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Kevin Carmichael: Jobs numbers show Bank of Canada hasn’t wrecked the economy after all

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What if the Bank of Canada knows what it’s doing?

Inflation is hovering around seven per cent, and the central bank’s target is two per cent, so the easy answer is, “No, it doesn’t have a clue what it’s doing.”

The news this week that the Bank of Canada lost money for the first time in its 87-year history only adds to the superficial notion that appointing Tiff Macklem to guide monetary policy was a mistake, even if the losses were incurred fighting a crisis that was unlike anything any living policymaker had ever seen.

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“We didn’t get everything right,” Macklem told the House finance committee on Nov. 23. “We got a lot of things right. We have some lessons to learn.”

The inflation miss was a serious mistake that warrants deeper scrutiny in case there are things that can be learned that will keep it from happening again. Macklem told lawmakers that as soon as inflation is back to target, “we are going to have to have a thorough review of how all our tools worked” through the COVID crisis.

When the Bank of Canada gets around to that review, it will turn up positives that are obvious to anyone who bothers to look, but end up obscured by the panic over inflation. The latest evidence that the Bank of Canada hasn’t wrecked the economy arrived Dec. 2, when Statistics Canada reported that hiring was little changed in November, and the jobless rate dropped to 5.1 per cent, a possible sign that higher interest rates might be taking the steam out of the economy without severely hurting momentum.

Job seekers attend a job fair in Calgary last month.
Job seekers attend a job fair in Calgary last month. Photo by Jim Wells/Postmedia

The dollar fell against the U.S. currency after the numbers were released, so some traders saw the news as a negative that would cause the Bank of Canada to balk at additional interest-rate increases. It’s possible. Macklem was clear at the finance committee that he isn’t finished, but Bay Street and Wall Street are split on whether that means more outsized interest-rate increases, or whether the Bank of Canada might be ready to taper its aggression, given its own forecasts show the economy could easily slide into a recession at any point over the next few months.

Statistics Canada said employers added 10,000 positions last month, less than the survey’s margin of error, making it difficult to say more than the labour market stood still. However, the agency’s monthly survey of households turned up 108,000 positions in October, an unusually large number, so hiring flatlined at a high level in November.

The jobless rate remains well inside any conventional definition of full employment, which is how economists describe an economy in which there are quantitatively enough jobs for everyone who wants one. Full-time employment increased by about 51,000 positions in November, and have increased by some 460,000 positions since November 2021, another sign of a strong labour market.

“It’s quite clear that the labour market remains tight and in solid shape overall,” Douglas Porter, chief economist at Bank of Montreal, said in a note to his clients.

Average hourly wages increased 5.6 per cent from November 2021, the sixth consecutive month that pay gains topped five per cent, a sign of upward inflationary pressure that the Bank of Canada has said it will be watching closely. Porter said the “still firm” pace of pay increases could leave Macklem uneasy about inflation heading into next week’s interest-rate decision, and re-upped his prediction that policymakers will opt to raise the benchmark rate another half point, which would put the target at 4.25 per cent.

The Bank of Canada’s benchmark rate was 0.25 per cent in March, and the possibility of an increase of four percentage points in less than a year will startle those who worried that a decade of ultra-low interest rates would make households and executives supersensitive to higher borrowing costs.

That worry could still be valid. Indeed, after getting beaten up earlier in the year for letting inflation get out of control, the Bank of Canada now regularly faces invective for causing a recession that hasn’t yet happened.

Earlier this week, Statistics Canada reported that gross domestic product grew at an annual rate of 2.9 per cent in the third quarter, much faster than most forecasts. The GDP numbers, paired with the ongoing strength of the labour market, supports Macklem’s bet that it is better to attack inflation now, when the economy is strong, rather than proceed tentatively, discover inflation is persistent, and end up having to raise interest rates when the economy is weaker. It might even be time to resume talking about a “soft landing,” which is how Bay Street talks about the possibility that an inflationary economy can be slowed without crashing into a bad recession.

“We’re entering 2023 at least in better shape than we have seen in many other moments in the past where we’re entering a slowdown or a recession,” Guy Cormier, chief executive of Desjardins Group, told the Financial Post’s Barbara Shecter this week, observing that there is “still money” in the personal and business accounts of the financial institution’s clients. “Yes, there will be a slowdown, but we feel that there are some positive conditions that could unfold in the next six, seven months.”

Here’s another positive: Statistics Canada reported that the employment rate of women aged 25 to 54 rose to 81.6 per cent in November, a record that further narrowed the gap with men. One of the goals of the Bank of Canada’s assault on the COVID crisis was to keep traditionally marginalized groups from getting left behind, betting that would create the foundation for a sturdier recovery.

Macklem’s not wrong when he ways the central bank got a lot of things right.

• Email: kcarmichael@postmedia.com | Twitter: carmichaelkevin

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Chile Economy Posts Weaker-Than-Expected Growth at End of 2023 – BNN Bloomberg

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(Bloomberg) — Chile’s economy unexpectedly posted a full-year gain for 2023 as upward revisions offset a weak fourth quarter, when a drop in mining compounded the drag from high interest rates and uneven demand.

Gross domestic product rose 0.1% in the October-December period compared with the prior three months, less than the 0.2% median estimate from analysts in a Bloomberg survey, according to the central bank. Revisions to third-quarter growth however meant the economy expanded 0.2% last year, outperforming the median forecast of economists polled by Bloomberg for a drop of 0.1%. 

The report represents mixed news for President Gabriel Boric who is trying to turn the page on last year’s weak growth caused by factors including the highest interest rate in over two decades and subdued confidence. Signs including rising energy consumption and a recent increase in retail sales indicate the economy may be turning the corner. Analysts surveyed by Bloomberg see Chile expanding faster than the Latin American average in 2024.

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What Bloomberg Economics Says

“Chile’s fourth-quarter GDP data showed weak growth and falling domestic demand — below central bank forecasts and consistent with a widening negative output gap. The print supports the central bank’s quick rate cuts and dovish tone late last year and early in 2024. Leading indicators this year point to a strong rebound in 1Q, with activity rising above central bank projections.”

— Felipe Hernandez, Latin America economist

— Click here for full report

Mining output dropped 2.9% in the fourth quarter compared with the prior three-month period, the central bank reported. The rest of the economy rose 0.6%.

Growth prospects are getting a boost from the central bank’s interest rate reductions, which have shaved 400 points from borrowing costs since late July. Annual inflation is seen slowing toward the 3% target in coming months.

Read more: Chile Rate Cut Bets Shift Again With Smaller Reduction Now Seen

Chile’s government is more optimistic than many private-sector economists in expecting GDP to expand 2.5% in 2024. A recovery in growth will help improve the business environment as the government lures investments in sectors such as lithium, Economy Minister Nicolas Grau said in a March 14 interview. 

Still, the administration has made little headway on key reforms, prolonging doubts for investors over possible tax and pension changes.

For millions of common citizens, the real economy remains stuck. There are so many apartments sitting empty in Chile that the government is considering stepping in to buy some, and unemployment is running at 8.4%, well above the pre-pandemic levels near 7%.

Read more: Homes That Buyers Won’t Touch Show Deepening Crisis in Chile 

–With assistance from Giovanna Serafim.

(Updates with economist quotes in fourth paragraph)

©2024 Bloomberg L.P.

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Bank of Canada walking a ‘tightrope’ as analysts forecast inflation jump in February

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Economists expect inflation reaccelerated to 3.1% in February

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People banking on an interest rate cut may not like the direction Canadian inflation is heading if analyst expectations prove correct.

Bloomberg analysts expect inflation to reaccelerate to 3.1 per cent in February when Statistics Canada releases its latest consumer price index (CPI) data on Tuesday, following a slowdown to 2.9 per cent year over year in January.

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Article contentCPI core-trim and core-median, the measures the Bank of Canada is most focused on, are forecast to come in unchanged from the previous month at 3.3 per cent and 3.4 per cent, respectively.

Policymakers made it clear when they held interest rates on March 6 that inflation remained too widespread and persistent for them to begin cutting.

Here’s what economists are saying about tomorrow’s inflation numbers and what they mean for interest rates.

‘Can’t afford missteps’: Desjardins Financial

The Bank of Canada’s preferred measures “have become biased,” Royce Mendes, managing director and head of macro strategy, and Tiago Figueiredo, macro strategist, at Desjardins Financial, said in a note on March 18, “likely overestimating the true underlying inflation rate.”

They estimated the central bank’s preferred measures of core-trim and core-median inflation are overemphasizing items in the CPI basket of goods whose prices are rising more than five per cent. After adjusting for the “biases,” they estimate the bank’s measures are more in the neighbourhood of three per cent — which is at the top of the bank’s inflation target range of one to three per cent.

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Article content“If the Bank of Canada ignores our findings, officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses,” they said.

Markets have significantly scaled back their rate-cut expectations based on the central bank’s previous comments. Royce and Figueiredo are now calling for a first cut in June and three cuts of 25 basis points for the year.

“Given the tightrope Canadian central bankers are walking, they can’t afford any missteps,” they said.

‘Inflict too much damage’: National Bank

The danger exists that interest rates could end up hurting Canada’s economy more than intended, Matthieu Arseneau, Jocelyn Paquet and Daren King, economists at National Bank of Canada, said in a note.

“As the Bank of Canada’s latest communications have focused on inflation resilience rather than signs of weak growth, there is a risk that it will inflict too much damage on the economy by maintaining an overly restrictive monetary policy,” they said.

They argue there is already plenty of evidence pointing to the economy’s decline, including slowing gross domestic product per capita, which has fallen for six straight quarters. The jobs market is also on the fritz with the private sector having generated almost no new positions since June 2023, they added.

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Article content“Moreover, business survey data do not point to any improvement in this area over the next few months, with a significant proportion of companies reporting falling sales and a return to normal in the proportion of companies experiencing labour shortages,” the economists said.

Despite all these signs of weakness, inflation is stalling, they said, adding it is being overly influenced by historic population growth and the impact of housing and mortgage-interest costs.

The trio expect very tepid growth for 2024 of 0.3 per cent.

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  1. Canada's economy created 41,000 jobs in February, all of them full time, said Statistics Canada.Economists on the February jobs data 
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Rising gas prices: RBC Economics

Higher energy prices likely boosted the main year-over-year inflation figure to 3.1 per cent in February, Royal Bank of Canada economists Carrie Freestone and Claire Fan said in a note.

Gasoline prices rose almost four per cent in February from the month before. But the pair believe a weakened Canadian economy and slumping consumer spending mean “price pressures in Canada are more likely to keep easing and narrowing (to fewer items in the CPI basket of goods).

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China Growth Beats Estimates, Adding Signs Economy Gained Traction With Stimulus

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China’s strong factory output and investment growth at the start of the year raised doubts over how soon policymakers will step up support still needed to boost demand and reach an ambitious growth target.

Industrial output rose 7% in January-February from the same period a year earlier, the National Bureau of Statistics said Monday, the fastest in two years and significantly exceeding estimates. Growth in fixed-asset investment accelerated to 4.2%, strongest since April. Retail sales increased 5.5%, roughly in line with projections.

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