(Toronto) Canadian households and the economy as a whole have proved surprisingly resilient in the face of rising interest rates, economists at the country’s major banks observed Friday, which could make it harder to fight inflation.
“There is no doubt that the economy had a lot more momentum at the end of last year than anyone expected,” Bank of Montreal chief economist Douglas said on Friday. Porter, during a roundtable organized by the Economic Club of Canada on the outlook for the coming year.
Labor market data released last week caused surprise by showing the economy added 104,000 jobs in December, while defaults on mortgage payments remained around historic lows.
Mr Porter, however, recalled that history showed that a recession was inevitable when interest rates rose as quickly as they did last year, and that resilience could complicate the fight against inflation. .
“The reality is that if the economy stays too strong, rates will go even higher. »
Although there is a risk of resorting to interest rate hikes to cool the economy, it is possible that the resilience demonstrated so far will lead to the smooth cooling that policymakers have been hoping for, the minister pointed out. Chief Economist of Scotiabank, Jean-François Perrault.
“It is a worrying thing, in the sense that it can mean that we have higher rates, argued Mr. Perrault. Perhaps the flip side is that this holy grail of a soft landing is no longer mythical and we might in fact achieve it. »
TD Bank chief economist Beata Caranci pointed out that the health of the economy — as well as the fact that many industries, such as manufacturing, were still quite dependent on hiring trends — made so that a recession would probably lead to far fewer job losses than usual.
“We have about 100,000 job losses this year, which won’t be little, or easy for those 100,000 people and their families, if it happens. However, this is a third of what would normally happen in a recession. »
The timing of interest rate hikes
Royal Bank Chief Economist Craig Wright said the bank is sticking to its forecast of a recession, as it has predicted since July, amid a number of long-term tailwinds, including free trade, cheap credit, and low-cost labor, are being reversed.
He noted that the effects of rapid rate increases had yet to materialize due to the time lag required for them to hit the economy.
“So there is still a lot of pain to come. »
Wright, however, expects the slowdown, deliberately imposed by interest rates, to do its job and bring inflation back to the Bank of Canada’s target range of 1% to 3% by the end of the month. the year.
Others are not so confident that inflation will be able to come down so quickly, with Porter noting that core inflation, which knocks out some volatile prices like energy, appeared to be stagnating at around 5% and that it will be difficult to roll back this as expectations change.
“That’s going to be the hardest thing to break. It was relatively easy to get inflation down from 8% to 6% with the decline in gas prices, but it’s the next step down to 2% that I think will be a little bit more difficult. »
Mme Caranci also noted that emerging factors, such as the reopening of the Chinese economy, could also lift energy prices. Its bank predicts that oil will rise to US$90 a barrel, which would further complicate the fight against inflation.
Overall, it will be some time before economists know how well the sharp rise in interest rates is working and how it will ripple through households and the economy as a whole.
“Monetary policy takes a long time to have an impact,” said Mr. Perrault. You increase it a lot and then you have to wait to see if it works or not. And that’s the challenge we have. »