March 9, 2023Print | PDF
As the world emerged from three years of COVID-19-related economic disruptions and challenges, economists, business leaders, and consumers sought signs of economic normalization. Instead, rising inflation worldwide has caused central banks to pursue a series of key interest rate hikes to slow spending. These hikes and fears of a potential recession have led to many significant layoffs across multiple industries—most notably within the tech sector.
On March 7, two leading economists answered questions on inflation, housing, and other topics at the annual Economic Outlook event presented by the Lazaridis School of Business and Economics at Wilfrid Laurier University and the Laurier Centre for Economic Research & Policy Analysis (LCERPA).
This year’s virtual event featured Beata Caranci (MABE '98), Senior VP & Chief Economist at TD Bank Group, and Royce Mendes, Managing Director & Head of Macro Strategy at Desjardins. Antonella Mancino, Assistant Professor of Economics at the Lazaridis School of Business and Economics, moderated the discussion.
Mancino opened the discussion with an acknowledgment of how the COVID-19 pandemic continues to impact how we live, work, and learn.
“Every day, there are new stories about the pandemic and its effects—topics including pandemic recovery, supply chain challenges, and shifting global landscapes make it challenging to anticipate what the next week may look like,” Mancino said.
Kalyani Menon, Associate Professor and Interim Dean of the Lazaridis School of Business and Economics, welcomed viewers and the panelists to the event.
“Over the years, we've been fortunate to bring together influential economists to share their thoughts on the state of our local, national, and global economies. It is events like Economic Outlook—where we bring in thought leaders, and we have interactions between industry policy, academia, and students and community—that really makes Laurier a thriving place for thought leadership,” Menon said.
Mancino kicked off the discussion with a question that is top of mind for Canadians— whether the Bank of Canada's current policy will get us back to lower inflation without triggering a recession. She noted that Mendes often posts on social media using a three-month annualized inflation rate instead of a 12-month rate.
Mendes said he prefers using a three-month rate because it reflects current economic conditions more accurately.
“What we've been looking at more recently is three-month rates. We're not looking at headline inflation because it is heavily affected by volatile factors like energy and food prices. What we're trying to do is look at some underlying inflationary measures. Those measures suggest that inflation isn't around 6% as the headline would suggest. It's closer to around three and a half percent over the past three months, and that's probably a better gauge for policymakers to set monetary policy,” Mendes said.
Caranci added that economists learned to be cautious during the pandemic with how they view near-term fluctuations in economic data because of the tremendous amount of volatility in global markets.
“That volatility remains embedded in today's data. You continue to see very large moves in three standard deviations from normal in the data today, despite the pandemic being something that's cast in the past at the moment,” Caranci said.
When it comes to lowering inflation without triggering a recession, Caranci said the question on the Bank of Canada's current policy could only be answered retrospectively.
“I think when you look through history, the analysis suggests it would be very difficult to avoid a recession when you're this far above your target on inflation. You ultimately have to pull a significant amount of domestic demand out of the economy to slow that trajectory. That typically happens through a weakening of the labor market, which is responding to the higher interest rates,” Caranci said.
She said that while every cycle is different, the current one is unique. Caranci added that recession is a broad term that often has no concrete definition.
“There's a lot of difference between 2008 and the 1980s. In 2001, we didn't even have a recession, although the U.S. did. What we're really talking about is what kind of depth and duration are we looking at. Most people are falling on the side that there are enough differences in factors that should prevent the depth, but the duration is probably still going to be there where you have a lower weak economy for a period of time in order to really suck out those inflationary forces from the economy,” Caranci said.
Robert Wilson, a Lazaridis School Master of Business Economics (MABE) student, asked the panelists how rising mortgage rates and construction costs could potentially impact monetary policy and financial markets and how they will affect housing affordability in the future.
Mendes said the structure of the Canadian mortgage market forces borrowers to renew their mortgages on a short, fixed schedule every five years. Since much of the Canadian economy is devoted to housing, it makes our housing market more reactive to changes in monetary policies.
He said housing is where we often see the most acute signs or early indications of monetary policy working its way through the economy. While housing prices sales and prices have declined over the last three months, construction starts have also slowed due to rising costs.
“Unfortunately, we also have major supply and affordability issues in regard to housing, so the last thing we want is less construction. We want to build more houses so that supply will hopefully stabilize prices or push them down a little bit further making life more affordable for Canadians. At the moment though, higher interest rates are working at cross purposes. I think over the next year, that's going to be an unfortunate side effect of getting inflation under control,” Mendes said.
Ricardo Jasson, a fourth-year Lazaridis School economics undergraduate student, asked how financial markets interpret the strong labour market in the face of rising interest rates.
Mendes said that he believes the strong labour market is the leading reason markets are still pricing further key interest rates from the Bank of Canada. According to the January Labour Force report from Stats Canada, employment increased by 150,000 while the unemployment rate stayed at 5 per cent. Mendes said that while those numbers appear promising, the surveys driving them often have low response rates leading to poor data quality.
“If you ask any economist what their forecast is for the Labour Force Survey, I would say whatever number they give you, they will have very low confidence in forecasting that number for any particular month. I think that for now, it's left markets with the idea that further rate hikes are possible. It still points to tightness in the labor market as a reason why the Bank of Canada is still leaving the door open to future rate hikes,” Mendes said.
Caranci said that the pandemic is still shaping how many businesses behave, especially regarding their workforces. She said that from keeping a larger number of employees to addressing skill gap challenges, global businesses continue to struggle as we transition out of the pandemic.
“The January data was extremely anomalous in terms of its size. Canada has hired in two months between December and January the amount of workers it normally hires in the course of an entire year. That raises the suspicion on the quality of the data,” Caranci said. “If we get strong data in February, I will fall off my seat because then we have a ‘Houston, we have a problem’ for the Bank of Canada. That conditional pause will definitely come into question.”
The volatility in labour, housing, and consumer spending continues to be challenging on both sides of the border. While the Canadian and U.S. economies are strongly linked, Mendes said a rate increase from the U.S. Federal Reserve doesn’t automatically indicate a rate hike from the Bank of Canada.
“In the last three cycles, the Fed has raised rates more than the Bank of Canada has. There is still a small part of the community that believes that if the Fed is moving, the Bank of Canada has to,” Mendes said. “That makes sense because what's happening in the US will often spill over into Canada, but it's not at some sort of hard and fast rule. If Canada has a different economic environment—we're seeing more slowing and regaining control of inflation faster than the U.S., we can take a different path on interest rates than the U.S.”
The Lazaridis School would like to thank Royce Mendes and Beata Caranci for participating in Economic Outlook 2023. Learn more about the exciting opportunities to study economics at the Lazaridis School at the undergraduate or graduate level.