MNI INTERVIEW: Firms See Canada Skirting Slump & More BOC Pain
Head of major business group CFIB says wage gains and inflation remain headaches.
Canada will avoid the recession investors are predicting no matter whether the central bank dishes out more pain through interest-rate hikes or tolerates inflation that's hurting profit, the head of one of the country's largest business groups told MNI.
Members of the Canadian Federation of Independent Business have boosted their views about the economy for a seventh consecutive month though sentiment remains below average, President Dan Kelly said on MNI's FedSpeak podcast.
“There’s no question that we’re in some kind of slowdown, but it may be that Canada avoids any kind of recession, and that’s what we’re expecting right now and what we’re hoping will happen,” he said.
CFIB's outlook differs from that of economists at several Canadian big banks who say the economy is already tipping into a recession. Meanwhile Statistics Canada is seen reporting next week that the economy grew at a 2% annualized first-quarter pace and unemployment is around record lows.
A GOOD BAROMETER
Smaller firm owners are good predictors of their own fortunes and those dovetail with Canada's GDP, Kelly said. Small and medium firms make up half of Canada's private-sector output and employ nine out of ten private sector workers.
Entrepreneurs are struggling to find good workers and that points to continued outsized wage and price gains, Kelly said. The CFIB's Barometer showed firms see wages up 3.2% over the next year and prices gaining 3.7%.
Those figures have moderated from record highs but exceed the Bank of Canada's view inflation will slow to 3% by midyear. Governor Tiff Macklem has hiked rates to 4.5% from 0.25% in the year through January and has said he could hike again if inflation gets stuck above the 2% target. While not predicting where rates will go, Kelly said in any case the BOC won't be providing a very soft landing.
“This is painful either way, either letting inflation run rampant without jacking up interest rates further, or seeing inflation wrestled under control through higher interest rates that do punish business and business investment,” he said.
INFLATIONARY FISCAL POLICY
“We’re hoping that we can get on the other side of this soon,” he said, adding “governments unfortunately are making this worse rather than better through spending.”
CFIB members are concerned the last federal budget dropped a forecast for balancing the books while also raising payroll taxes and the carbon tax and shrugging off calls for extended repayment of pandemic business loans.
“Business owners realize that today’s deficits are tomorrow’s taxes, so if we rack up deficits forever, we’re never going to get ahead of it, and a growing share of our taxes is going to go towards serving the deficits,” Kelly said.
Kelly last week convinced Minister Chrystia Freeland to lower credit card fees that were a key concern. While Kelly is optimistic she will also give firms more time to repay "CEBA" pandemic loans, that step must happen in the next few months to be effective.
DOUBLE SHIFTS
“The debt issue is a big one for a lot of businesses,” Kelly said. “I don’t think the door is entirely closed and I think there are a lot of Members of Parliament sympathetic to this, from all parties.”
Canada’s governing Liberals lack a majority of seats and need opposition votes to pass budgets.
Only half of firms report their sales have returned to pre pandemic levels and many have taken on significant new debts, he said. Compounding the issue is a hot job market that's forcing many entrepreneurs to work the equivalent of an eight-day week because they can't find good staff, he said. Some are emulating large firms by calling in temporary foreign workers, until now a resort mainly of big corporations.
“A typical story I’m hearing from restaurant owners for example: pre-pandemic they might have needed 10 workers, now they only need five workers because the business is slower, but they can only find two workers.”
“There has been no real slowdown in the labor market even though the economy has been kind of flat.”