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Resilient economy may muddle inflation fight, recession still expected: economists

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TORONTO — Canadian households and the overall economy have proven surprisingly resilient in the face of rising interest rates, said senior economists from the big banks, which could complicate the fight against inflation.

“There’s no question that the economy had much more momentum at the end of last year than really anyone was expecting,” said BMO chief economist Douglas Porter, speaking at an Economic Club of Canada panel Friday about the outlook for the year ahead.
His comments come as data out last week showed the economy added a surprise 104,000 jobs in December, while delinquencies on mortgage payments remain around historic lows.

Porter said however that history shows a recession has been unavoidable after rates rise this fast, and that the resilience could make for a tougher fight ahead against inflation.

“The reality is if the economy remains too strong, then rates will go even higher.”

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While there is the risk of needing higher rates to cool the economy, there is the potential for the resilience shown so far to lead to the gentle cooling that policymakers are attempting, said Scotiabank chief economist Jean-Francois Perrault.

“It’s a worrisome thing in the sense that maybe it means you do have higher rates,” said Perrault. “The flip side of that is maybe this Holy Grail of a soft landing is no longer mythical, that we might actually engineer that.”TD chief economist Beata Caranci said the health of the economy, along with the fact that many industries like manufacturing are still pretty lean on hiring trends, means that a recession will likely mean far fewer job losses than usual.

“We have about 100,000 job losses occurring this year, which will not be mild or that 100,000 and their family, if it occurs. However, that is a third of what would normally occur in a recession.”

There’s still a lot of pain to come

Craig Wright

RBC chief economist Craig Wright said the bank is sticking to its forecast of a recession that it’s been predicting since last July, as a number of long-term tailwinds including free trade, cheap credit and low-cost labour, reverse.

He noted the effects of the rapid rate increases still haven’t played out because of the lag on how long it takes to hit the economy.“So there’s still a lot of pain to come.”

Wright however expects the slowdown, purposefully imposed through interest rates, will do its job and have inflation back to the Bank of Canada’s target range of one to three per cent by the end of the year.

Others aren’t so confident inflation will be able to come down so quickly, with Porter noting that underlying inflation, which strips out some volatile prices like energy, looks to be settling in at around five per cent and it will be tough to get that down as expectations shift.

“That’s what’s going to be the tougher nut to crack here. It was relatively easy getting inflation down from eight to six or as gasoline prices retreated, but it’s that next step back down to two per cent that I think is going to be a little bit more of a challenge.”Caranci also noted that emerging factors, like the reopening of the Chinese economy, could also push energy prices back up, with the bank forecasting oil going back up to US$90 a barrel, which would further complicate the inflation fight.

Overall, it will be some time before economists know how well the sharp rise in interest rates are working, and how it will play out in households and the overall economy.

“Monetary policy takes a long time to have an impact,” said Perrault. “You increase it a lot, and then you got to wait to see if it works or not. And that’s the challenge that we have, and they have.”

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The UK labor strikes are years in the making – Vox.com

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The UK labor strikes are years in the making  Vox.com

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Bond correction coming: What an economist and an investor say about inflation – Financial Post

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Bond correction coming: What an economist and an investor say about inflation  Financial Post

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Freeland meets with provincial, territorial finance ministers in Toronto

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TORONTO — Deputy Prime Minister and Finance Minister Chrystia Freeland is hosting an in-person meeting Friday with the provincial and territorial finance ministers in Toronto to discuss issues including the current economic environment and the transition to a clean economy.

The meeting will focus on the economic situation both domestically and globally, according to a federal source with knowledge of the gathering, including discussions on how to provide incentives and supports to be competitive with the U.S.’s Inflation Reduction Act.

U.S. President Joe Biden’s Inflation Reduction Act includes electric-vehicle incentives that favour manufacturers in Canada and Mexico, as well as the U.S.

The incentives, which were already revised to include Canada and Mexico after originally focusing on the U.S., are now facing criticism from Europe about North American protectionism.

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The source, who spoke on the condition they not be named to discuss matters not yet made public said the ongoing challenges with health care in Canada will also come up at the meeting. More substantive discussions on that will be held next week when the prime minister meets with premiers on Feb. 7.

In her opening remarks, Freeland said it’s essential for Canada to have its rightful place in the transition to a clean economy, calling it one of the biggest challenges of the moment.

We are in a situation with a lot of economic uncertainty globally, said Freeland, adding that later in the day, the ministers will have a discussion with Bank of Canada governor Tiff Macklem.

“I think that conversation with the governor will be useful and important for all of us,” she said.

Despite the need to address health care challenges, Canadian jobs and the transition to a clean economy, Freeland said the government recognizes it also has to contend with real fiscal constraints.

Freeland will hold a closing news conference at 3:30 p.m. local time.

The meeting comes at a tense time for many Canadian consumers, with inflation still running hot and interest rates much higher than they were a year ago.

The Bank of Canada raised its key interest rate again last week, bringing it to 4.5 per cent, but signalled it’s taking a pause to let the impact of its aggressive hiking cycle sink in.

The economy is showing signs of slowing, but inflation was still high at 6.3 per cent in December, with food prices in particular remaining elevated year over year.

Interest rates have put a damper on the housing market, sending prices and sales downward for months on end even as the cost of renting went up in 2022.

Meanwhile, the labour market has remained strong, with the unemployment rate nearing record lows in December at five per cent.

— With files from Nojoud Al Mallees in Ottawa and James McCarten in Washington

This report by The Canadian Press was first published Feb. 3, 2023.

 

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