MNI INTERVIEW: Lasting Canada Stimulus Seen on Lagging Rebound

Canada faces long-term weakness in business investment and productivity that will encourage policy makers to keep stimulus in place through the burst where firms re-open following pandemic lockdowns, Craig Alexander, chief economist at Deloitte Canada, told MNI.

The Bank of Canada will likely wait until the fourth quarter of next year to raise its 0.25% rate, said Alexander, who has testified half a dozen times to parliament's economic committees. That timing is towards the end of Governor Tiff Macklem's guidance period for a move in the second half of 2023. Expanded government spending won't be significantly wound down until 2023, he predicts.

Justin Trudeau's Liberal government is pushing ahead with a CAD100 billion stimulus package aimed at "punching through" the pandemic recovery, even as Alexander predicts all the lost jobs could be regained by August. Canada's bigger problem is a longer cycle of exporters losing market share in the U.S., slower investment and productivity, and growth fueled more by indebted consumers, he said.

"I actually don't think we were on the path to prosperity," he said. That's even with Deloitte's new economic outlook published Tuesday that projects 6.7% GDP growth this year, rivalling peaks not seen since 2007 or the early 1970s. The expansion will slow to 4.1% next year as the re-opening burst subsides. "Even with that positive outlook, there has been a lot of damage done to the economy."

NO FED-STYLE MANDATE

Unemployment will decline to 6.6% by early next year, but hover above 6% for years after that rather than testing the lows seen before the pandemic, because of technological shifts displacing workers in some industries and deep cutbacks in others, he said. "There are workers in those sectors that are not going to have jobs to return to," Alexander said.

While the central bank is unlikely to aid the job market by adopting a Fed-style dual mandate with full employment after a framework review due later this year, policymakers will use existing flexibility on its 2% inflation target, he said.

"I'm not convinced that if the Bank of Canada had a dual mandate that included full employment, it would really change how the Bank of Canada conducts monetary policy," he said, adding his rate forecast would remain unchanged if a dual mandate was adopted. Macklem has already pointed to regain 750,000 jobs to restore the job market's potential.

Alexander said keeping stimulus going into 2023 gives the recovery more time to be well entrenched, and to assess other potential risks such as Covid-19 variants and rapid inflation.

"Canada is poised to have very strong economic growth and job creation as the vaccination process is completed, but it might not be smooth sailing after that initial rebound," he said.

Source: Deloitte