Bank of Canada governor Tiff Macklem, an enthusiastic water skier, borrowed from one of his favourite sports to describe the current state of the Canadian economy.
“We’ve said for some time that we’re expecting a choppy recovery and, unfortunately, we’re in a very serious chop,” he
said
on a Jan. 20 call with reporters after the central bank released
a new forecast
that predicts an economic contraction this winter.
The forecast is a disappointing turn. Canada’s economy was gathering pace over the summer, but conditions turned rough ahead of the holidays as the second wave of COVID-19 infections forced governments across the country to restrict movement and commerce. Employers sent more than 60,000 people home in December, the first decline in employment since the spring, Statistics Canada
reported
earlier this month.
With no immediate end to the pandemic in sight, the Bank of Canada’s forecasting team concluded that gross domestic product (GDP) will contract at an annual rate of 2.5 per cent in the first quarter of 2021, after growing 4.8 per cent in the fourth quarter, thereby offsetting the boost the economy should get from the earlier-than-expected arrival of effective vaccines.
Overall, the Bank of Canada predicts growth of four per cent in 2021, compared with a previous estimate of 4.2 per cent, 4.8 per cent in 2022 and 2.5 per cent in 2023.
“We’re moving in the wrong direction right now,” Macklem said. “We’re starting off in a deeper hole. We’ve got to climb back out of that.”
The shift in circumstances highlights the fragility of the recovery from one of the most epic recessions in history. Canada’s ability to generate wealth will be determined by the public health system’s ability to keep up with the coronavirus. There’s enough money in the system to power growth, but businesses and households won’t spend it freely until the disease is brought under control.
“That is what will determine everything,” said Darcy Briggs, a Calgary-based portfolio manager at Franklin Templeton Canada.
that he intends to leave the benchmark interest rate at 0.25 per cent until some point in 2023, and that the central bank would continue to create roughly $4 billion per week to purchase Government of Canada bonds, an approach to monetary policy that puts downward pressure on borrowing costs by augmenting private-sector demand for bonds.
Extraordinary stimulus remains essential, in part, because Canada’s economy has run into additional headwinds. The immediate future of the oil industry is clouded by mediocre prices, uncertain demand and TC Energy Corp.’s decision to stop building the Keystone XL pipeline in the face of political opposition in the United States. The dollar’s appreciation has become so problematic that the Bank of Canada felt compelled to flag it as a key risk to its inflation outlook, something it hasn’t done so explicitly since 2011.
“Appreciation of the Canadian dollar creates direct downward pressure on inflation by lowering the prices of imports,” the central bank said. “Further appreciation of the Canadian dollar could slow output growth by reducing the competitiveness of Canadian exports and import-competing production. Slower output growth would also imply more disinflationary pressures.”
The Bank of Canada’s bond-buying efforts are controversial with a minority of market participants, economists and politicians who dislike the sight of the central bank using its unique power to create money so aggressively.
In theory, Macklem is testing the central bank’s ability to contain inflation, since a massive increase in the money supply should cause prices to rise. There is no evidence of that yet, as Statistics Canada on Jan. 20
reported
that the Consumer Price Index (CPI) increased 0.7 per cent in January from a year earlier, a reading that suggests deflation is the greater threat at the moment.
“The ongoing drag from economic slack is the most important driver of inflation dynamics over the medium term,” the Bank of Canada said in its new outlook, which predicts some temporary spikes in the CPI, but concludes that inflation won’t “return sustainably” to the two-per-cent target until 2023.
Still, Macklem began the process of unwinding his bond-buying program by reminding traders and investors that the Bank of Canada doesn’t intend to be a major player in bond markets indefinitely.
The central bank used its new policy statement to tweak its language around quantitative easing (QE), as the policy is known, saying that, as “the Governing Council gains confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required.”
Policy-makers also used their quarterly economic report to point out that the central bank now holds about 36 per cent of all federal government debt, compared with 32 per cent in October, an amount that as a percentage of GDP is greater than the holdings of the central banks of Australia and Sweden, but less than the U.S. Federal Reserve and the Bank of England.
In other words, the Bank of Canada has more ammunition, but its armoury isn’t bottomless.
“There’s an upper limit,” Briggs said. “We’re not there yet. We assume QE will end with the pandemic.”
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.
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.
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.
