Spring lessons from Canada’s recent economic winter

Spring is usually seen as a turning point in the year. In Canada, it’s a period of thawing, warming, and brightening—a brand new season that will bring new energy and hope. For some of us who had it a bit rougher, it can even be a moment for soothing and recovery. This time, along with the season, many Canadians and scores of businesses looking to put a four-year economic winter behind them are also looking for a long-awaited fiscal spring. Lately, inflation—the last in a series of factors that extended this economic winter—is finally showing very encouraging signs, and the Bank of Canada is hinting that the cycle of interest rate cuts could still very possibly start as soon as this June. If true—and if growth is as forecasted and remains solid in 2024—it will be a pretty good outcome for the bank, which has been dealing with an unprecedented challenge to both the Canadian economy and its reputation in the past few years. We would have gone from the highest rate of inflation in more than 40 years to its desired target band of between one per cent and three per cent without experiencing a recession. Those are certainly developments under which the recent conduct of monetary policy can been seen as a success story. Simon Gaudreault is chief economic and vice-president of research at the Canadian Federation of Independent Business. Photograph courtesy of Simon Gaudreault The road to get there, however, has been demanding. Canadians still experience higher price levels because lower inflation merely slows the increase, and does not reverse it. Higher interest rates make access to home ownership a more distant dream that is slipping away from way too many prospective buyers. And for businesses, the impact of monetary policy has been harsh: according to the Canadian Federation of Independent Business’ (CFIB) Monthly Business Barometer, in April, 52 per cent of small and medium-sized businesses reported that demand for their goods or services was insufficient—a level not usually recorded outside of recessions—and 50 per cent mentioned that borrowing costs were causing them difficulties at the moment (a near-record share since we’ve started the survey in 2009). For Canadian business owners, this "it tastes awful, but it works" monetary policy moment is even more difficult to swallow because they’ve had to bear the brunt of the situation, but were never really the main part of the problem. Indeed, CFIB data shows that their 12-month price and wage plans only briefly peaked at 4.9 per cent and 3.6 per cent in the spring of 2022, and have been on a solid downward trend since. The Bank of Canada’s mission is first and foremost to keep inflation low and stable. To better achieve that, it is independent from the political process, allowing it to process differently—but not to ignore—the information and feedback from economic actors compared to other policy makers. With interest rates, it also has in its arsenal a very blunt tool, and recent developments have shown it will not hesitate to use it with great force and speed to accomplish its mission. But the economy is a complex beast with multiple parts coexisting in different states and going in opposite directions at the same time. Macroeconomic indicators such has GDP or headline inflation, or even core inflation measures, are always a bit deceptive in the sense that they mask these diverging realities. Therefore, monetary policy should be conducted with the help of a wide range of indicators, and should take great care minimizing the collateral damage it inflicts. What is the point of going from decades-high inflation to the target in record time if, in the process, we constrain demand unnecessarily, put the brakes on housing supply, and precipitate business failures? Hopefully, the recent episode has taught us a few things about inflation and monetary policy going forward. First, high and rising inflation is a terrible thing that can inflict a lot of pain very quickly, so aiming to keep it low and stable is a very important goal. Second, monetary policy works and central bank independence—not to be confused here with isolation—is one of the important factors behind its effectiveness. Third, not all economic actors will be impacted by inflation or monetary policy to the same extent or at the same time, so the blunt tool of interest rates must be used with care. Fourth, despite ever-present communication challenges, a variety of indicators and economic information sources should be used in the conduct of monetary policy to go beyond the surface and truly account for the complexity of our economy in order to avoid inflicting unnecessary pain. Let’s hope this long economic winter will have equipped us to make the next ones less harsh, and that the spring finally comes back in full force. Simon Gaudreault is the chief economist and vice-president of research at the Canadian Federation of Independent Business. He is responsible for conducting research and lobbying on a variety of economic, commercial, political, and social issues affecting SMEs across Canada. The Hill Times