MNI INTERVIEW:BOC Sees Soft Landing In GDP Stall- Ex Govt Econ

The Bank of Canada will likely see weak fourth quarter GDP data released Tuesday as pointing to a welcome soft landing that will allow policymakers to follow through on the conditional commitment to pause after eight straight interest-rate hikes, former government economist Glen Hodgson told MNI.

“This is what a healthy slowdown looks like, what a soft landing looks like,” said Hodgson, a consultant who has worked at the federal finance department and trade finance bank, and advised governments as former chief economist at the Conference Board. Canadian output was 0.0% at an annualized pace, far less than than the market consensus for around 1.5% and the Bank of Canada's 1.3% estimate.

Investors have overstated the economy's downshift in recent months and the latest GDP figures continue to show resilience to the jump in interest rates and a shaky U.S. economy, Hodgson said. Canada's consumer spending rebounded in Q4, a weaker dollar supported exports and the inventory run-down that stalled GDP is more about a few industries anticipating slower growth than a genuine slump, he said.

“I don’t interpret it as a bad number,” Hodgson said of the GDP report. “The Bank should be pleased because we’ve gone through about a 400 basis point increase in interest rates over the past year, which is really slamming the brakes on.”

BRAKE IS WORKING

Governor Tiff Macklem has said the economy could be flat in the first three quarters of this year, helping restore balance to an overheated economy. The Bank in January hiked a quarter point to 4.5% and Macklem said he's likely done unless there's a rush of evidence higher rates aren't doing enough to restore 2% inflation.

“I personally don’t see the case right now for another increase in Canada,” Hodgson said. “You’ve already put your foot on the brake, the car has slowed down, there’s no need to slam on the brake any further.”

“It’s more likely that the next move by the Bank of Canada is going to be a rate cut, I wouldn’t be at all surprised now to see that happen before the end of 2023,” he said. With a soft landing in sight the Bank can pause even with the Fed poised for two or three more hikes, Hodgson argued.

He also contradicted others who say loose fiscal policy will keep the pressure on the Bank to look at more tightening. (See: MNI INTERVIEW: Deficit Means Little Scope For BOC Cut- Asselin)

BACK IN THE BOTTLE

Recent spending announcements are spread out over time and the last fiscal update showed the budget could be balanced within five years following record deficits at the height of the pandemic, he said.

“There’s no reason to add extra fiscal stimulus right now, even if the economy goes into recession,” Hodgson said. "The automatic stabilizers will be sufficient,” he said, referring to fiscal programs that shrink revenue and boost benefit outlays in any downturn.

While Canadian CPI remains elevated at around 6%, Hodgson said the last few reports have signaled trend inflation is most of the way back to 2% after peaking around 8% in June.

“We are slowly putting the inflation genie back in the bottle,” Hodgson said.