A 2023 recession is still possible, but Canada's fundamentals will make the slowdown more bearable, former BoC governor says
The Bank of Canada can rein in the country’s elevated inflation rate without risking economic growth, according to the institution’s former governor.
“It would be nonsense to crush inflation down to 2% immediately since some of it is going to go away by itself, [but] obviously it would be nonsense to just ignore it and hope for the best,” Stephen Poloz said in an interview with BNN Bloomberg.
“So somewhere in the middle is that sort of stagflationary some-of-this, some-of-that path, and there’s no painless way to get there because of what has happened in Ukraine.”
Poloz warned that the current discourse surrounding Canadian inflation does not sufficiently address the importance of consumer purchasing power.
“There are some mechanisms affecting inflation that people aren’t really talking about, like how much less disposable income people have,” Poloz said. “What’s [the retail segment’s] response? They’re going to slash prices. That’s what disinflation looks like; it’s not about crushing the economy. So I think we have a lot of those preconditions there that are helping.”
However, while a recession does seem to be in the cards for next year, Canada’s strong labour market fundamentals will make the slowdown more bearable – and can even herald a return to a more normalized economic environment.
“I think of it more as an altitude adjustment: the plane got up to 40,000 feet by mistake, we really were supposed to be at 35,000 feet – too much turbulence up here,” Poloz said. “So let’s get it levelled off at a sustainable altitude of 35,000 feet. Do we have to go down to 30 for a while to get back to 35? Possibly, but it’s not going to feel like much of a recession if that’s what happens: the labour market is super strong, the economy is strong.”