It’s still going too well, misery. The economy is still progressing at too fast a pace for inflation to deflate sustainably, according to what we decode from the Bank of Canada’s message. But is this really the case?
By raising its key rate by 0.25 percentage point, the Bank is showing its determination to control prices and bring annual inflation back to around 2%. She is not shy despite the effects of this gesture on household mortgage payments, despite the negative impact on housing starts and housing, which is in crisis.
“The Bank is afraid of having lost its credibility, it wants to strengthen its credibility,” believes expert Steven Ambler, professor of economics at the University of Quebec in Montreal (UQAM).
The key rate had not increased for six months. It rises to 4.75% and could even increase by another quarter of a percentage point in July, during the next decision, according to what three of the four economists consulted predict. It would thus reach the American level – which is currently sailing in a range of 5%-5.25% – unless the latter increases further by then.
What is fueling this fear of the bank? First, the inflation rate in April, which was higher than expected and up on March by 0.1 point, to 4.4%. What, inflation is back?
Then, the strong growth of the Canadian GDP in the first quarter (0.7%), to which is added the preliminary figure of GDP growth for the month of April (0.2%), surprisingly strong despite the strike at the federal and the ice storm. Households are spending and the real estate market is picking up.
Added to this portrait is the growth of Canadian exports in April, published Wednesday, at the same time as the Bank of Canada’s announcement. They increased by 2.8% in April to reach an all-time high. The trade surplus with the United States rose from 7.2 to 9.5 billion, which constitutes a peak in eight months, according to the economic department of the National Bank.
In short, we are far from a decline (below the 0% mark), as can be seen in this graph.
A year ago, I chronicled a hated question, asking whether a recession should be triggered to quell inflation. A year later, economists are pushing the prospect of a recession even further, assuming it actually happens.
Last fall, Desjardins Group saw a recession in the first quarter of 2023 in its crystal ball. This forecast shifted to the second quarter of 2023 and then to the third quarter. And next week, Desjardins does not rule out postponing the fateful moment again during its forecast pow-wow.
For its part, the National Bank expects a slight contraction of the economy in the fourth quarter of 2023 and the beginning of 2024, which will push the unemployment rate up to around 6% in Canada (it is currently 5% ).
A mirage ?
But is this recent good performance of the economy a mirage?
The surge in the economy in the first quarter is essentially attributable to the month of January, which was already a long way off. The job vacancy rate has melted, a sign of the slowdown in the labor market. In addition, household disposable income fell in the first quarter, the economy’s productivity is very low and business investment is anemic, notes economist Steven Ambler of UQAM.
In an analysis published with two other experts, including none other than former Bank of Canada Governor David Dodge, Steven Ambler finds that the amount of money circulating in the economy is decreasing rapidly, a precursor to the marked deflation of the ‘inflation.
“There were certainly reasons supporting the Bank’s decision to raise the policy rate. In our opinion, however, a one-month reversal in the downward path of headline inflation (in April) does not create a new trend,” write the economists, who would have kept the rate stable, in light of other elements. divergent.
Economist Benoit Durocher, from Desjardins, points out that the impact of interest rate hikes takes 18 to 24 months to feel its full effect, and we would therefore only be at the beginning of the impact.
It’s still going too well, but is it? Are we looking in the rearview mirror? Have we reached a turning point, which will be reflected in the data for the next few months, with falling inflation?