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Key Data Suggests South Africa's Economy Has Averted a Technical Recession – Bloomberg

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Key Data Suggests South Africa’s Economy Has Averted a Technical Recession  Bloomberg

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Given high inflation, slowdown in Canada’s economy is ‘a good thing,’ Tiff Macklem says

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Bank of Canada governor Tiff Macklem says that although a slowing economy may not seem like a good thing, it is when the economy is overheated.

Speaking in Quebec City on Tuesday, Macklem said that higher interest rates are working to cool the economy as elevated borrowing costs are constraining spending on big-ticket items such as vehicles, furniture and appliances.

As demand for goods and services falls, Macklem says the economy will continue to slow.

“That doesn’t sound like a good thing, but when the economy is overheated, it is,” he said.

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In addition to global events, the overheated domestic economy pushed up prices rapidly, he said.

To slow the economy domestically, the Bank of Canada has embarked on one of the fastest monetary policy tightening cycles in its history. It has hiked its key interest rate eight consecutive times since March, bringing it from near-zero to 4.5 per cent.

However, last month, the Bank of Canada said it will take a “conditional” pause to assess the effects of higher interest rates on the economy.

“Typically, we don’t see the full effects of changes in our overnight rate for 18 to 24 months,” Macklem said on Tuesday.

“In other words, we shouldn’t keep raising rates until inflation is back to two per cent.”

However, the governor said the Bank of Canada will be ready to raise rates further if inflation proves to be more stubborn than expected.

Bank of Canada hikes interest rates again to 4.5%

The Bank of Canada is raising interest rates again, bumping it to 4.5 per cent. This marks the eighth increase in less than a year, leaving some homeowners scrambling to keep their mortgages.

As gas prices have fallen and supply chains have improved, inflation in Canada has slowed since peaking at 8.1 per cent in the summer. Macklem called this a “welcome development,” but stressed inflation is still too high.

“If new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further,” Macklem said.

For inflation to get back to two per cent, Macklem said wage growth will have to slow, along with other prices.

Wage gains lagging inflation

Wages have been growing rapidly for months but continue to lag the rate of inflation. In December, wages were up 5.1 per cent.

Though annual inflation is still at decades-high levels, economists have been encouraged by a more noticeable slowdown in price growth over recent months.

The Bank of Canada forecasts the annual inflation rate will fall to three per cent by mid-year and to two per cent in 2024.

Royce Mendes, an economist with Desjardins, said that Macklem is crossing his fingers that the rate hikes he has implemented so far will be enough to get it done.

“The head of the Bank of Canada seems quite comfortable sitting on the sidelines even as his U.S. counterpart will be discussing the need for further monetary tightening south of the border,” Mendes said.

 

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China reopening is wild card for Canada sticking economic soft landing, analysts say

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OTTAWA/TORONTO, Feb 6 (Reuters) – China’s rapid reopening is likely to fuel demand for commodities produced in abundance by Canada, potentially helping Canada’s economy avoid a recession as long as it does not also force up inflation and spur further interest-rate hikes.

The Bank of Canada last month hiked its key interest rate to 4.5%, the highest level in 15 years, and said the economy will stall in the first half of the year and could tip into recession. That prompted the central bank to pause its most aggressive tightening cycle for now, becoming the first major central bank to do so.

But analysts say a rebounding Chinese economy will likely fuel demand for Canada’s major exports, including oil, natural gas, grain, cereals and other goods, making a much-desired soft landing for the economy more likely than previously thought.

China, the world’s second-biggest economy, has lifted many of the most debilitating restrictions after abruptly jettisoning its strict “zero COVID” policy in December.

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“We are really seeing China roaring back with expected growth, liquidity and fiscal spending accelerating from here, with the Canadian dollar and Canadian stocks being major beneficiaries,” said Joseph Abramson, co-chief investment officer at Northland Wealth Management.

Traders have already bid up Canadian stocks and the Canadian dollar , dubbed a ‘commodity currency’, since the news of China reopening surfaced in December. The benchmark stock market (.GSPTSE), which has a roughly 30% weighting in energy and mining stocks, is up nearly 8% while the loonie has gained 1.8% against the U.S. dollar.

Doug Porter, chief economist at BMO Capital Markets, said that for Canada, China’s reopening is more a “clear-cut positive” than it would be for other countries with fewer commodities exports.

Canada has the world’s third-largest reserves of oil , which climbed as much as 17.9% since China began relaxing its restrictions in December before giving back much of those gains.

But China’s reopening-driven oil price rise could stoke inflationary pressures, which Bank of Canada Governor Tiff Macklem highlighted as a concern for keeping rates paused in an interview with Reuters last week.

“The biggest near-term risk, the thing that could throw things off quickly, would be if the rapid reopening in the economy in China causes global commodity prices, oil prices, to go up,” Macklem said.

The U.S. Federal Reserve, the European Central Bank and the Bank of England have since laid the groundwork for a pause as well.

Most analysts forecast a more services-driven rebound in China and do not expect it will produce a dramatic oil shock.

“If it’s primarily services that are driving the rebound from the relaxation of restrictions, maybe you don’t get that explosive oil input-cost pressure across the world,” said Derek Holt, head of capital markets economics at Scotiabank.

Karl Schamotta, chief market strategist at Corpay said China’s reopening will help put a floor under global price levels, potentially offsetting demand destruction as economies slow.

“But we don’t think Western central banks will be forced to tighten more aggressively in response to a new and unexpected inflation shock,” he added.

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New report looks at Saskatchewan’s economic outlook for 2023 by Global News

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