Economy

Opinion: Say hi to the new weak, stagnant economy. It'll be here for a while – The Globe and Mail

Published

7 months ago

March 14, 2024

Shoppers walk past a boarded up storefront on Saint-Catherine Street in downtown Montreal, Dec. 19, 2023.Christinne Muschi/The Canadian Press

Craig Alexander has served as chief economist at Deloitte Canada, the Conference Board of Canada and Toronto-Dominion Bank.

The Canadian economy is struggling with high interest rates and a housing affordability crisis. Yet the message from the Bank of Canada is one of tough love. The central bank is not willing to lower interest rates until the war against inflation is decisively won. This has far-reaching implications.

The most immediate implication is that the Canadian economy will remain weak this year. While it does look like a soft landing is being achieved, with a recession avoided, the bad news is that the economy is likely to stagnate and there will be pockets of domestic weakness that will add to some of Canada’s leading economic challenges.

The latest economic data drives home this point. While the economy managed to post meagre growth of 1.0 per cent at an annualized rate in the fourth quarter of 2023, the slim gain was largely the product of strong export growth that speaks to the relative economic strength of the U.S. economy. In contrast, Canadian consumer spending on a per-person basis fell and domestic demand contracted by 0.7 per cent annualized in the final quarter of last year.

High interest rates and their impact on demand are deterring business investment in machinery and equipment, which contracted at a 5.7 per cent annualized rate in the fourth quarter, the fifth drop in six quarters. This is disheartening because Canada needs more investment in capital per worker to boost productivity. In 2023, labour productivity fell by 1.8 per cent, marking a third consecutive annual decline. This is a problem because productivity is the primary source of a rising standard of living. Before the COVID-19 pandemic, labour productivity growth was responsible for 90 per cent of the rise in income per capita.

Elevated borrowing costs are also adding to Canada’s housing affordability crisis. The Bank of Canada is worried about cutting interest rates because it fears that lower rates will reignite Canadian residential real estate markets, which could push up shelter costs and make it more difficult to return inflation to 2 per cent. While this is a distinct possibility, it should also be acknowledged that high mortgage rates are reducing the pool of homebuyers, keeping more individuals in rental markets that are overheating. Rents rose 7.9 per cent year-over-year in January.

Montreal real estate market sees ‘dynamic start’ to 2024 as February home sales rise

High interest rates are also making it more expensive for rental property owners to finance their buildings – mortgage interest costs were up 27.4 per cent year-over-year in January – and this too is adding to rent increases. Higher capital costs for builders, reflecting elevated interest rates, has also weighed down residential construction, which fell 10.2 per cent in 2023, at a time when inadequate supply of homes is contributing to the affordability crisis.

The combination of weak demand and high borrowing costs is also causing businesses financial strains. Business insolvencies have soared in recent months, surging 48.8 per cent in January, reaching a 17-year high and 163 per cent above prepandemic levels.

These are examples of the economic costs being incurred to lower inflation and they are trends that are likely to persist in the near term. Eventually, the economic weakness will sufficiently dampen inflation to motivate the central bank to begin cutting interest rates.

Financial markets are betting that the central bank will ease policy in June or July, but some commentators are warning that we might not see interest rate relief until the fall. It should be stressed, however, that the future pace of monetary policy easing is likely to be gradual. If so, it will take many months, and likely well into 2025, for interest rates to drop to a level that no longer applies brakes to the economy.

Make no mistake, the Bank of Canada will win the war against inflation, and this is a good thing. High inflation deeply erodes the standard of living of Canadians. Inflation is also highly regressive, hurting low-income Canadians the most. The brutal inflation shock we have just lived through demonstrates why price stability is so important.

But returning us to low and stable inflation is creating its own set of economic scars, and it is adding to some of Canada’s structural economic challenges of weak business investment, poor productivity and housing affordability problems.

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Economy

Minimum wage to hire higher-paid temporary foreign workers set to increase

Published

1 day ago

October 21, 2024

Anne Joseph

OTTAWA – The federal government is expected to boost the minimum hourly wage that must be paid to temporary foreign workers in the high-wage stream as a way to encourage employers to hire more Canadian staff.

Under the current program’s high-wage labour market impact assessment (LMIA) stream, an employer must pay at least the median income in their province to qualify for a permit. A government official, who The Canadian Press is not naming because they are not authorized to speak publicly about the change, said Employment Minister Randy Boissonnault will announce Tuesday that the threshold will increase to 20 per cent above the provincial median hourly wage.

The change is scheduled to come into force on Nov. 8.

As with previous changes to the Temporary Foreign Worker program, the government’s goal is to encourage employers to hire more Canadian workers. The Liberal government has faced criticism for increasing the number of temporary residents allowed into Canada, which many have linked to housing shortages and a higher cost of living.

The program has also come under fire for allegations of mistreatment of workers.

A LMIA is required for an employer to hire a temporary foreign worker, and is used to demonstrate there aren’t enough Canadian workers to fill the positions they are filling.

In Ontario, the median hourly wage is $28.39 for the high-wage bracket, so once the change takes effect an employer will need to pay at least $34.07 per hour.

The government official estimates this change will affect up to 34,000 workers under the LMIA high-wage stream. Existing work permits will not be affected, but the official said the planned change will affect their renewals.

According to public data from Immigration, Refugees and Citizenship Canada, 183,820 temporary foreign worker permits became effective in 2023. That was up from 98,025 in 2019 — an 88 per cent increase.

The upcoming change is the latest in a series of moves to tighten eligibility rules in order to limit temporary residents, including international students and foreign workers. Those changes include imposing caps on the percentage of low-wage foreign workers in some sectors and ending permits in metropolitan areas with high unemployment rates.

Temporary foreign workers in the agriculture sector are not affected by past rule changes.

This report by The Canadian Press was first published Oct. 21, 2024.

— With files from Nojoud Al Mallees

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Economy

PBO projects deficit exceeded Liberals’ $40B pledge, economy to rebound in 2025

Published

5 days ago

October 17, 2024

Anne Joseph

OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.

However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.

The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.

Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.

The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.

The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.

This report by The Canadian Press was first published Oct. 17, 2024.

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Economy

Statistics Canada says levels of food insecurity rose in 2022

Published

6 days ago

October 16, 2024

Anne Joseph

OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.

In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.

The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.

Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.

In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.

It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.

This report by The Canadian Press was first published Oct 16, 2024.

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