Canada’s economy remains on the path to recovery, with strong consumption trends and a robust job market. But higher commodity prices are still a concern. Kim Parlee speaks with Beata Caranci, Chief Economist, TD Bank, about the outlook for growth.
- We are back with Beata Caranci. We're taking a look now what's her expectations are for the Canadian economy. Beata, I'm just going to jump right in. Let's start with your economic outlook for growth for Canada for this year and next. What do you see?
- Well, there's a good tailwind in Canada right now. So we had a delayed reopening relative to what you were seeing in the US and even much of Europe. And so we're just now getting into these stronger consumption patterns coming through.
And the job market is pretty hot in Canada. We have labor force participation rates that are higher today than they were pre-pandemic. And the one thing that's missing, which is not a bad thing from an inflationary perspective-- but wages are lagging. And in a high inflation environment, one would expect we're going to start to see some wage push pressures coming through.
So for the Canadian economy, there-- again, a lot of resilience, a lot of tailwind on the economy. However, at the end of the day, people are being taxed by higher commodity prices coming through, whether it's at the pump or at the grocery stores. And so that will shave some of that growth pattern. But we do think that the economy-- having a 3% growth rate this year would not be unusual.
- I want to get to commodities in a second. But let's just, before we get there-- the Bank of Canada, obviously, thinking exactly what you're saying-- is that there are concerns about inflation, part of their mandate. What do you see them doing? And will it change?
- Well, at this juncture, not yet. And I guess they're going to be doing what we're doing-- is looking for whether we're into a true financial stress period with an extended duration. But at the end of the day, central banks, both in Canada and the US-- they approach monetary policy different this cycle.
Normally, they adjust interest rates before the economy has actually moved into excess demand. So they use forecasts of where they expect the economy to be in a year to a year and a half and say, oh, we're going to be in a balanced economy at that point. So we should start raising interest rates now.
They did not do that this time. And this is why there's a sense they're behind the inflation curve, because the economy's already in excess demand, more demand than there is capacity. So there is a natural push towards inflation irrespective of what's happening on the supply side globally. And this is putting them-- basically, all central banks, whether it's in the UK, US, or Canada-- in a position to have to raise interest rates even in the face of risk. So the risks really have to manifest into significant slowdowns in growth for them to basically be thrown off that course.
What it could do while they're going to continue increasing interest rates-- it could cause them to change the pattern of it, maybe take a pause and then do a 50 basis point hike as risks recede. So that pattern may look differently. But that endpoint still has to occur that they have to get a much higher than they are today with just a single rate hike.
So typically at this point in the cycle, you would have a policy rate somewhere between 1% and 1.5%. And we're sitting at 50 basis points-- so a lot longer to go.
- Interesting. Very interesting. I've got three topics and three minutes, Beata. So I'm going to go fast. I want to get them in. Commodities-- obviously, not great for spending. It's a bit of a tailwind, though, for the western part of the country. How significant is that?
- It's not enough to offset the drag that it could have on the consumer side. But it is, to your point, a big buffer. So not only is it on the energy side-- agriculture, wheat, soybeans-- so these are areas that are going to offer a tailwind, but regionally-- so Saskatchewan and Alberta in particular will be benefiting in this environment.
- Interesting. The loonie-- what does that jolty Bank of Canada 50 basis points and then maybe a pause going to do to the loonie? What do you see there?
- Well, the loonie has been incredibly disciplined. And in market terms, it's range-bound. It can get up to $0.79. And it's somewhere on the low end around $0.77.
In this market, where oil prices are today, you would have expected that the loonie would be well north of $0.80. It's not there. A lot of trade is going over to the US dollar. There is a flight to safety happening that benefits the US dollar. And there's too much risk in the global economy. And that's a net negative for the Canadian dollar.
So if oil, at these prices, doesn't break it into $0.80, I would suspect not much will. So we would think that you're going to hold somewhere in a $0.77 to $0.79 range.
- Interesting. The last one, of course, the Canadians-- we do love our real estate. And we talk about it a lot. And with rates finally starting to move up, the Canadian market has defied gravity when it comes to real estate-- any changes that you see in the upcoming year or two?
- Not at this time. We are expecting the central bank to keep raising interest rates and those mortgage rates to reflect that and that to calm down some of the sales enthusiasm that we've seen.
But on the flip side, one of the benefits that we're starting to see, Kim, just very early signs, is a lift in the supply side. And if that continues, that should help get the market back into balance and calm prices down, not lead to corrective pressures, but at least get us off these double-digit rate growth-- the growth rates that we've been seeing for the last two years. Existing home prices over a two-year period are up nearly 50%. It's completely unsustainable.
- Beata, I have about a minute. My last question is just what have we not talked about that you are watching when it comes to the Canadian economy and what's going to be happening ahead?
- Well, I think there's just going to be a lot of supply chain discussions that are going to be happening. One of the challenges is we are-- between Russia and Ukraine, they have significant metals, minerals, energy, and agriculture exposure.
And we might be hearing discussions in Canada, for example, in the case of wheat shipments-- what we're seeing internationally is a lot more protectionism start to come through. You might recall we saw this when it was a health risk with PPE, countries hoarding for themselves. And you're actually starting to see that in the agriculture space, some countries saying-- putting export bans on wheat, others putting limitations on what can be sent out-- Indonesia in terms of edible oils.
And so it'll be interesting to see how Canada plays in that space because-- do we want to be shipping to countries who are putting bans on, or do we want to be supporting regions like Europe that really need it and Ukraine? So I think that'll be an interesting year as we go through on how these supply chains reorient and the degree of protectionism that now creeps into the food security space.
- We do live in interesting times, Beata. Thank you so much for your time today. We really appreciate it.
- My pleasure.