The Canadian economy may be on track for a recession this year, but it won’t feel as severe as other downturns the country has experienced over the past few decades, according to Bank of Canada Governor Tiff Macklem.
“It’s not going to feel great. But it is not going to feel like what people think of when you say the word recession,” Mr. Macklem said in an appearance before the House of Commons finance committee on Thursday. “You say recession, they think big job losses, very, very painful.”
The central bank is forecasting near-zero economic growth through the first three quarters of 2023, as higher interest rates constrain consumer spending and business investment. It expects the rate of unemployment – which remains near an all-time low – will rise in the coming months.
“But this is still going to be a pretty healthy labour market,” Mr. Macklem said. “This is not going to feel like the kind of recessions that we had in ‘08, or ‘81 or ‘91.”
Mr. Macklem reiterated that the Bank of Canada does not expect to raise interest rates further, despite a stronger-than-expected January jobs report published on Friday. But he said he’s willing to hike rates again if inflation does not drop as much as the bank is forecasting. The bank has raised its policy interest rate to 4.5 per cent from 0.25 per cent since March.
Mr. Macklem’s comments about the severity of a potential recession feed into a continuing debate about whether the country’s economy can attain a so-called “soft landing,” which would mean getting inflation back to the central bank’s 2-per-cent target without a major economic contraction and significant rise in joblessness.
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The strength of recent economic data in Canada, the United States and elsewhere has reinvigorated the discussion. The Canadian housing market continues to slump. But the labour market remains surprisingly robust, with employers adding 150,000 jobs in January, 10 times the amount Bay Street analysts were forecasting.
The resilience of the economy is a mixed blessing for central bankers. Mr. Macklem and his team want to see economic activity slow, and unemployment rise, to reduce upward pressure on consumer prices. The stronger the economic data, the more likely it is that the bank will raise rates again.
At the same time, Mr. Macklem has said he’s wary of overshooting and causing a deeper contraction than needed to get prices under control – particularly because it takes six to eight quarters for interest rate changes to have their full impact. This dynamic played into the bank’s decision to announce a “conditional pause” to further rate hikes last month.
Many Bay Street economists are still predicting a recession this year, although most echo the Bank of Canada’s assumption that it will be relatively mild by historical standards. A number of forecasters have pushed back their timelines for when they expect economic activity to stall, given the momentum through the end of 2022.
“Taken together, inflation and seemingly greater economic resilience suggest that calls for a mild recession, or stall, or soft landing appear increasingly realistic. This is particularly true in Canada and the United States,” Bank of Nova Scotia chief economist Jean-François Perrault wrote in a forecast published earlier this month.
Mr. Perrault published a follow-up report on Thursday outlining four possible trajectories for inflation. He sees inflation averaging between 3.3 per cent and 4.5 per cent this year, depending on the evolution of the labour market, supply chains and commodity prices.
The Bank of Canada’s latest forecast sees the annual rate of consumer price index inflation falling from 6.3 per cent in December to around 3 per cent by the middle of the year, and then returning to 2 per cent by the end of next year. Statistics Canada will publish the January CPI numbers on Tuesday.
“We’ve already seen a momentum shift in goods prices,” Mr. Macklem told the finance committee on Thursday. But he added that he needs to see a broader weakening in the economy before he will be comfortable with the trajectory of inflation.
“The tightness in the labour market needs to ease, wage growth needs to moderate, and service price inflation needs to cool. Inflation expectations also need to come down and businesses return to more normal pricing behaviour. If those things don’t happen, inflation will get stuck above our 2-per-cent target, and additional monetary tightening will be required,” he said.
Discussions about the trajectory of interest rates and the severity of a potential recession largely revolve around Canada’s labour market. Low unemployment and high demand for workers is pushing up wages, which is feeding through to inflation, particularly in the service sector.
Central bank officials argue that unemployment needs to rise to bring wage growth in line with the bank’s inflation target. But they remain hopeful that the elevated level of job vacancies across the country could provide a cushion for falling labour demand. In other words, they’re hoping businesses will cut unfilled positions without laying off a large number of workers.
The Bank of Canada does not publish a forecast for the rate of unemployment. But a central bank staff research paper published in November said the rate of unemployment would “most likely” rise to around 6.7 per cent if demand for workers were to drop back to prepandemic levels. That would be up from an unemployment rate of 5 per cent in January.