Canada is relatively well-positioned following years of economic upheaval but is still at risk of tipping into a “mild recession” or even steeper downturn, according to an assessment by the International Monetary Fund (IMF).
The report released Thursday positions the Canadian economy as an outperformer among its G7 counterparts.
The country has come through the COVID-19 pandemic “relatively well,” thanks in no small part to widespread compliance with public health measures and strong vaccine uptake, the report said.
And while most world economies have been affected by Russia’s war in Ukraine and the resultant disruptions to the global supply chain, Canada’s position as a commodity exporter means it has been “hit less hard” than other countries.
With both fiscal and monetary policy tightening in 2022, the IMF expects Canada’s economy will slow in the years ahead compared with the roaring return from the pandemic recession.
Canadians lacking faith in economy as grocery bills soar
Unemployment is expected to rise to around 6.2 per cent as inflation returns to roughly two per cent by the end of 2024, according to IMF projections, which largely align with forecasts from both the Bank of Canada and the Liberal government.
Finance Minister and Deputy Prime Minister Chrystia Freeland on Thursday pointed to the report as proof-positive that the federal government is ready to navigate stormy economic waters.
“As we contend with the pandemic’s aftershocks, this remarkable economic recovery has allowed us to reinforce Canada’s social safety net without pouring fuel on the fire of inflation. And critically, it means that Canada faces the global economic slowdown from a position of fundamental strength,” she said in a statement.
But the IMF also outlines a series of risks to Canada’s outlook — both external factors and some unique to the Canadian economy — that could push the country into a steeper downturn than forecast.
Home prices at ‘unsustainable heights’ during pandemic
The IMF said the rise in interest rates through 2022 has “triggered a welcome housing correction” after home prices rose to “unsustainable heights during the pandemic.”
The report said the run-up in home prices through the first half of 2021 was “fully explained” by the “historically low” mortgage rates on offer and the growing incomes of most Canadian households during the economic recovery.
With higher rates now cooling the housing market, the IMF expects home prices in Canada to drop 20 per cent or more from their peak to trough before settling.
As of October, the average home sale price in Canada has declined 18 per cent on a seasonally adjusted basis from the peak in February, according to figures from the Canadian Real Estate Association (CREA).
The report states that the financial system is “likely to remain resilient” even as costlier mortgages weigh on Canadian households, but the IMF also flags a need to boost the supply of housing to properly address affordability.
Inflation could prove stickier
The annual inflation rate in Canada eased to 6.9 per cent in October, down from the peak of 8.1 per cent in June but still well above the Bank of Canada’s target of 2.0 per cent.
While the IMF agrees with the central bank’s timeframe for returning inflation levels to target within two years’ time, the job “could prove more challenging than expected,” the report states.
If inflation stays higher than baseline past 2024, or if expectations de-anchor and the Bank of Canada is forced to push its policy rate even higher to keep consumer and business confidence in its mandate, the economy could slow more than currently anticipated.
“This would result in slower growth as well as a faster housing correction,” the IMF report reads.
Further spillover from Russia’s war and other global risks
Continued commodity price volatility adds to the uncertainty of the war’s impact, and the possible need for additional sanctions on Russia could hurt Canadian trade prospects, the IMF said.
Broader conflicts like this and a reduction in international co-operation threaten to fracture the existing global financial system, the IMF notes.
Canada should continue to push its co-operative approaches on the world stage, the fund argues, through multilateral trade agreements and joint efforts for climate change mitigation.
Other threats to Canada’s outlook include additional COVID-19 outbreaks in less vaccinated countries and the risk of cyberattacks compromising physical or digital infrastructure.
US inflation and consumer spending cooled in December – Al Jazeera English
The Federal Reserve’s preferred inflation gauge eased further in December, and consumer spending fell – the latest evidence that the Fed’s series of interest rate rises are slowing the economy.
Friday’s report from the US Department of Commerce showed that prices rose 5 percent last month from a year earlier, down from a 5.5 percent year-over-year increase in November. It was the third straight drop.
Consumer spending fell 0.2 percent from November to December and was revised lower to show a drop of 0.1 percent from October to November. Last year’s holiday sales were sluggish for many retailers, and the overall spending figures for the final two months of 2022 were the weakest in two years.
The pullback in consumer spending will likely be welcomed by Fed officials, who are seeking to cool the economy by making lending increasingly expensive. A slower pace of spending could boost their confidence that inflation is steadily easing. Still, the decline in year-over-year inflation matched the Fed’s outlook and is not likely to alter expectations that it will raise its key rate by a quarter-point next week.
On a monthly basis, inflation ticked up just 0.1 percent from November to December for a second straight month. Energy prices plunged 5.1 percent, and the overall cost of goods also fell.
“Core” prices, which exclude volatile food and energy costs, rose 0.3 percent from November to December and 4.4 percent from a year earlier. The year-over-year figure was down from 4.7 percent in November, though still well above the Fed’s 2 percent target.
Falling prices for oil, gas, copper, lumber, wheat and other commodities, along with the unclogging of supply chains, have helped slow the retail costs of cars, furniture and clothes, among other items.
Price increases, though, have remained persistently high for some goods and services, including eggs, which skyrocketed 60 percent last month compared with a year ago. Egg prices rose 11.1 percent just in December, inflated by an outbreak of avian flu that has led to a culling of herds and higher feed costs.
Car rental prices have also soared nearly 27 percent from a year ago and rose 1.6 percent just in December.
But for many other items, inflation is easing. Coffee prices, though up nearly 14 percent in the past year, rose just 0.2 percent last month. And the cost of clothes and shoes rose just 3 percent in the past year and 0.3 percent last month.
Friday’s figures are separate from the better-known inflation data that comes from the consumer price index. The CPI, which was released earlier this month, has also shown a steady deceleration.
“The latest data offer the first tangible signs that the economy’s main engine is slowing,” said Oren Klachkin, lead US economist at Oxford Economics, referring to consumers, whose spending accounts for about 70 percent of economic activity.
The Fed has been seeking to slow spending, growth and the surging prices that have bedevilled the nation for nearly two years. Its key rate, which affects many consumer and business loans, is now in a range of 4.25 percent to 4.5 percent, up from near zero last March. Though inflation has been decelerating, most economists said they think the Fed’s harsh medicine will tip the economy into a recession sometime this year.
“We continue to see the US economy experiencing a mild recession this year,” said Lydia Boussour, senior economist at EY Parthenon.
Low levels of unemployment
A recession typically causes widespread layoffs and higher unemployment. But for now, US employers are adding workers, and the unemployment rate remains at a half-century low of 3.5 percent.
Should job losses, which are occurring at many finance and tech companies, drive up unemployment, a recession could eventually be declared by a group of economists at the National Bureau of Economic Research, a nonprofit that officially determines when recessions occur. The economists at the NBER typically make such an announcement well after a recession has actually begun.
For now, the number of people seeking unemployment benefits – a proxy for layoffs – declined last week to 186,000, a very low level historically. And Walmart, the nation’s largest employer, said it would raise its minimum wage, from $12 to $14 an hour, to help it keep and attract workers.
The Fed is in an increasingly delicate position. Chairman Jerome Powell has emphasised that the central bank planned to keep boosting its key rate and to keep it elevated, potentially until the end of the year. Yet that policy may become untenable if a sharp recession takes hold.
On Thursday, the government reported that the economy grew at a healthy clip in the final three months of last year but with much of the expansion driven by one-time factors: Companies restocked their depleted inventories as supply chain snarls unravelled, and the nation’s trade deficit shrank.
By contrast, consumer spending in the October-December quarter as a whole weakened from the previous quarter, and business investment dropped off sharply. Overall, the economy expanded at a 2.9 percent annual rate in the October-December quarter, down slightly from a 3.2 percent pace in the previous quarter.
If consumers remain less willing to boost their spending, companies’ profit margins will shrink, and many may cut expenses. That trend could lead eventually to waves of layoffs. Economists at Bank of America have forecast that the economy will grow slightly in the first three months of this year – but then shrink in the following three quarters.
More frugal consumers would threaten to send the economy into a recession. But they can also help reduce inflation. Companies cannot keep raising prices if Americans will not pay the higher prices.
Last week, the Federal Reserve’s beige book, a gathering of anecdotal reports from businesses around the country, said, “Many retailers noted increased difficulty in passing through cost increases, suggesting greater price sensitivity on the part of consumers.”
Your Weekend Reading: Nobody Knows Where the US Economy Will Land – Bloomberg
The US Economy Slows Down
The Federal Reserve must be pleased with the top-line numbers in Thursday’s fourth-quarter GDP report, which showed the U.S. economy grew by a solid 2.9% while its preferred price index slowed to 3.2%. But drill down, and the economy looks to be losing momentum.
Maybe the best news from the report is that consumer spending continued to increase at a steady 2.1% and contributed about half of the GDP growth. It appears that rising interest rates haven’t yet caused consumers to pull back, though the December retail sales report showed a sharp drop in spending and could augur a slowdown.
The shift in spending toward services that began as lockdowns eased continued. Services contributed 1.16% to the consumption increase, with motor vehicle and parts chipping in 0.20%. End-of-year discounts may have moved forward purchases, and auto analysts are forecasting weak growth this year.
Businesses also restocked inventories as supply chains eased, which accounted for 1.46% of the GDP growth. Net exports also added 0.56%. But neither is likely to be sustained going forward. The other big lift to GDP came from government spending, which increased 3.7% and contributed 0.64%. Most of this was transfer payments and salaries rather than defense or public works.
The biggest cause for concern was the 6.7% fall in fixed private investment. Much of that was housing (-26.7%), owing to the sharp increase in interest rates. What the Fed giveth, it now taketh away. Capital expenditures also fell 3.7%, which signals that businesses are getting nervous and spending less on equipment that can boost worker productivity.
Intellectual property investment is holding up better, but research and development declined last quarter. One culprit may be last year’s expiration of the immediate expensing for R&D. The pullback in business investment amid higher interest rates and economic uncertainty has been evident in the ISM purchasing managers index for some time.
The economy can’t live on consumption alone, and the sharp decline in the savings rate—2.9% in the fourth quarter compared to 7.3% a year earlier—suggests that consumers may be running up credit cards to make ends meet or take the vacation they couldn’t during the pandemic. But as savings decline, so may consumer spending.
Perhaps the best news for the Fed is that real disposable personal income grew 3.3% as the personal consumption expenditure price index eased to 3.2%, down from 4.3% in the third quarter and 7.5% in the first. This suggests that its monetary medicine may be starting to work, and it might not have to raise interest rates as high as some expected a few months ago.
Recent job and unemployment claim reports also indicate that the labor market is holding up well, even as many large companies announce layoffs. Small businesses are still hiring, and China’s abandonment of zero-Covid policies will help global growth.
The biggest risks to the U.S. economy other than higher interest rates this year are probably the tax increases in the Inflation Reduction Act and a regulatory onslaught that are compounding business uncertainty. President Biden has a growing economy, and let’s hope he can keep it.
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