MNI INTERVIEW: Canada Prices Rising Too Fast For BOC- CFIB

Canada's economy isn't providing convincing evidence to the central bank that the most aggressive rate-hike campaign in decades is doing enough to win the inflation fight, despite signs that growth is stumbling, the head of an influential business survey told MNI.

Managers are reporting to the Canadian Federation of Independent Business that the pain of higher borrowing costs is now the most widespread since 2009, with half of respondents calling them a difficulty. But while executives see signs of a recession they plan to continue with wage and price increases above the Bank of Canada's 2% target according to Andreea Bourgeois.

“The economy is slowing down, and the question is, is it slowing down fast enough for the Bank of Canada’s tastes? I’m not sure,” said Bourgeois, Director of Economics at CFIB who has met with BOC staff to compare notes. The monthly CFIB Barometer has a larger sample size than the central bank's quarterly anecdotal business survey.

Bank of Canada Governor Tiff Macklem held his key overnight lending rate at 5% last month, the highest since 2001, and said he could hike for an 11th time in this cycle if inflation appears to remain stubborn. Officials also say the lagged effect of hikes could be substantial and that they want to avoid opening up more slack in the economy than is needed, even with inflation seen holding above the 2% target until mid-2025.

'EVERYTHING IS CATCHING UP'

Amplifying the borrowing pain is a Covid-era lending program that's expiring soon, forcing many entrepreneurs to seek private loans at much higher interest rates to pay back the government, Bourgeois said. Part of the government loans are forgivable if paid back on time, meaning it can be somewhat less expensive to refinance at higher rates.

“Right now everything is catching up and they are realizing this is how much it’s going to cost me,” she said.

The Bank’s hikes have done some rebalancing of the economy, she said, noting a decline in expected price increases from earlier record highs. Firms on balance in the latest monthly poll still expect to raise prices 3.2% over the next 12 months and wages by 2.6%.

“If they still want to get to 2% as fast as possible, they will play with the rate just based on the fact that inflation is still well above that,” Bourgeois said of the BOC. (See: MNI INTERVIEW: BOC Could Hike Once Or Twice More, Dodge Says)

VERY LOW OPTIMISM

The economy has moved towards recession, with four in 10 firms polled seeing a lack of domestic demand and sentiment over the next 12 months is the lowest since the depths of the pandemic. Firms may also be reacting to recent minimum wage increases across half of the country’s provinces and a rise in federal payroll taxes, she said.

Small businesses with fewer than 100 workers account for 68% of Canada’s private-sector employment, and medium-sized companies with up to 500 employees make up another 21%. Those firms contribute about half of Canada’s GDP.

Canada's output shrank at a 0.2% annualized pace in the second quarter and some economists see a recession at hand after a year when many forecasts were confounded by resilient consumer spending. To be sure, any technical recession stands to be mild with unemployment still within half a percentage point of record lows and some households holding onto pandemic relief checks. (See: MNI INTERVIEW: BOC Seen On Hold Until Mid-2024 Cut- Stillo)

Long-term optimism “is at a very low level for Canada right now,” Bourgeois said. “The level we’re seeing in some indicators, it’s close to levels seen in 2009, also close to what we have seen during the pandemic.”