No one knows if the country is in for a `soft landing': Poloz
Is Canada facing a soft economic landing or a hard recession on the journey ahead?
It's a question weighing on the minds of consumers, business operators and economists as inflation in the country takes off and interest rates head higher.
As business leaders gathered Thursday in Banff for the Global Business Forum, one of the most pressing issues is whether Canada — and Alberta — can skirt a fullblown economic contraction.
“I'm going to say nobody knows that,” said Stephen Poloz, former governor of the Bank of Canada.
The discussion comes as central banks dial up higher interest rates to cool down red-hot prices and seek to keep inflation expectations at bay.
The Canadian economy is in a strong position today, but it is also “flying too high,” Poloz told journalists on the sidelines of the conference before speaking at the annual summit.
He equates the situation to a pilot who has soared too high and needs to throttle back the engines to descend.
“You don't have to land the plane on the ground or crash the plane or any of those things to achieve that. But there are constraints,” he said.
“We know we're going to have slower growth. The pressures in the labour market will need to go away; that means the excess demand has to come out of the economy.
“Now, do you get to go there in a nice smooth, straight line? Or do you have to dip below and have a recession along the way? No one knows the answer to that.”
The path ahead is important for consumers and business operators as interest rates continue to rise around the world.
On Thursday, the Bank of England boosted its main rate by half a percentage point to 2.25 per cent, its highest level since 2008. The U.S. Federal Reserve increased its key rate by 75 basis points on Wednesday.
Many economists expect another rate hike is coming from the Bank of Canada in October, following five hikes in the past seven months that have pushed the policy interest rate up to 3.25 per cent.
The Bank of Canada, which has an inflation target of two per cent, notes it could take up to two years for such interest rate increases to reach their full effect.
Poloz, the bank's governor from 2013 until 2020, said it's too soon for interest rates to have a widespread impact, although they have cooled housing markets. Higher prices for items such as gasoline are already slowing consumer spending.
“It is certainly possible for us to have what is called a soft landing,” he said. “But I don't even like that as a metaphor, because we're not trying to land. We are just trying to downshift. In behind all of that, if inflation expectations are still pretty well anchored at two per cent or thereabout ... then it will be easier.”
Inflation in Canada increased by seven per cent in August from a year earlier, cooling somewhat from July's 7.6 per cent jump, as pump prices dipped.
Since hitting more than
US$120 a barrel in early June following Russia's invasion of Ukraine, benchmark U.S. crude prices have dropped sharply, closing at $83.49 on Thursday.
At the same time, almost one million jobs in Canada were unfilled in the second quarter and many companies are facing severe labour shortages.
Can the economic engine shift into a lower gear without stalling?
“It's about a 50-50 possibility and perhaps with the new (inflation) numbers coming in, it's a little higher than that,” Ted Mallett, head of economic forecasting for the Conference Board of Canada, said Wednesday in an interview.
“A recession may or may not happen, but what is pretty well assured is that we're in a growth pause, at the very least, for the next two or three quarters.”
The Royal Bank of Canada has projected a recession will hit the Canadian economy next year, as rising interest rates, high inflation and the ongoing labour crunch pull the country into a “moderate and short-lived” contraction in 2023.
As for Alberta, RBC forecasts the province will see economic growth slow to 1.8 per cent next year from around five per cent in 2022.
High oil prices remain a positive economic force for Alberta; the provincial government is expecting a $13.2-billion surplus for the fiscal year ending next March.
“Alberta is in a good, a pretty solid, position. With that in mind, of course, there are factors at play that will impact all residents of Canada, regardless of where they live,” said RBC economist Carrie Freestone.
Another interest rate hike from the Bank of Canada of 50 basis points is expected in October, and possibly a smaller increase in December, said Alberta Central's chief economist, Charles St-arnaud.
He places the likelihood of a recession at even odds and worries that with high levels of household debt and wages falling behind expenses, a “great consumer squeeze” could happen.
“The Bank of Canada is hoping for a Goldilocks situation where we don't slow too much, yet we slow enough to keep inflation down,” he said. “The question is not do we get negative quarters of growth — it's how far into negative territory we go, and for how long?”
Business Council of Alberta president Adam Legge, who moderated a conference panel on Thursday with Poloz, said the effects of inflation and higher interest rates, labour constraints and supply chain disruptions are the top concerns for companies planning for 2023.
However, high commodity prices should also help the province weather some of the turbulence ahead.
“Everybody's preparing for an economic slowdown in order to get this inflation under control,” Legge added.
“The world is short oil and gas and those prices are going to, I expect, remain elevated, which will keep Alberta's economy faring better than our other peer provinces.”