Can the federal budget do anything about it?
Former Bank of Canada governor Stephen Poloz has warned that the country is at greater risk of a “hard landing” than ever before.
Inflation finally cooled to 5.2% last month, following a downward trend from the record highs that persisted throughout the latter half of 2022, including a 40-year record 8.1% last June, to January’s 5.9%.
But in a joint interview conducted by CTV on Sunday together with formal Liberal finance minister John Manley, Poloz told CTV’s Question Period host Vassy Kapelos that the chances of Canada hitting a hard landing – or an economic slump right after a period of growth – remained.
“The risk of a hard landing has definitely gone up, given that so much has already happened, and we’re still waiting for the rest of the effects of interest rate rises to work their way through,” Poloz said.
Poloz said that while the federal government’s efforts to rein in inflation were working, it was the response of the supply side of the country’s economy that the ex-governor was “heartened by”.
“That’s really where a soft landing comes from,” he added. “It’s not fancy engineering on the part of the central bank. But as the supply side continues to grow, such as new entrants into the workforce from immigration and from parents who are taking advantage of the new childcare policy, those kinds of things are … coming up from below [and] strengthening the economy.”
Growth on the supply side was a good sign, but Poloz maintained that Canada would need some luck to avoid a recession and achieve a soft landing.
Federal Finance Minister Chrystia Freeland, who is set to table the budget this week, has been hinting that the budget would show enough fiscal restraint to avoid stoking inflation while simultaneously showcasing significant new investments for Canada.
Apart from its previously announced ten-year, billion-dollar national health care funding and millions of dollars poured into affordable housing funding, the federal government has been exploring targeted measures to soften the blow of inflation and clean-economy spending.
The latter investment would help Canada compete with the U.S. Inflation Reduction Act, a piece of legislation which offered billions of dollars’ worth of green energy incentives, KTVZ News Channel 21 reported.
But Poloz told Kapelos that the window of opportunity for an adventurous budget had passed, and that last year’s federal budget was a “missed opportunity” to mix up the government’s usual spending trends, stimulate the economy, and “lower the trajectory” of the central bank’s interest rates.
At this point in time, there was less of a chance government spending could counteract the impact of the Bank of Canada’s recent interest rate hikes, Poloz said. He explained that the “interest-sensitive” parts of the budget – such as business investment and housing – was already in a three-quarter-long slump.
“I think we’re mostly beyond that point as an issue,” Poloz said. “… [That] missed opportunity is behind us and now the economy is clearly slowing down. We got all that news in the fourth quarter, sooner than most people expected. So in that sense, it feels recessionary already. So … that business about causing inflation is off the table.”
Any thoughts on the story? Let us know in the comments below.