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

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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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Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

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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.

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Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

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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.

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Trump’s victory sparks concerns over ripple effect on Canadian economy

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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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