Economic headwinds set in as inflation continues to bite

06 October 2022 3 min. read
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The Bank of Canada’s efforts to curb inflation will cool the economy heading into next year, according to RSM Canada’s quarterly “The Real Economy” report.

The central bank has used one of its few policy levers – heightening interest rates – to try to tackle inflation, which has been elevated for over a year. Though there are some signs inflation could have peaked – with it easing to 7.6% in July from 8.1% in June – it will take some time for inflation to slow amid the continuing war in Ukraine and a tight labour market.

Tu Nguyen, an economist at RSM, expects the central bank to continue raising rates until the end of the year.

Raising rates cools the economy and inflation, but it also boosts unemployment. The central bank has decent wiggle room, however, with unemployment at a low 4.9% despite a modest decline in job numbers the last two months.Unemployment and employment rateThe Canadian economy lost 43,000 jobs in June and 30,000 in July, though the bulk of those numbers were workers leaving the labour force – and entirely within service-producing sectors such as education, healthcare, and social services.

There are still more than 1 million vacancies, however, mostly in food and services and healthcare. The RSM report notes that the long-term challenge is the worker shortage, and Canada relies on immigration rather than natural growth to expand its labour pool.

The government has dragged its heels on addressing factors depressing birth rates – including effective policies for parental leave, daycare, and affordable housing – preferring instead to import greater numbers of both skilled and unskilled labour to appease corporations and prop up the housing bubble.

The housing market cooling slightly in the past number of months – mostly because of interest rate hikes – has had the perverse impact of cancelling projects in a country already starved for housing stock. With immigration targets of 400,000 per year – mostly directed to real estate hotspots such as Toronto, Montreal, and Vancouver – homeowners will likely have to wait but a brief moment for the policy-driven bubble to resume its absurd march upward.

According to the RSM report, Canada needs to build hundreds of thousands of units to house its people.Real GDP growth

The “R” word, today or tomorrow?

According to Nguyen, Canada isn’t currently in a recession. One rule of thumb for identifying a recession is two consecutive quarters of contraction in GDP. Canada’s economy has grown every quarter since Q3 2021, including 6.6% in Q4 2021, 3.1% in Q1 2022, and 3.3% in Q2 2022.

But Nguyen notes that two quarters of contraction isn’t enough to identify a recession; indicators such as payroll employment, unemployment rate, real income and spending, and industrial production also need to considered. By those measures, the economy is in a downturn rather than a recession.

The RSM report expects the economy to stagnate – if not contract – heading into next year, as higher interest rates and a tightening cycle do their part. The Canadian economy could be pushed into a recession by a continuing and possibly expanded conflict between Russia and Ukraine, due to its hefty impact on food, energy, and mineral prices. Another risk factor is a potential debt or health crisis in China.