Optimistic forecast for Manitoba and Canada

Hey there, time traveller!
This article was published 07/02/2023 (943 days ago), so information in it may no longer be current.

When the Bank of Canada increased interest rates by 0.25 per cent two weeks ago, it was the eighth increase in 10 months.

But Pierre Cleroux, chief economist at the Business Development Bank of Canada (BDC), told Manitoba Chambers of Commerce members on Tuesday morning that the good news is it is likely the last one and by the end of the year, interest rates should start to come down.

“The rate increases have done their job,” said Cleroux, meaning inflation is starting to come down.

It also means, according to Cleroux — and a consensus of bank economists agree — that Manitoba and Canada will likely not fall into recession this year.

Now Cleroux also pointed out that there is some quibbling about the use of the word that carries very negative connotations.

While Cleroux’s forecast calls for GDP growth in Canada this year of 0.5 per cent, there are still some forecasters calling for a mild recession and a 1.0 per cent decline in 2023.

The difference between 0.5 per cent growth and 1.0 per cent decline is not very significant. Cleroux noted that if a business suffered a 10 per cent drop in sales, that would be a very big deal, but a 1.0 per cent drop would not be nearly so concerning.

Cleroux’s expectation that there will not be a big recession is borne out of some fundamental elements that are different than past recessions, most notably that the last two, in 2007 and 2020, were caused by outside forces — the U.S. financial crisis that caused a global recession and the pandemic in 2020.

This time the economy is performing well but creating too much inflation and the Bank of Canada has increased interest rates to reduce inflation

“This is a much more controlled situation,” he said. “If the economy is slowing down too much the Bank of Canada can reduce interest rates. That is why we are more optimistic about this slowdown that the last two recessions.”

Not surprisingly, Cleroux expects the Manitoba economy to outperform Canada this year — 0.9 per cent growth forecasted for Manitoba and 0.5 per cent for the country.

Manitoba’s economy fares better when there is a downturn in the larger national marketplace, Cleroux points out, because of its diversified economy.

In fact, the data for Manitoba is quite strong. Not only does this province continue to post unemployment numbers that are better than the national average — 4.3 per cent in Manitoba compared to 5.0 per cent in Canada in December 2022 — but Manitobans are paying about 25 per cent less than the national average in average scheduled monthly payments for new mortgage loans.

Retail sales remain well above pre-pandemic levels in this province, whereas consumption is coming down nationally and although real estate prices have come down by about 6.5 per cent from the peak in Manitoba, that’s nothing compared to the 19 per cent decline nationally. And housing starts have held their own in the province as well.

“The burden of increased interest rates is lower here than in Canada,” Cleroux said. “The effects of interest rate hikes are not the same in Manitoba. That is why the economy is not going to slow down as much. We are not talking about recession here.’

Cleroux said the BDC does not forecast provincial growth rates outside the current year because it does not have the same amount of data it has for the country. BDC is forecasting 1.2 per cent growth in Canada in 2024.

Irrespective of the pandemic, he said the fact that there was such strong growth in Canada in 2021 and 2022 — 4.6 and 3.5 per cent — meant that economic growth was beyond the economy’s capacity and hence the rising inflation which hit 8.1 per cent in June, 2022, a 40-year high.

Cleroux is as optimistic as he is about the recovery because the global economy is not going to be facing the two surprises that occurred this time — the war in Ukraine and the supply chain disruption.

With inflation under control — the inflation rate in the last three months annualized was only 1.0 per cent — and with supply chain disruptions almost all worked out of the system and the effects of Russia’s war in Ukraine better understood, the way forward is more clear.

But Cleroux said one nagging challenge businesses have been grappling with — labour shortages — is not going away.

That’s because of the aging workforce which is not getting any younger.

“Almost 20 per cent of workers in Manitoba are older that 55. That was only 12 per cent 20 years ago,” he said. “That means 20 per cent of the workforce will retire in the next 10 years. This is a unique situation and a new phenomenon.”

Cleroux’s advice to businesses grappling with that challenge — invest in technology.

martin.cash@freepress.mb.ca