Economy

A stubbornly strong economy complicates the fight against inflation

Published

2 years ago

March 8, 2023

You mighT have expected the fastest tightening of global monetary policy in 40 years to deal a heavy blow to the world economy. Yet in 2023 it seems to be shrugging off the effects of higher interest rates. Not only is inflation stubbornly high, but economic activity also appears to have quickened. Faster growth may sound good, but it is a headache for policymakers, who are trying to bring about a managed slowdown. And it could mean that a recession, when it eventually strikes, is more painful.

At the end of last year, according to business surveys, manufacturing and services output were shrinking around the world. Today manufacturing output is flat and services are rebounding. American consumers are spending freely. Both wages and prices continue to grow fast, even in places where they were long stagnant. Japan looks set for a round of bumper wage rises in the spring. In the euro zone the monthly rate of “core” inflation, which excludes food and energy prices, broke records in February. Labour markets are extraordinarily tight. As we report this week, in half of the members of the oecd, a group of mostly rich countries, employment rates are at record highs.

From equities to credit, financial markets are priced for global economic growth that is above trend. Not so long ago, investors were debating whether the world economy would face a “hard landing” involving a recession, or a “soft landing”, in which inflation was conquered without any downturn. Today they are asking whether the world economy is landing at all.

There are several reasons for the apparent acceleration. The mini-boom that took hold in the markets late in 2022 stimulated animal spirits. China’s reopening from zero-covid has led to a swift economic recovery which has caused order books in emerging markets to fill up. Falling energy prices in Europe have loosened the screws on its economy. But above all else, consumers and firms in most big economies are in strikingly good financial health. Many households are still flush with savings built up during the covid-19 pandemic; firms managed to lock in low interest rates for long stretches and have yet to suffer much from higher borrowing costs. Only in the most rate-sensitive sectors of the global economy, such as property, is the impact of higher rates clearly visible. In America the economy is so strong that even housing may be recovering slightly.

The acceleration means that recession is not imminent. But it also means that central banks will have to raise interest rates further if they are to succeed in returning inflation to their 2% targets. On March 7th Jerome Powell, the chairman of the Federal Reserve, hinted as much, causing stockmarkets to fall. Policymakers now face two difficult judgments.

The first is the extent to which monetary tightening to date has yet to have its full effect. Economists often talk up the “long and variable lags” with which interest rates work, but research suggests policy may be working faster today. If the effects of last year’s tightening are already exhausted, much more may be needed. A second judgment is over the persistence of the factors that seem to have immunised much of the economy from rate rises. Eventually, consumers will run out of spare cash and firms will feel the pinch from higher borrowing costs. In countries such as Sweden, where interest-rate rises rapidly pass through to households, the economy is suffering.

One thing is clear: the ideal path, where inflation falls without growth faltering much, looks narrower than it did even a month ago. Instead, central banks are increasingly likely to have to choose between tolerating higher inflation or slamming on the brakes for a second year running. ■

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Economy

Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

Published

1 day ago

November 8, 2024

Anne Joseph

OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.

Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.

Business, building and support services saw the largest gain in employment.

Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.

Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.

Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.

Friday’s report also shed some light on the financial health of households.

According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.

That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.

People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.

That compares with just under a quarter of those living in an owned home by a household member.

Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.

That compares with about three in 10 more established immigrants and one in four of people born in Canada.

This report by The Canadian Press was first published Nov. 8, 2024.

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Economy

Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

Published

3 days ago

November 6, 2024

Anne Joseph

The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.

The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.

CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.

This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.

While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.

Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.

The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.

This report by The Canadian Press was first published Nov. 7, 2024.

Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.

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Economy

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

Published

3 days 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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