Economy

Resilient economy may muddle inflation fight, recession still expected: economists

Published

2 years ago

January 17, 2023

Pedestrians walking in the financial district of Toronto. Photo by Brent Lewin/Bloomberg files

TORONTO — Canadian households and the overall economy have proven surprisingly resilient in the face of rising interest rates, said senior economists from the big banks, which could complicate the fight against inflation.

“There’s no question that the economy had much more momentum at the end of last year than really anyone was expecting,” said BMO chief economist Douglas Porter, speaking at an Economic Club of Canada panel Friday about the outlook for the year ahead.

His comments come as data out last week showed the economy added a surprise 104,000 jobs in December, while delinquencies on mortgage payments remain around historic lows.

Porter said however that history shows a recession has been unavoidable after rates rise this fast, and that the resilience could make for a tougher fight ahead against inflation.

“The reality is if the economy remains too strong, then rates will go even higher.”

While there is the risk of needing higher rates to cool the economy, there is the potential for the resilience shown so far to lead to the gentle cooling that policymakers are attempting, said Scotiabank chief economist Jean-Francois Perrault.

“It’s a worrisome thing in the sense that maybe it means you do have higher rates,” said Perrault. “The flip side of that is maybe this Holy Grail of a soft landing is no longer mythical, that we might actually engineer that.”TD chief economist Beata Caranci said the health of the economy, along with the fact that many industries like manufacturing are still pretty lean on hiring trends, means that a recession will likely mean far fewer job losses than usual.

“We have about 100,000 job losses occurring this year, which will not be mild or that 100,000 and their family, if it occurs. However, that is a third of what would normally occur in a recession.”

There’s still a lot of pain to come

Craig Wright

RBC chief economist Craig Wright said the bank is sticking to its forecast of a recession that it’s been predicting since last July, as a number of long-term tailwinds including free trade, cheap credit and low-cost labour, reverse.

He noted the effects of the rapid rate increases still haven’t played out because of the lag on how long it takes to hit the economy.“So there’s still a lot of pain to come.”

Wright however expects the slowdown, purposefully imposed through interest rates, will do its job and have inflation back to the Bank of Canada’s target range of one to three per cent by the end of the year.

Others aren’t so confident inflation will be able to come down so quickly, with Porter noting that underlying inflation, which strips out some volatile prices like energy, looks to be settling in at around five per cent and it will be tough to get that down as expectations shift.

“That’s what’s going to be the tougher nut to crack here. It was relatively easy getting inflation down from eight to six or as gasoline prices retreated, but it’s that next step back down to two per cent that I think is going to be a little bit more of a challenge.”Caranci also noted that emerging factors, like the reopening of the Chinese economy, could also push energy prices back up, with the bank forecasting oil going back up to US$90 a barrel, which would further complicate the inflation fight.

Overall, it will be some time before economists know how well the sharp rise in interest rates are working, and how it will play out in households and the overall economy.

“Monetary policy takes a long time to have an impact,” said Perrault. “You increase it a lot, and then you got to wait to see if it works or not. And that’s the challenge that we have, and they have.”

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Economy

Trump’s victory sparks concerns over ripple effect on Canadian economy

Published

2 hours ago

November 6, 2024

Anne Joseph

As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.

Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.

A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.

More than 77 per cent of Canadian exports go to the U.S.

Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.

“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.

“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”

American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.

It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.

“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.

“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”

A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.

Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.

“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.

Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.

With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”

“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.

“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”

This report by The Canadian Press was first published Nov. 6, 2024.

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Economy

September merchandise trade deficit narrows to $1.3 billion: Statistics Canada

Published

1 day ago

November 5, 2024

Anne Joseph

OTTAWA – Statistics Canada says the country’s merchandise trade deficit narrowed to $1.3 billion in September as imports fell more than exports.

The result compared with a revised deficit of $1.5 billion for August. The initial estimate for August released last month had shown a deficit of $1.1 billion.

Statistics Canada says the results for September came as total exports edged down 0.1 per cent to $63.9 billion.

Exports of metal and non-metallic mineral products fell 5.4 per cent as exports of unwrought gold, silver, and platinum group metals, and their alloys, decreased 15.4 per cent. Exports of energy products dropped 2.6 per cent as lower prices weighed on crude oil exports.

Meanwhile, imports for September fell 0.4 per cent to $65.1 billion as imports of metal and non-metallic mineral products dropped 12.7 per cent.

In volume terms, total exports rose 1.4 per cent in September while total imports were essentially unchanged in September.

This report by The Canadian Press was first published Nov. 5, 2024.

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