How the Bank of Canada is trying to avoid ‘the worst alternative’
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Recession risks have increased as the Bank of Canada continues to raise interest rates in an attempt to rein in inflation, which is felt most intensely among customers facing a prolonged period of rising prices.
It’s also causing more concern among advisors as clients begin to wonder how long this cost of living hike will last and what impact it will have on their savings.
Globe Advisor Deputy Editor-in-Chief Rajeshni Naidu-Ghelani spoke with Nathan Janzen, Deputy Chief Economist of RBC Economics, at the Inside ETFs Canada conference in Toronto about the investment bank’s decision. increase its call for a recession until the first quarter of 2023 and what that means for investments. and consumers.
Recessions, of course, are not good for investments. Give us your perspective on where we are and what will happen to investments as we enter a recession.
Business capital investment has been relatively positive lately. I can look at things like imports of machinery and equipment into Canada, they’ve been very strong. Much of this is related to labor shortages. It’s probably very difficult for businesses to meet demand right now without the supply of labor available. So we see evidence that they are buying more machinery to try to increase the productivity of their existing workforce. It’s a really positive thing.
Long term for the economy, over the next year as we enter a recession, we would likely see a decline in investment spending. There are structural problems with the aging of the population, and this limits the availability of labor supply. So that will always be a problem. This may be less of a problem next year with the rising unemployment rate, but labor shortages will be back. These relate more to longer-term structural forces than to cyclical factors.
[For investors] asset values have already fallen sharply in anticipation of a recession next year. So to some extent for the markets, the idea that there will be a recession next year will come as no surprise. A lot of this is expected and priced.
Most consumers’ primary inflation concerns are food and fuel. The question they keep asking is how rising interest rates will reduce their food bill. What’s your answer to that?
From the central bank’s perspective, there is not much it can do about oil or food prices. These are really driven by global factors and commodity prices over which the Bank of Canada alone has no influence.
The type of inflation that central banks try to control is that of broader inflationary trends that push up the prices of services. We also get this question and it’s usually not a satisfying answer to say [clients], ‘Well, the bank can’t do anything about it.’ So they’re just going to drive rates up anyway, but that’s the kind of environment we find ourselves in, and we also know the alternative is much higher inflation for much longer.
This is probably the worst alternative. If inflation exceeds wages for a long time, you know it’s negative for all households. What they are trying to do is bring inflation down so that wage growth can start to outpace inflation again. It’s a better environment for households, but the road to get there isn’t always easy.
This interview has been edited and condensed.
– Rajeshni Naidu-Ghelani, Deputy Editor of Globe Advisor
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