As we’ve seen in the recent surge in climate disasters, the effect of a gradual increase in temperatures does not necessarily result in a gradual impact on people’s daily lives. Nor does it affect people equally.
Wednesday’s Monetary Policy Report from the Bank of Canada offered a similar lesson, as the central bank once again warned that the poor and over-borrowed were likely to suffer more from both high inflation and the high borrowing rates needed to bring down stubborn inflation.
While he admitted that the latest quarter-point hike in its key rate to five per cent would hurt many people, Bank of Canada governor Tiff Macklem warned that he remained wary of overshoot — with the possibility that the lagging effects of a long series of interest rate hikes could kick in suddenly and put the economy into reverse.
Unnecessary pain?
“We’re trying to balance the risks of under- and over-tightening,” Macklem said in answer to a reporter’s question at Wednesday’s news conference in Ottawa. “If we do more than we need now, it’s going to be unnecessarily painful.”
Asked repeatedly by reporters why a string of 10 interest rate hikes had not had a stronger impact on inflation, including food and house prices, Macklem and senior deputy governor Carolyn Rogers cited a number of effects, including a housing shortage, a strong labour market and the post-pandemic surge in immigration that recently sent Canada’s population to the 40-million mark.
But the other thing that may be “buffering” the effects of higher rates are forces similar to the K-shaped recovery that we saw after the COVID-19 pandemic meltdown. Just as we’ve seen in recent climate disasters, not everyone is affected the same.
Following the COVID-19 pandemic, some economists predicted there would be a K-shaped recovery, as richer people bounced back and poorer people did not. Now there are signs of a split in the Canadian economy between those with savings and those without. (Jeff Curry/Reuters)
“We deal in a lot of aggregate numbers and averages, but we know that inflation and interest rates affect people very differently,” Rogers said. “In particular, we know … that the most vulnerable Canadians are the ones that are hurt most both by inflation and by higher interest rates.”
While news stories quite fairly focus on the plight of the worst off, a majority of Canadians remain in financial good shape, she said. And those better-off Canadians are able to keep spending even as prices rise.
“There are two things that are helping buffer many households from both inflation and interest rates, and that is the savings they accumulated over the course of the pandemic. You can see three-quarters of households have accumulated quite a bit more savings than they had prior to the pandemic,” Rogers said, citing the Monetary Policy Report (MPR), which contains many interesting graphs and charts.
“The other thing we think is supporting confidence and buffering Canadians from some of the impacts is the strong labour market,” she said, adding that people are not afraid of losing their jobs.
Central banks have been wrong
While Macklem and Rogers emphasized the view that we are heading to a slow and smooth soft landing without heading to recession, an MPR outlook is never complete without a mention of the downside risks.
“It’s ridiculous to think that a quarter-point rate hike [on Wednesday] would make the difference between starting a recession and avoiding recession,” longtime Edmonton financial analyst and author Hilliard MacBeth wrote in a social media post this week.
But of course there are many examples of what we might call the last straw effect, when a final increase in rates or the final rise in global temperatures can lead to a cascade of consequences. The impossible thing to know in advance is when the moment is reached. Certainly both the Bank of Canada and the U.S. Federal Reserve have gotten sudden changes wrong in the past.
Many economists have suggested that central banks around the world have gone too far, too fast in hiking rates and that the well-known lagging effect of previous sharp rate hikes could come all at once.
Bank of Canada raises interest rate to 5% and doesn’t rule out more hikes
The Bank of Canada has raised its benchmark interest rate to 5 per cent, saying inflation and excess demand remain stubbornly high. Many Canadians with mortgages are feeling the pain, with some paying double what they did just a few years ago.
Canadian author Malcolm Gladwell wrote a whole book about the concept in The Tipping Point, “that magic moment when an idea, trend or social behaviour crosses a threshold, tips, and spreads like wildfire.”
In the climate context, that wording might be disquieting in a year when the hectares burned in Canadian wildfires hit a new “magic moment.”
In the Canadian economy, there are a number of negative indicators that could come together to cross a threshold.
Hints of a June slowdown in home sales could be confirmed in Friday’s latest real estate data. A sharp fall in U.S. inflation on Wednesday, new rules to cut risk on mortgage extensions and this week’s announced decline in sales at Aritzia are potential signs that the economy may be reaching a turning point.
Growing signs of a slowdown
“Increased missed payments on products like credit cards and auto loans are a concern,” Rebecca Oakes, vice-president of advanced analytics at Equifax Canada, said in a release of new data last month.
The average interest rate that mortgage holders are paying is still well below what you’d pay if you had to renew now. As each person’s renewal comes due, they will have to take money from their consumer spending to debt repayment.
“The impact of the rate hikes were felt in markets (especially bonds) in real time, but the real economy is only just starting to feel the real effects of the tightening of the credit channel,” Cullen Roche, a well-known U.S. money manager, said in a social media post.
This week, inflation in China — a country blamed for contributing to global price hikes due to its pandemic industrial shutdowns — fell to zero, with producer prices actually shrinking.
On Wednesday the current governor said while there may still be more rate hikes ahead and little chance of interest rate cuts, he’ll watch the economy meeting by meeting in order to be ready for the unexpected.
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.
