As if Great Depression-size job losses and a cartoonish contraction in the nation’s economic output weren’t enough, analysts are starting to fret over a new risk from the coronavirus pandemic: deflation.
Deflation, or a sustained period of falling prices, may sound like a good thing: Goods and services cost less, saving consumers money. But deflation prompts shoppers to put off purchases on the expectation that prices will fall further if they wait. That can lead to a toxic cycle in which lower spending prompts businesses to cut wages, further pushing down consumer purchases and prices.
Deflation also can make it harder to repay mortgages and other debt, which become costlier in inflation-adjusted terms.
The economy can get stuck in a rut, similar to the “lost decade” that battered Japan in the 1990s.
Economists similarly worried about deflation during the Great Recession of 2007-09. But while average annual price increases dipped below 1% in 2010, they never declined. The current recession, however, has featured a more abrupt and dramatic blow to the economy.
“I think the risk of the U.S. falling into a deflationary trap is higher now than at any time during the Great Recession,” says economist Ryan Sweet of Moody’s Analytics.
The U.S. is not now experiencing deflation. Sure, oil prices have cratered to historically low levels and gasoline prices are slowly following them down. But when assessing deflation, economists generally put aside food and energy costs, which are highly volatile and likely to recover from near-term ups and downs.
A measure of prices excluding food and energy costs that the Federal Reserve watches closely – known as the core personal consumption expenditures (PCE) price index — rose 1.7% annually in March, below the Fed’s 2% target but nothing close to a yearly decline. Yet the shutdown of much of the nation’s economy to contain the coronavirus – along with more than 20 million related layoffs – has hammered consumer demand.
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In response, airlines already have slashed ticket prices. Hotels are expected to follow suit, Morgan Stanley wrote in a research note. In March, apparel prices were down 1.6% annually and new vehicle prices fell 0.4%.
Perhaps a bigger concern is that the sudden drop in consumer spending, amplified by the layoffs, has hammered business revenues, forcing many companies to lower wages at least temporarily, says Barclays economist Blerina Uruci.
A myriad of companies have announced executive pay cuts, including Delta, Marriott, Macy’s, Bed Bath and Beyond, Nordstrom and Macy’s.
Many small businesses are also reducing wages for low- and midlevel workers as sales have plummeted. Creative Noggin, a marketing company in Boerne, Texas, has trimmed salaries across the board by 20% to 30% rather than lay off any of its 14 employees, says CEO Tracy Marlowe.
Lower wages can further dampen consumer spending, forcing additional price cuts, Uruci says. Reduced pay, she says, also gives business more room to lower prices and maintain at least modest profits.
During the Great Recession, by contrast, most businesses didn’t cut wages despite unemployment that hit 10% because they didn’t want to lose their most skilled employees, Uruci says.
Barclays expects the rise in the core PCE index to average 0.6% from the third quarter of 2020 through the first quarter of next year. That’s a meager price rise but it’s not deflation. And Sweet says he would need to see price drops persist for more than six months to label the episode deflation.
Morgan Stanley says certain bonds that hedge against inflation are implying a 55% risk of deflation over the next two years, but the research firm says the market is far overstating the chances.
The Fed is doing its part to head off deflation by making clear it will do what it must to spur stronger demand and higher prices by lowering borrowing costs.
“As long as inflation expectations remain anchored, then we shouldn’t see deflation,” Fed Chair Jerome Powell said at a news conference last week. “Needless to say, we’ll be keeping very close track of that.”
But with inflation expected to fall to such low levels in coming months, it wouldn’t take much to push the economy into a deflationary spiral, Sweet says. After all, long-term forces such as discounted online shopping and the more globally-connected economy have been keeping inflation below the Fed’s target for years.
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Now, many states have started to allow shuttered business to reopen and a solid recovery is expected by summer, assuming the outbreak eases substantially by then. But if that doesn’t happen, or if the virus returns to a significant extent in the fall or winter, that could halt the rebound and increase the chances of deflation, Sweet says.
“We can’t afford anything else going wrong,” he says.
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.