Post-COVID imponderables up the risks with Freeland’s recovery outlook

OTTAWA—Will the global economy prove to be a COVID long-hauler? The diagnosis remains uncertain, as with every other factor concerning the virus and its duration and impact. Despite the negative influence of the Delta variant, the Canadian economy has bounced back fairly well. And in keeping with this brighter outlook, the Bank of Canada was expected this week to signal it will continue over coming months to scale back some of its aggressive efforts to stimulate the economy during the health emergency. How gradually that will happen may be in flux. Bank of Canada Governor Tiff Macklem was expected to signal this week that a decision to raise the central bank’s trend-setting overnight interest rate, while not imminent, may have to be moved forward in the second half of next year. Economic forecasts for Canada indicate a continuing rebound, with strong four per cent growth likely in 2022. But the outlook is weighed down by numerous post-pandemic imponderables. Canada’s jobs bounce back in recent months has been generally impressive, with more people employed now than before the virus arrived in 2020 and a jobless rate at 6.9 per cent, compared to its peak of 13.7 per cent last year. However, the situation is clouded by a tumultuous labour market. Employee shortages were in evidence before 2020, but the pandemic has exacerbated the problem as a result of a shutdown of immigration, people advancing their retirement plans, and a host of issues around wages, COVID fears, and career paths—all leading to the anomaly of a relatively high continuing unemployment rate coupled with widespread labour shortages. “I think what we're seeing here is it's more complicated to open an economy than to close an economy," Macklem told a U.S. think tank earlier this month. The likelihood of higher wages because of the labour shortage feeds into a more troubling factor—a burst of inflation unseen in nearly 20 years. Rising post-pandemic consumer demand, supply chain disruptions, product shortages, and surging oil prices have suddenly put an end to many years of price stability for Canadian consumers. Food and gasoline prices have soared beyond what anyone predicted a year ago and the unexpected explosion in housing costs as a result of the pandemic continues. And economists are rethinking their conviction that higher living costs would only be a temporary aftershock from the pandemic. For the newly appointed Trudeau cabinet, this gives affordability even more urgency. If inflation persists, the Liberals will need to somehow balance their transformative vision based on radical climate change action, higher taxes on the wealthy, and more generous social programs with increasing demands from the public for practical, down-to-earth relief. Quickly putting in place promised programs to make home ownership more affordable, ease student loan repayments, improve Employment Insurance, and support better skills training will take on added importance. On a wider scale, Canada as an exporting country has a lot at stake in a solid global recovery. While fears of impending stagflation (the damaging combination of slow growth and runaway prices) seem overblown, some of the key factors behind the international bout of stagflation in the 1970s are present again in the form of surging energy and food costs. The British economy, the fifth largest in the world, is facing a debilitating mix of product and worker shortages along with an energy crunch driving up the cost of living and doing business. Similar problems are being seen across much of the globe, including Europe and China. In the U.S., consumers’ confidence in a strong post-COVID recovery has flagged and the International Monetary Fund recently warned the continuing pandemic and inflationary pressures driven by supply chain bottlenecks are putting the economic rebound at risk. Here at home, Finance Minister Chrystia Freeland has now put her confidence in Canada’s reviving economy on the line by replacing broad-based COVID support programs with more targeted, less expensive measures. The move no doubt reflects concerns about government spending, inflation factors, and claims that the programs were slowing employees' return to work. With most Canadians vaccinated and the economy reopening, Freeland’s bet on the pandemic being mostly over makes sense. And paring back support programs will give the Liberal minority something handy to trade for the support of the NDP, which is calling for full pandemic aid plans to be reinstated. But the way forward is likely to be uneven, with a return to the economic status quo pre-COVID still subject to unexpected shocks. Les Whittington is a regular columnist for The Hill Times. The Hill Times

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Post-COVID imponderables up the risks with Freeland’s recovery outlook

If inflation persists, the Liberals will need to somehow balance their transformative vision with increasing demands from the public for practical, down-to-earth relief.

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