Sometimes, we see clearer looking in on another economy, and the dynamics in Canada are mirroring Australia, and New Zealand, so when the Bank of Canada Governor Tiff Macklem discussed the latest Monetary Policy and decision, it was relevant more broadly.
They held target for the overnight rate at 5% and warned that while rates might have to go higher if inflation reaccelerated, their base case was a pause, for some time, waiting the for effects of higher rates to pull inflation into target – a target not expected to be met for some long time. The Bank is also continuing its policy of quantitative tightening.
Global economic growth continues to slow, with inflation easing gradually across most economies. While growth in the United States has been stronger than expected, it is anticipated to slow in 2024, with weakening consumer spending and business investment. In the euro area, the economy looks to be in a mild contraction. In China, low consumer confidence and policy uncertainty will likely restrain activity. Meanwhile, oil prices are about $10 per barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have eased, largely reversing the tightening that occurred last autumn.
The Bank now forecasts global GDP growth of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace. With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025.
They called out risks to this forecast:
First, inflation expectations have come down only very modestly over the past few quarters. If households and businesses continue to expect inflation to stay elevated, this could impede the pace at which price and wage growth moderate.
Second, wages have been increasing at a fast pace relative to productivity growth. On average, consumers’ real wages are higher than they were in 2019. Productivity growth is effectively stalled and wages are still rising robustly. Because of this, the Bank remains concerned that cost pressures could add to inflation.
Third, house prices could also rise more than anticipated. This would increase inflation by raising shelter costs. While the base case includes a modest increase in house prices, this forecast is subject to a high degree of uncertainty. This risk could materialize if easing financial conditions lead to stronger-than-expected demand for housing while supply remains constrained.
The conflict in Israel and Gaza and attacks on ships in the Red Sea are affecting seaborne trade in the region and could push oil prices and shipping costs higher. So far, global disruptions from these developments have been contained. But if the conflict were to spread further, oil prices could rise sharply and the prices for traded goods could also increase significantly.
In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024. Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted. With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply. Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth. However, wages are still rising around 4% to 5%.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
