‘The global economy is due for a reality check,’ warns the central banks‘ bank | Canada News Media
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‘The global economy is due for a reality check,’ warns the central banks‘ bank

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The global economy is at a critical juncture that could weigh on prosperity for years to come. For the first time in decades, we face a combination of high inflation and financial fault lines. To stop these problems from becoming entrenched, it’s time for a reality check on what current policy settings can and cannot achieve.

Global inflation has crept down from its peaks as supply chains normalized, commodity prices fell and central banks embarked on the strongest and most synchronized monetary policy tightening in years. As we report in the latest BIS Annual Economic Report, history shows that it typically takes a year for inflation to return to its previous level after surges, even during episodes less acute than the one following the pandemic.

Against this backdrop, there is an emerging sense of hope in some quarters that the global economy will achieve a soft, or soft-ish, landing. But we must be ready to tackle the significant risks that cloud the outlook.

One risk is that high inflation could persist. New price pressures could emerge. In many countries, households’ purchasing power has fallen, as wages have not kept pace with inflation. With tight job markets, workers may seek to redress the balance. Firms have found it easier to raise prices and may pass higher costs on to consumers, creating a vicious cycle. Once this sets in, it is hard to stop.

Meanwhile, risks to financial stability loom. Debt and asset prices exceed those in past periods of interest rate hikes. So far, there are still buffers from pandemic-era savings and longer loan terms locked in during years of low borrowing costs. But these buffers are depleting. As they exhaust, growth could slow more than currently expected.

The resulting financial strains will likely come through credit losses. Weak banks risk losing their footing. Historically, banking stress often goes in tandem with higher interest rates. High debt, high asset prices, and high inflation add to the risks. The current episode ticks all the boxes. Although banks are stronger than before, pockets of vulnerability remain, especially where rules to make banks stronger were not applied to smaller banks. As recent experience has shown, even small institutions can trigger systemic collapses in confidence. Non-bank financial institutions will also be challenged. These types of investment firms have grown in leaps and bounds since the Great Financial Crisis. They are rife with hidden leverage and liquidity mismatches. Business models that worked in the era of low-for-long rates will face stern tests in a higher-for-longer one.

Shaky government coffers cloud the picture further. Financial instability, if acute enough, forces governments to step in to backstop markets. And it delivers a growth hit that weakens fiscal revenues. This would heighten already high public debt levels. In turn, any doubts about the government’s ability to pay its bills add to financial instability.

How should policymakers respond to these challenges? Central banks’ task is clear: they must restore price stability.  A shift to permanent high inflation would have enormous costs, especially for the most vulnerable in our societies.

To give central banks more room to fight inflation, extra measures must kick in to ensure the safety and stability of financial institutions and the financial system. Where gaps exist, new regulations may be required. Working together, central banks and governments should keep macroprudential policies tight, as this can limit the strains higher rates place on banks. And stiffer bank supervision could remedy some of the faults that came to light in recent bank failures. We urge policymakers to implement Basel III now without further delay.

Fiscal policy must consolidate. This too would help in the fight against inflation and bolster financial resiliency. And it would provide badly-needed buffers that could be deployed against future downturns.

Above all, policy needs to take a longer-term view. Monetary and fiscal policies have carried too much of the burden of sustaining economic growth. As a result, they have severely tested the limits of what we call the region of stability – the mix of monetary and fiscal policy that fosters enduring economic and financial stability and defuses the inevitable tensions between them. History shows that overstepping these boundaries can trigger high inflation, economic slumps, and banking, currency, or sovereign crises.

Policymakers must be realistic about what they can achieve. High inflation and financial instability did not emerge by accident. They were the result of a long journey, reflecting in no small part an overly ambitious view of monetary policy’s ability to hit a small inflation target and a more general belief that macroeconomic policy could support growth indefinitely, without stoking inflation.

Mindsets need to change. They must recognize the shortcomings of repeated emergency action, which stimulates output in downturns but fails to rebuild buffers when growth resumes.  To drive long-term economic prosperity, governments need to reinvigorate long-neglected structural reforms. Without a reality check, we risk losing the trust that society needs to have in policymaking. Only price and financial stability can assure wider economic prosperity over the longer term.

Agustín Carstens is the general manager of the Bank for International Settlements (BIS).

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

 

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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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