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If you thought 2022 was bad, wait until you see what 2023 has in store for the economy

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For many Canadians, 2022 was a tough year as interest rates climbed, inflation soared and the economy slowed. Unfortunately, 2023 doesn’t look like it will provide much respite.

Analysts say a recession is looming and unemployment is expected to rise, all while prices remain high and interest rates bite into our purchasing power.

“We could be in store for a bit of a doozy [of a year],” said Royce Mendes, the managing director at Desjardins Capital Markets.

He says 2022 was dominated by rising prices and a rapid increase in borrowing costs. Inflation peaked this summer at 8.1 per cent on an annualized basis. The Bank of Canada’s key lending rate started the year at 0.25 per cent. Seven straight rate hikes have left borrowing costs four full percentage points higher.

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Mendes says that sets up a difficult year ahead.


Last year “was a transition to an environment of higher prices and an environment of higher interest rates,” he told CBC News, adding that 2023 “will be a year where we have to live with it for a full year.”

Inflation will continue to dominate 2023

Even seasoned forecasters have found this a tricky period to navigate. The economy is awash in contradictions and the data are quite noisy.

“I’m coming up on my 10th anniversary as chief economist. I would say 2020 was the weirdest [year],” said BMO’s chief economist Douglas Porter. “But this [year’s] is a very odd cycle.”

He points to the end of the pandemic-related restrictions that weighed on the economy, the sharp rise in prices and the continued strength of the labour market as just a few of the countervailing forces at play.

A man stands on stage in front of floor-to-ceiling drapes.
Bank of Canada governor Tiff Macklem raised interest rates seven times in 2022. Here, he speaks during a lunch by the Business Council of British Columbia in downtown Vancouver on Dec. 12, 2022. (Jonathan Hayward/The Canadian Press)

Looking ahead, he says inflation will continue to dominate the economic story of 2023. BMO’s forecasts show inflation will remain stubbornly high, especially through the first half of the year.

He’s predicting the Bank of Canada has one more rate hike in store in January and will then hold rates at 4.5 per cent through the rest of 2023.

All that will continue to weigh on growth. And Porter says that phenomenon is not unique to Canada’s economy.

“I think the global economy as a whole will struggle to see much growth this year. We think the U.S. economy will essentially be flat in the coming years. So, exports are going to face a little bit of a challenge as well,” Porter told CBC News.

Recession forecast

Most private sector forecasts in Canada now assume there will be some kind of a recession in early 2023. Those forecasts assume that it will be short and mild.

But it doesn’t take much to nudge a short and shallow recession into something much worse. In fact, researchers at Oxford Economics believe Canada has already slipped into a recession.

“Canada has likely just entered a moderate recession that will last for much of 2023,” Tony Stillo, Oxford’s director of Canada economics, wrote in a note to clients. “Prevailing household debt and housing imbalances will mix with pandemic and geopolitical forces to make Canada’s recession deeper than most advanced economies.”

Whether you look at private sector forecasts like Oxford’s, or global outlooks from the International Monetary Fund and the Organisation for Economic Co-operation and Development, the emerging picture of 2023 is grim.

“There’s not a lot of positive stories for 2023, so it’s pretty easy to be pessimistic,” said Stephen Tapp, the chief economist at the Canadian Chamber of Commerce.

Tapp says there are plenty of risks to the downside. He says many Canadian companies took on debt during the darkest days of the pandemic and have now seen their debt payments skyrocket as interest rates rose.

 

Bank of Canada governor explains how far he’s willing to go to get inflation under control

In a wide-ranging interview, Bank of Canada governor Tiff Macklem says Canadians should expect more interest rate hikes, and a mild recession is possible, as the central bank continues its fight against inflation.

He also says the end of China’s zero-COVID policies can upset otherwise healing global supply chains.

But, Tapp agrees with most others, that inflation and interest rates will be the driving force in the economic landscape. And he says in spite of all the pessimism, he can see a path to economic recovery.

“If central banks are winning the war on inflation. If stubbornly high inflation starts to come down faster than markets have priced in, that’s going to be good news and markets could rally, confidence could come up and inflation expectations could anchor faster,” Tapp said.

Should bounce back

That could lead to a faster bounce back in economic growth. And eventually, it would open the door to a reduction in borrowing costs.

A recession has proven to be a pretty effective tool to bring down prices. When the economy shrinks, people don’t buy as much stuff. When they don’t buy as much stuff, prices begin to fall and rebalance with demand.

It can be a painful process, especially when that contraction sweeps into your particular corner of the economy. But, Mendes says that painful part of the process shouldn’t last very long.

“While it won’t be a pleasant year, it will be a year in which hopefully there is meaningful progress made in reattaining the ultimate goal of low and stable inflation.”

In a lot of ways, 2023 will be a mirror image of 2022. Last year started out strong and ended weak and steeped in pessimism. 2023 will begin weak and should end strong.

By this time next year, the economy should have rebounded, inflation should have come under control and there should be a healthy dose of optimism that the Bank of Canada is getting ready to cut interest rates again.

But that’s probably more “shoulds” than most Canadians are comfortable with.

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Economy

Britain's economy went into recession last year, official figures confirm – The Globe and Mail

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People walk over London Bridge, in London, on Oct. 25, 2023.SUSANNAH IRELAND/Reuters

Britain’s economy entered a shallow recession last year, official figures confirmed on Thursday, leaving Prime Minister Rishi Sunak with a challenge to reassure voters that the economy is safe with him before an election expected later this year.

Gross domestic product shrank by 0.1 per cent in the third quarter and by 0.3 per cent in the fourth, unchanged from preliminary estimates, the Office for National Statistics (ONS) said on Thursday.

The figures will be disappointing for Mr. Sunak, who has been accused by the opposition Labour Party – far ahead in opinion polls – of overseeing “Rishi’s recession.”

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“The weak starting point for GDP this year means calendar-year growth in 2024 is likely to be limited to less than 1 per cent,” said Martin Beck, chief economic adviser at EY ITEM Club.

“However, an acceleration in momentum this year remains on the cards.”

Britain’s economy has shown signs of starting 2024 on a stronger footing, with monthly GDP growth of 0.2 per cent in January, and unofficial surveys suggesting growth continued in February and March.

Tax cuts announced by finance minister Jeremy Hunt and expectations of interest-rate cuts are likely to help the economy in 2024.

However, Britain remains one of the slowest countries to recover from the effects of the COVID-19 pandemic. At the end of last year, its economy was just 1 per cent bigger than in late 2019, with only Germany faring worse among Group of Seven nations.

The economy grew just 0.1 per cent in all of 2023, its weakest performance since 2009, excluding the peak-pandemic year of 2020.

GDP per person, which has not grown since early 2022, fell by 0.6 per cent in the fourth quarter and 0.7 per cent across 2023.

Sterling was little changed against the dollar and the euro after the data release.

The Bank of England (BOE) has said inflation is moving toward the point where it can start cutting rates. It expects the economy to grow by just 0.25 per cent this year, although official budget forecasters expect a 0.8-per-cent expansion.

BOE policy maker Jonathan Haskel said in an interview reported in Thursday’s Financial Times that rate cuts were “a long way off,” despite dropping his advocacy of a rise at last week’s meeting.

Thursday’s figures from the ONS also showed 0.7 per cent growth in households’ real disposable income, flat in the previous quarter.

Thomas Pugh, an economist at consulting firm RSM, said the increase could prompt consumers to increase their spending and support the economy.

“Consumer confidence has been improving gradually over the last year … as the impact of rising real wages filters through into people’s pockets, even though consumers remain cautious overall,” Mr. Pugh said.

Britain’s current account deficit totalled £21.18-billion ($36.21-billion) in the fourth quarter, slightly narrower than a forecast of £21.4-billion ($36.6-billion) shortfall in a Reuters poll of economists, and equivalent to 3.1 per cent of GDP, up from 2.7 per cent in the third quarter.

The underlying current account deficit, which strips out volatile trade in precious metals, expanded to 3.9 per cent of GDP.

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How will a shrinking population affect the global economy? – Al Jazeera English

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Falling fertility rates could bring about a transformational demographic shift over the next 25 years.

It has been described as a demographic catastrophe.

The Lancet medical journal warns that a majority of countries do not have a high enough fertility rate to sustain their population size by the end of the century.

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The rate of the decline is uneven, with some developing nations seeing a baby boom.

The shift could have far-reaching social and economic impacts.

Enormous population growth since the industrial revolution has put enormous pressure on the planet’s limited resources.

So, how does the drop in births affect the economy?

And regulators in the United States and the European Union crack down on tech monopolies.

The gender gap in tech narrows.

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John Ivison: Canada's economy desperately needs shock treatment after this Liberal government – National Post

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Lack of business investment is the main culprit. Canadians are digging holes with shovels while our competitors are buying excavators

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It speaks to the seriousness of the situation that the Bank of Canada is not so much taking the gloves off as slipping lead into them.

Senior deputy governor, Carolyn Rogers, came as close to wading into the political arena as any senior deputy governor of the central bank probably should in her speech in Halifax this week.

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But she was right to sound the alarm about a subject — Canada’s waning productivity — on which the federal government’s performance has been lacklustre at best.

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Productivity has fallen in six consecutive quarters and is now on a par with where it was seven years ago.

Lack of business investment is the main culprit.

In essence, Canadians are digging holes with shovels while many of our competitors are buying excavators.

“You’ve seen those signs that say, ‘in emergency, break glass.’ Well, it’s time to break the glass,” Rogers said.

She was explicit that government policy is partly to blame, pointing out that businesses need more certainty to invest with confidence. Government incentives and regulatory approaches that change year to year do not inspire confidence, she said.

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The government’s most recent contribution to the competitiveness file — Bill C-56, which made a number of competition-related changes — is a case in point. It was aimed at cracking down on “abusive practices” in the grocery industry that no one, including the bank in its own study, has been able to substantiate. Rather than encouraging investment, it added a political actor — the minister of industry — to the market review process. The Business Council of Canada called the move “capricious,” which was Rogers’s point.

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While blatant price-fixing is rare, the lack of investment is a product of the paucity of competition in many sectors, where Canadian companies protected from foreign competition are sitting on fat profit margins and don’t feel compelled to invest to make their operations more efficient. “Competition can make the whole economy more productive,” said Rogers.

The Conservatives now look set to make this an election issue. Ontario MP Ryan Williams has just released a slick 13-minute video that makes clear his party intends to act in this area.

Using the Monopoly board game as a prop, Williams, the party’s critic for pan-Canadian trade and competition, claims that in every sector, monopolies and oligopolies reign supreme, resulting in lower investment, lower productivity, higher prices, worse service, lower wages and more wealth inequality.

(As an aside, it was a marked improvement on last year’s “Justinflation” rap video.)

Williams said that Canadians pay among the highest cell phone prices in the world and that Rogers, Telus and Bell are the priciest carriers, bar none. The claim has some foundation: in a recent Cable.co.uk global league table that compared the average price of one gigabyte, Canada was ranked 216th of 237 countries at US$5.37 (noticeably, the U.S. was ranked even more expensive at US$6).

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Williams noted that two airlines control 80 per cent of the market, even though Air Canada was ranked dead last of all North American airlines for timeliness.

He pointed out that six banks control 87 per cent of Canada’s mortgage market, while five grocery stores — Sobeys, Metro, Loblaw, Walmart and Costco — command a similar dominance of the grocery market.

“Competition is dying in Canada,” Williams said. “The federal government has made things worse by over-regulating airlines, banks and telecoms to actually protect monopolies and keep new players out.”

So far, so good.

The Conservatives will “bring back home a capitalist economy” — a market that does not protect monopolies and creates more competition, in the form of Canadian companies that will provide new supply and better prices.

That sounds great. But at the same time, the Conservative formula for fixing things appears to involve more government intervention, not less.

Williams pointed out the Conservatives opposed RBC buying HSBC’s Canadian operations, WestJet buying Sunwing and Rogers buying Shaw. The party would oppose monopolies from buying up the competition, he said.

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The real solution is to let the market do its work to bring prices down. But that is a more complicated process than Williams lets on.

Back in 2007, when Research in Motion was Canada’s most valuable company, the Harper government appointed a panel of experts, led by former Nortel chair Lynton “Red” Wilson, to address concerns that the corporate sector was being “hollowed out” by foreign takeovers, following the sale of giants Alcan, Dofasco and Inco.

The “Compete to Win” report that came out in June 2008 found that the number of foreign-owned firms had remained relatively unchanged, but recommended 65 changes to make Canada more competitive.

The Harper government acted on the least-contentious suggestions: lowering corporate taxes, harmonizing sales taxes with a number of provinces and making immigration more responsive to labour markets.

But it did not end up liberalizing the banking, broadcasting, aviation or telecom markets, as the report suggested (ironically, it was a Liberal transport minister, Marc Garneau, who raised foreign ownership levels of air carriers to 49 per cent from 25 per cent in 2018).

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The point is, Canada has a competition problem but solving it requires taking on vested interests. Conservative Leader Pierre Poilievre has indicated he is willing to do that, calling corporate lobbyists “utterly useless” and saying he will focus on Canadian workers, not corporate interests.

“My daily obsession will be about what is good for the working-class people in this country,” he said in Vancouver earlier this month.

Even opening up sectors to foreign competition is no guarantee that investors will come. There are no foreign ownership restrictions in the grocery market (in addition to the five supermarkets listed above, there is Amazon-owned Whole Foods). When the Competition Bureau concluded last year that there was a “modest but meaningful” increase in food prices, it recommended Ottawa encourage a foreign-owned player to enter the Canadian market. It was a recommendation adopted by Industry Minister Francois-Philippe Champagne, to no avail thus far.

But it is clear from the Bank’s warning that the Canadian economy requires some shock treatment.

Robert Scrivener, the chairman of Bell and Northern Telecom in the 1970s, called Canada a nation of overprotected underachievers. That is even more true now than it was back then.

It’s time to break the glass.

jivison@criffel.ca

Get even more deep-dive National Post political coverage and analysis in your inbox with the Political Hack newsletter, where Ottawa bureau chief Stuart Thomson and political analyst Tasha Kheiriddin get at what’s really going on behind the scenes on Parliament Hill every Wednesday and Friday, exclusively for subscribers. Sign up here.

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