abundance.
Rising mortgage rates have consequently put the squeeze on the real estate market.
Sales on the West Coast were down 40.8 per cent in August compared with the same month a year earlier, according to the BC Real Estate Association. And sales across Canada fell 24.7 per cent year over year during that same month, according to the Canadian Real Estate Association.
Meanwhile, the U.S. Federal Reserve’s recent rate hikes – up another 75 basis points last month alone – have resulted in a decline in the Canadian dollar.
While this can stimulate Canadian exports, a lower loonie also makes it more expensive to import goods into the country, adding yet another inflationary pressure to the economy.
But hiking rates to battle inflation comes with risks, according to Andrey Pavlov, a finance professor at Simon Fraser University’s Beedie School of Business.
“I do think that our central banks like the Bank of Canada and the Federal Reserve are overreacting a little bit. The increases in interest rates up to this point were appropriate, but I think we’ve gone too far, and the danger of that is we’re really going to make it very difficult for people to meet basic financial obligations,” he said. “Once people start not being able to make their mortgages and other car loans or whatever they have, then there is a danger we might end up being in a dangerous cycle the way we did in 2008.”
Peacock said part of the problem is that central banks were behind the curve raising rates and are now trying to rapidly make up ground in the fight against inflation.
He gives some leeway to the central banks for that, though, because there was a lot of fear and uncertainty hanging over the global economy in the wake of the pandemic.
“It’s not really a stark criticism as much as an observation. They have to catch up,” Peacock said
He added that if the pace of inflation had been growing at around five per cent for a decade or so — significantly beyond the BoC’s target of two per cent – then inflation would not be the concern it is right now.
“People can live in that world. It’s when it surprises us. That’s where it really becomes problematic,” Peacock said.
Because of the province’s strong ability to export valuable resources, there is an ongoing discussion among BCBC economists whether the province might have the ability to “skate through” any economic downturn resulting from efforts to reduce inflation, according to Peacock.
But he remains more skeptical about the province’s ability to make a soft landing due to its economic dependence on the declining real estate market.
“It’s going to be very bumpy and, for the most part, is going to look and feel like a recession,” Peacock said.
Recessions are, mostly as a rule of thumb, defined as two consecutive fiscal quarters of negative gross domestic product growth. But more generally, recessions entail a broader decline in both product and labour markets, rather than big declines focused on one or two sectors, according to Peacock.
And Yu said efforts to cool the economy through rate hikes can cause “quite a bit of economic pain” as well as job losses.
“We’re going to see, at least in early 2023, just a period in which we’re sort of fluctuating around slow growth,” he said.
“That doesn’t mean we have to have a large-scale employment drop off as well. And we also have to note that there are a lot of companies in Canada and B.C. that are still looking for workers.”
A Sept. 12 Royal Bank of Canada (TSX:RY) outlook said any soft landing for the Canadian economy looks increasingly unlikely.
Economists at the bank are forecasting a “moderate” downturn in which the unemployment rate rises by 1.7 percentage points.
“Signs are that inflation pressures have peaked, at least in North America, as global commodity prices fall from very high levels, supply chain disruptions ease and housing markets correct under the weight of rising mortgage costs,” RBC economists said in the forecast. “Still, central banks will continue to pump the monetary policy brakes until consumer demand has softened enough to bring inflation rates fully back to target.”
Meanwhile, Pavlov said inflationary pressures can be addressed in the long term if Canada shores up its capacity to produce goods and services locally, insulating itself from the same supply chain disruptions that are affecting consumer prices now.
“We’re shipping our raw materials out of Canada and then bringing back finished goods,” he said.
“It’s pretty clear that regulation, red tape, high and complicated taxes make it very, very difficult to really produce anything here.”