Reining in government spending could take some of the pressure off the Bank of Canada in tamping down inflation and help limit pain for debt-ridden Canadians, according to a new report from CIBC.
The central bank’s return to rate hikes last week with a 25-basis-point increase has economic forecasters hurriedly revising their outlooks for inflation and interest rates, with CIBC also turning its lens on the role played by fiscal policymakers.
In the report released Monday from chief economist Avery Shenfeld and senior economist Andrew Grantham, CIBC forecasts another rate hike of a quarter percentage point from the Bank of Canada in July or September, which would bring the policy rate to 5.0 per cent.
Rate cuts, meanwhile, aren’t expected to come until June 2024, according to CIBC forecasts. The central bank policy rate is projected to fall to 3.5 per cent by the end of next year, CIBC predicts.
Rates are going to have to stay higher for longer in the status quo, the CIBC economists argue, unless there’s a shift in approach from federal and provincial governments to help the Bank of Canada with its goal of getting inflation back to its two per cent goal.
While the Bank of Canada’s primary tool to achieve its inflation mandate is to set the cost of borrowing using its benchmark rate, governments can have an impact on that progress by slowing or ramping up demand based on their spending and policy objectives.
Fiscal stimulus that puts more money in the pockets of Canadians, for example, can fuel demand and inflation, in turn.
Federal Finance Minister Chrystia Freeland often noted in presenting the Liberals’ 2023 budget that she would exercise “fiscal responsibility” in charting the country through a period of cooling-but-still-high inflation and economic uncertainty on the horizon.
That budget, which passed through the House of Commons last week in Ottawa, has been heavily criticized by the federal Conservatives as overspending.
Public sector spending not helping cool inflation: CIBC
The authors argue in the CIBC report that while each level of government was effective in winding down stimulus tied to the COVID-19 pandemic in 2022, fiscal restraint has since been waning.
“It’s not that fiscal policy is significantly fueling the inflation we’re now seeing, it’s that it would be even better if, at least in the near term, it was actually putting some downward pressure on inflation by helping to cool off the fire,” the report reads.
And while the federal opposition has put the Liberal government’s spending plans in the crosshairs, the CIBC report points primarily at the provincial spending plans as fuelling demand.
The “drag on growth” needed to rein in inflation “would have been much larger without a surge in provincial spending,” the report states.
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Much of this extra spending came in the form of tax rebates branded as ways to help Canadians cope with high inflation — but CIBC argues this support went past inflation relief and verged into stimulus.
While the provinces could be chastised for last year’s spending plans, Ottawa has its share of blame in the 2023 federal budget, Shenfeld and Grantham argue.
The upcoming “grocery rebate,” which will be distributed next month, will add a projected 0.4 percentage points to gross domestic product (GDP) in the second quarter of the year if all spent, according to CIBC’s projections.
Altogether, the federal and provincial spending plans won’t end up as much of a drag on growth this year, leaving the Bank of Canada’s interest rates left to do the bulk of the work, according to CIBC.
The higher interest rates need to go, and the longer they stay there, will have other knock-on effects, per the report.
Housing impacts
Governments at all levels have identified home construction as something that will need to speed up to accommodate Canada’s population growth in the years ahead, but high interest rates have an acute impact here, slowing down the pace at which shovels get into the ground.
“That’s hardly ideal in an environment in which a shortage of housing is pressuring apartment rents and the overall cost of home ownership,” the report reads.
Canadian homeowners coming up for mortgage renewals in the next couple of years are also slated for significant pain as their payments rise to reflect higher interest rates; CIBC calls this a “significant risk to household financial stability” if the Bank of Canada’s policy rate remains at high levels.
A “somewhat tighter fiscal path” would allow the central bank to start cutting its interest rate sooner, the authors say, or limit how high monetary policymakers have to take the rate in the first place.
CIBC looks ahead to the fall fiscal updates from the provinces and federal government and warns of announcing additional spending as a risk for higher interest rates and more financial pain for Canadian households.
Freeland, speaking after the Bank of Canada’s latest rate decision last week, was asked whether higher-than-anticipated government spending in the 2023 federal budget was a concern she had discussed with Bank of Canada governor Tiff Macklem.
She reiterated that Ottawa and the central bank operate independently in setting fiscal and monetary policy but have “clear lines of communication.”
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.
