MNI INTERVIEW: Canada Faces Recession, Not Wage Spiral-Adviser

Canada is much more likely to face a recession in the near term than a wage-price spiral as the central bank takes needed action to pull demand back in line with supply, a labour market adviser to federal and provincial governments told MNI.

“The probability that we’ll enter or are in a recession right now is pretty high given what central banks here in Canada and around the world are doing,” Tony Bonen, executive director of the Labour Market Information Council, whose board is comprised of officials from every province, Statistics Canada and the federal labour department. Central bankers in Canada “are taking that action to constrain growth, precisely because markets are overheated. The labor market response to that will show up in the data with a bit of a delay.”

Any recession that emerges should be less damaging than the Global Financial Crisis around 2008 or Canada's deep slump in the early 1990s, Bonen said. The job market is a big part of the cushion, he said, with wages rising at a 5% annual pace, record vacancies and a historically low unemployment rate.

“Labor markets in Canada are in the best position that they could be when entering a recession," he said. "The demand for workers is so high, there’s no other way to meet it in any realistic timeline, so if you’re going to slow the demand in labor markets this is the ideal set of factors you would want.” (See MNI INTERVIEW-Canada Job Mkt May Get Even Hotter: Indeed Econ.)

LATE BUT DEDICATED EFFORT

Canada -- unlike the U.S., Europe and China -- is still growing at a strong pace, with early estimates showing annualized expansion of about 4.5% in the second quarter. While recent monthly job losses are in contrast to the U.S., unemployment in both nations remains at the lowest in decades in part because the supply of workers is held back by retirements in an ageing workforce and as some people sit out of the job market amid Covid.

The concern remains that the Bank of Canada has to tame inflation that's about four times its 2% target, that wage demands will keep pace with consumer prices, and last month's 100bp hike will exert stress on the economy. Bonen said there's still time to keep a wage-price spiral in check.

"The concerted action by the Bank of Canada and other central banks, if it came a bit late it at least came with a very strong and a dedicated effort to reduce inflation and that’s already starting to show up in some of the inflation data," he said. "I’m optimistic that we won’t see wage-price spirals, and perhaps this might turn into something of a good news story where there is a bit of sustained wage growth, not unsustainable wage growth but a bit of real increases in wages.”

The bigger error would be for the central bank to dilute its fight against inflation out of fear of stalling the job market, Bonen suggested. “The Bank of Canada mandate to focus on inflation, that needs to be their focus, especially now,” he said. “The question of how to accommodate negative impacts on workers and businesses as a result of that needs to fall to others in the policy world.”

HOPE FOR THE LONG RUN

While rising unemployment will likely be part of the correction, Bonen said much of the damage may be blunted if most of the reduced demand is matched by accelerated retirements rather than losses among prime-age workers.

Over the longer run, the relatively low supply of workers is likely to persist. The head of the labor market group said it is better to think of "labour tightness” than "labour shortage,” even if he too is guilty of using the latter term.

The pandemic has led to discussions among policymakers and employers about working from home, flexible schedules and the right to disconnect after regular hours, Bonen said. Firms will try harder to overcome higher recruitment costs in ways that benefit themselves, workers and productivity, he said. So far the evidence is also that gains could go more towards lower-paid and gig workers.

“There could be a silver lining to this in the medium to long term,” he said. “This will hopefully spur greater innovation, and we in Canada are on track to have otherwise fairly low productivity gains in coming years.”