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World economy at critical juncture in inflation fight, central-bank body warns

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LONDON, June 25 (Reuters) – The world’s central bank umbrella body, the Bank for International Settlements (BIS), called on Sunday for more interest rate hikes, warning the world economy was now at a crucial point as countries struggle to rein in inflation.

Despite the relentless rise in rates over the last 18 months, inflation in many top economies remains stubbornly high, while the jump in borrowing costs triggered the most serious banking collapses since the financial crisis 15 years ago.

“The global economy is at a critical juncture. Stern challenges must be addressed,” Agustin Carstens, BIS general manager, said in the organisation’s annual report published on Sunday.

“The time to obsessively pursue short term growth is past. Monetary policy must now restore price stability. Fiscal policy must consolidate.”

Claudio Borio, the head of BIS’s monetary and economics unit, added there was a risk an “inflationary psychology” was now setting in, although the bigger-than-expected rate hikes in Britain and Norway last week showed central banks were pushing “to get the job done” in terms of tackling the problem.

Their challenges are unique by post-World War Two standards though. It is the first time that, across much of the world, a surge in inflation has co-existed with widespread financial vulnerabilities.

The longer inflation remains elevated, the stronger and prolonged the required policy tightening, the BIS report said, warning that the possibility of further problems in the banking sector was now “material”.

If interest rates get to mid-1990s levels the overall debt service burden for top economies would, all else being equal, be the highest in history, Borio said.

“I think central banks will get inflation under control. That is their job – to restore price stability,” he told Reuters. “The question is what will the cost be.”

Reuters Graphics Reuters Graphics

BANKING CRISES

The Swiss-based BIS held its annual meeting in recent days, where top central bankers discussed the turbulent last few months.

March and April saw a failure of a number of U.S. regional banks including Silicon Valley Bank and then the emergency rescue of Credit Suisse in the BIS’s own backyard.

Historically, about 15% of rate hike cycles trigger severe stress in the banking system, the BIS report showed, although the frequency rises considerably if interest rates are going up, inflation is surging or house prices have been rising sharply.

It can even be as high as 40% if the private debt-to-GDP ratio is in the top quartile of the historical distribution at the time of the first rate hike.

“Very high debt levels, a remarkable global inflation surge, and the strong pandemic-era increase in house prices check all these boxes,” the BIS said.

It estimated too that the cost of supporting aging populations will grow by approximately 4% and 5% of GDP in advanced (AEs) and emerging market economies (EMEs) respectively over the next 20 years.

Absent belt-tightening by governments, that would push debt above 200% and 150% of GDP by 2050 in AEs and EMEs and could be even higher if economic growth rates wane.

Part of the report published already last week also laid out a “game changing” blueprint for an evolved financial system where central bank digital currencies and tokenised banking assets speed up and smarten up transactions and global trade.

Commenting further on the economic picture, Carstens, former head of Mexico’s central bank, said the emphasis was now on policymakers to act.

“Unrealistic expectations that have emerged since the Great Financial Crisis and COVID-19 pandemic about the degree and persistence of monetary and fiscal support need to be corrected,” he said.

The BIS thinks an economic “soft, or soft-ish” landing – where rates rise without triggering recessions or major banking crashes – is still possible, but accepts it is a difficult situation.

Analysts at Bank of America have calculated there have been a whopping 470 interest rate rises globally over the past 2 years compared with 1,202 cuts since the financial crash.

The U.S. Federal Reserve has lifted its rates 500 basis points from near zero, the European Central Bank has hiked the euro zone’s by 400 bps and many developing world economies have done far more.

The question remains what more will be needed, especially with signs that companies are taking the opportunity to boost profits and workers are now demanding higher wages to prevent a further erosion of their living standards.

“The easy gains have now been reaped and the last mile is going to be more difficult,” Borio said, referring to challenges central bankers now face reeling inflation back to safe levels. “I wouldn’t be surprised if there were more surprises”.

(This story has been corrected to change the combined rise ECB rate hikes to 400 basis points from 375 basis points in paragraph 22)

Reporting by Marc Jones; Editing by Emelia Sihtole-Matarise

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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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