At first sight, one could believe in the best of all worlds.
The most recent statistics on Thursday spoke of the unexpected creation of 35,000 jobs last month and an unemployment rate that remained at 5%, very close to its record low in Canada. The average hourly wage, meanwhile, probably rose faster than inflation for a second month in a row.
The week before, it was reported that the Canadian economy had shown such strength in the first two months of the year that the first quarter of 2023 could end with growth of 3% at an annualized rate. This would be six times higher than the Bank of Canada was still predicting at the end of January.
It is even said that after having been hit hard for a year by the rise in interest rates, the real estate market is beginning to show signs of a modest rebound. Perhaps not yet housing starts, but at the very least the number of sales and prices, which could indicate that a low level has been reached in several large cities, in particular in Montreal and Quebec, reported Thursday the Professional Association of Real Estate Brokers of Quebec.
What will the Bank of Canada think of this situation, which will announce its key rate on Wednesday and take the opportunity to update its portrait of the overall situation in the spring edition of its Monetary Policy Report?
Struggling with a surge in the cost of living, the central bank undertook, a year ago, an equally rapid and massive rise in its interest rates (from 0.25% to 4.5%) with the declared intention to put a strong brake on the enthusiasm of consumers and businesses. Not only did she admit she was ready to plunge the economy into recession, but she almost seemed to want it.
Canada is not the only one to experience an unexpected economic upturn, recalled Thursday in a brief analysis the chief economist of the Bank of Montreal, Douglas Porter. “In fact, the economies are holding up so well this year that some are now wondering not just if there will be a soft landing, but if there will be a soft landing at all. »
But what are we complaining about? Even though the economy and employment are doing much better than expected, that hasn’t stopped inflation from losing steam in Canada. From a high of 8.1% in June, the 12-month rise in the consumer price index (CPI) slowed further in February, from 5.9% to 5.2%, its lowest level since January 2022 and its biggest drop in a month since April 2020, when the economy came face to face with the COVID-19 pandemic.
Too early
Has Canada found a way to rein in inflation and gradually bring it down to “a low, stable and predictable level,” as its central bank puts it, without having to go through a recession? It’s far too early to tell, but it’s unlikely, warn most observers.
Indeed, we are still far from the goal, that is to say the famous target of 2% inflation in the medium term. In January, the Bank of Canada hoped to have succeeded in bringing inflation back to around the upper limit of its range from 1% to 3% by the middle of the year and to reach 2% in 2024.
The minutes of its March Governing Board deliberations, however, revealed that there were fears that it “will remain stuck” at a “significantly higher level” due in part to the remarkable resilience of the labor market, rising wages outpacing productivity improvements, generous government spending policies, and consumer and business expectations. Controlling inflation is also a matter of psychology, where central banks have to convince people that prices will remain “low, stable and predictable” and that we should not engage in wage and price escalation. .
The Bank’s latest surveys, the results of which were released last week, show that Canadians expect inflation and the economy to slow. But also that it will take well over two years, maybe even five, before inflation gets back into the 1% to 3% range.
The Bank indicated, at the start of the year, that it wanted to pause its interest rate changes to give itself time to measure the effect of its period of accelerated increases. It also allows him to assess the impact of other events, such as the latest banking turmoil in the United States and Europe. But it will not move on Wednesday, predict economists. First and foremost because it is still far too early, they repeat.
The Bank itself estimates that it normally takes between 18 and 24 months for a change in interest rates to have its effect on the economy, slowly diffusing through borrowing costs, consumption and investment, economic activity and employment. The first of its eight rate hikes was decreed only 13 months ago.
But let there be no illusions, warn most forecasters, like Desjardins Group economist Hélène Bégin. “Quebec, like Canada, will find it difficult to escape the recession this year,” she said two weeks ago.
This text is taken from Courrier de l’économie.