Bank of Canada Governor Tiff Macklem holds a press conference at the Bank of Canada in Ottawa on July 12.Sean Kilpatrick/The Canadian Press
Jim Stanford is economist and director of the Centre for Future Work. David Naylor is a physician, clinical epidemiologist and former president of the University of Toronto.
In the 19th century, before scientists understood the causes of most acute and chronic diseases, doctors routinely treated illness by bleeding their patients. Using an array of gruesome techniques (from deliberate wounds to the application of leeches), clinicians thought they could restore a patient’s health by eliminating impure blood.
Perversely, doctors attributed negative reactions to bloodletting – such as bounding pulse, weakness and fainting – to the disease, not their misguided treatments. The resulting iatrogenic death toll will never be known.
This medical analogy seems painfully applicable to the current course of treatment for Canadian inflation. With 10 interest-rate hikes in 18 months, the Bank of Canada is trying to drain what it thinks caused the disease – in its view, excess spending by ordinary households – from the bloodstream of Canada’s economy.
The patient is showing obvious distress: gross domestic product shrank in two of the past three quarters, unemployment is rising and major banks have set aside billions in loan-loss provisions for expected defaults. But now, the most conclusive symptom of mistreatment is evidence that higher interest rates, themselves, are causing more inflation, not less.
The cost of shelter is the biggest single category in the Consumer Price Index, with a 28-per-cent weighting. Interest charges on mortgages are a large component of those housing costs. They have skyrocketed because of the bank’s actions: up a record 30.6 per cent over the past year, adding almost one full percentage point to inflation.
Indeed, excluding mortgage debt charges, Statistics Canada reports current inflation would be 2.4 per cent, well within the bank’s target band (2 per cent plus or minus one percentage point).
Of course, monetary hawks would argue that it is only because of the rate hikes that inflation, minus mortgages costs, has fallen to such a level. But higher housing expenses not only disproportionately drive the CPI; they also offset consumer savings from price reductions supposedly attributable to central-bank policy.
So, it is also undeniable that higher interest rates, for now, are contributing to higher inflation. And the further inflation falls, this perverse impact is proportionately larger – giving all the more reason to be cautious about further rate increases.
Like those 19th-century medics, however, Bank of Canada clinicians seek to explain away the side effects of their treatment. For example, Governor Tiff Macklem argued recently that mortgage debt charges are best excluded from estimates of underlying, or core, inflation precisely because they have increased so rapidly. While that line of thinking has merit, the path Mr. Macklem pursues from there does not.
Mr. Macklem prefers a synthetic CPI-trim measure of inflation, from which the central bank excludes items with the biggest price changes – up or down. By this measure, which excludes mortgage debt – and many products whose prices are falling – inflation is still a danger, possibly necessitating more rate hikes. This gambit will be cold comfort to mortgage holders, who have no such ability to simply exclude debt charges from their actual cost of living.
Moreover, the adverse effects of high interest rates on housing costs reach far beyond this direct link to mortgage charges. Rents are also soaring, in part because Canadians who cannot afford to buy must turn to the rental market.
Most ominously, new housing construction in Canada is imploding. Residential investment has fallen 21 per cent since the bank began tightening. Given the existing housing shortage, and Canada’s surging population (up 1.2 million in the past year), contracting housing supply clearly implies even faster shelter inflation in the future.
Instead of fretting about this, Mr. Macklem highlights weak construction as an encouraging sign that higher interest rates are reducing spending and rebalancing demand and supply. He also acknowledges most of the recent decline in the inflation rate, falling quickly from 8.1 per cent in June, 2022, reflects falling energy prices and repaired global supply chains – things not sensitive to his interest-rate adjustments.
What explains this obtuseness? Studies of clinical decision-making highlight the importance of the chagrin factor: doctors fear that failure to act will lead to deep regret if there is a bad outcome. It is hard not to sense the chagrin factor at work in the bank’s deliberations – chagrin at not having responded faster to late-pandemic inflation, followed by fear that failure to act decisively now will allow inflation to become a chronic condition.
But in addition to technical skill, knowing when not to intervene is often what defines the best clinicians. Indeed, the tincture of time is sometimes the best medicine. One can only hope that a more precise consideration of risk-benefit ratios and restraint will prevail as the Bank of Canada navigates the months ahead.
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.
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