TORONTO, July 27 (Reuters) – The Bank of Canada’s pledge to let the economy run hot could be tested by inflation that’s already at a decade-high level, with more price increases expected as businesses shuttered during the COVID-19 pandemic reopen and consumers dip into record savings.
The Canadian central bank says the current inflation pressures are due to temporary factors, such as supply constraints and the comparison to prices from a year ago, when the economy was reeling from the pandemic, and that inflation will ease back to its 2% target by 2022. read more
It has signaled that its benchmark interest rate will be kept at a record low of 0.25% until at least the second half of 2022, planning for demand to temporarily exceed supply in an effort to boost employment more than in past economic recoveries.
But some economists worry that Canada’s inflation, which was 3.6% on an annual basis in May, could be more stubborn than expected, particularly because parts of the services sector, which accounts for about 70% of the economy, are only just reopening.
If inflation lingers it could raise expectations for price increases. That’s a situation that tends to be a game changer for central banks because actual inflation is linked to what people expect it to be.
For instance, businesses and households often take into account the expected rate of inflation in wage negotiations and the setting of goods prices, as happened in the 1970s and early 1980s when inflation soared in Canada.
“If you get a little more persistence (on inflation), especially in the early part of 2022, maybe things aren’t quite as transitory as people think,” said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets.
The Bank of Canada “runs the risk that expectations change and they run afoul of their target,” Reitzes added.
Consumers’ expectations for inflation one year from now have already climbed above 3% and inflation expectations among firms have climbed to a near-record high, BoC surveys showed this month.
Updated weights to the basket of goods and services in the Consumer Price Index, representing consumer spending patterns during the coronavirus pandemic, could give another bump to inflation. The new weights are due to be reflected in the June inflation report on Wednesday. read more
‘UPSIDE RISKS’
Meanwhile, a significant decrease in COVID-19 infections in Canada in recent months has led to reduced restrictions on travel, hospitality and other high-contact services. About 71% of the country’s population has been vaccinated, a Reuters tally shows. read more
Pent-up demand for some services and difficulties hiring workers, after border closures stalled the flow of immigrants, could drive a fresh wave of price hikes, including for airline tickets, hotel accommodation and personal services.
Some of those increases are already playing out in the United States, which is further along in its reopening than Canada. read more
“In those hard-hit services sectors, it is really going to be a question of whether supply can keep up with demand,” said Josh Nye, senior economist at Royal Bank of Canada.
Another consideration is the unprecedented savings accumulated by Canadians during the pandemic due to government support and reduced spending. In 2020, the BoC estimates the extra savings worked out to C$5,800 ($4,613) on average per person.
“There are some upside risks to the consumer spending forecast, depending on how much of that excess savings is deployed and how quickly,” Nye said.
“If that creates such strong demand that businesses in the services sector can’t keep up, then we could see even stronger inflation.”
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.
