The Bad Economic Times Have Only Just Started for Canada

Canada’s economic woes have only just begun, despite recent signs of moderation in both GDP and job growth. The agony that Canadians are currently facing due to inflation is only going to intensify, thanks to Trudeau.

There will be a tough spell in the Canadian economy. The rate of expansion has slowed dramatically. Job creation has slowed down. The rate of inflation has not decreased. However, the suffering that families are experiencing now will only intensify.

In a note, Desjardins associate in macro strategy Tiago Figueiredo expressed pessimism about the future.

The economy held up better than predicted for a time there. The interest rate increases from the Bank of Canada accumulated. The economy and the number of available employment both improved even so.

The economy was bound to suffer, though. Rising loan rates and skyrocketing inflation have been devastating to families. Now, economists are seeing signs of instability in the data, and they anticipate this to worsen. the second quarter of this year saw a decline in GDP.

This week, economists will have a better idea of whether or not the economy shrank further in August after showing no growth in July. Reasons for this include natural disasters and labour disputes like the B.C. port strike.

Canada’s economy had already lost steam before that happened.

If that happens, Canada will officially be in a recession because the official definition requires two consecutive quarters of negative growth.

Manulife Investment Management’s global head economist and strategist Frances Donald has argued that we should stop discussing the name of this economic downturn and instead concentrate on how it will affect individuals.

“Even if there are technical factors that avert two quarters of negative GDP, this economy will feel like a recession to most Canadians, for the next year,” she said to CBC News.

Several variables, according to experts, are hiding the true severity of the economic downturn. As a first point, it takes the economy around a year and a half to fully reflect the effects of changes in interest rates.

Seventeen months ago, the Bank of Canada started its cycle of rate increases. That implies we haven’t seen the full effect of Canada’s fastest, most aggressive interest rate increasing cycle yet.

Second, the pandemic altered consumption habits, which have yet to return to pre-pandemic levels of predictability. Canadians made significant purchases during lockdowns due to pandemic fears. We scooped up exercise tools, televisions and hoover cleaners. These same families are now investing mostly on activities rather than material goods.

New data on retail sales shows an increase in July and a decline in August. When so many external forces are tugging at and pushing on consumers, it can be difficult to tell how much of what’s happening is cyclical or seasonal.

Inflation and rising borrowing costs are dampening discretionary consumer spending. Another evidence of slow growth for the Canadian economy at a time when the Bank of Canada is dealing with inflation that’s higher than expected, BMO senior economist Robert Kavcic Said.

An extraordinary increase in immigration looms over all the data and shifts. In just the past year, Canada has seen an influx of over a million new residents. This has boosted consumption, but it has also hidden some structural flaws.

According to Donald, those things have helped make the economy look better than it is.

We are in the time just after the Titanic struck the iceberg, but before it sank. When we’ve had a shock, but it hasn’t been too bad,” Donald explained.

The Bank of Canada has temporarily stopped raising interest rates. The central bank, however, cautioned that this would be conditional on continued inflation reduction efforts.

Fortunately, the Titanic economy isn’t the only one we can save by cutting interest rates.

Since then, inflation has surged to unprecedented heights. The price of everything went up, not just petrol and mortgage rates this time. All of the so-called core measures of inflation, which exclude more erratic factors like the cost of petrol, increased or remained stable.

Scotiabank’s vice president and head of Capital Markets Economics, Derek Holt, calls the breadth of August’s pricing pressures “astounding.” He claims that 52 percent of the items in the consumer price index basket are increasing by four percent on an annualised basis from one month to the next. Almost two-thirds have seen gains of more than 3%.

According to him, the most recent numbers cast doubt on the foundational beliefs individuals have held about the economy.

As the saying goes, “inflation is cooling.” They attribute it entirely to increases in the price of petrol and mortgage interest rates. They say the government’s (fuzzy) “plan” is successful.

They claim that it’s clear the Bank of Canada will not raise rates again. In a note to customers, he called it all “complete, utter, rubbish.”

According to Holt, “definitely ups the odds of a rate hike” at the next FOMC meeting in October because of the recent acceleration in inflation readings.

Sharon Kozicki, the Bank of Canada’s deputy governor, spoke publicly this week and described the central bank’s predicament.
“Rate reductions are still a ways off.”

If we don’t take action now, we’ll have to take even more action later. She warned attendees at a Regina luncheon that excessive austerity could have unintended consequences for the economy.

Some inflationary swings, she added, were “not uncommon,” and that previous rate hikes “will continue to weigh” on economic growth.

Nothing of it is novel. The central bank has spent the better part of the last year and a half discussing the trade-offs involved in preventing inflation from becoming entrenched, while also avoiding doing too much and creating more pain than is required.

Economists like Donald, though, argue that things have changed as the central bank considers when and how it will have to look at bringing rates back down to lessen the burden on people.

“Rate reductions are still quite a ways off,” she said. However, the exit ramp was seen far off in the distance. And the Bank of Canada is working to broaden that exit ramp so they have some leeway if they ever need it.

In her opinion, rates will begin to drop again in the first half of 2019.

“But for a lot of Canadians, there’s… a lot of pain to get through,” Donald remarked.