Post-pandemic labour market a surprise, Rogers says

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This article was published 10/03/2023 (959 days ago), so information in it may no longer be current.

A day after the Bank of Canada announced its pause on interest rate hikes, its senior deputy governor, Carolyn Rogers — who grew up in Winnipeg and graduated from Brandon University — was in Winnipeg to explain the bank’s strategy.

In a speech to the Manitoba Chambers of Commerce, Rogers pointed out that Canada’s economic growth rate has been the strongest among the G7 countries since the beginning of last year and the International Monetary Fund expects Canada to have the strongest average GDP growth in the G7 over 2023 and 2024. But she said there is still lot of hurdles for the economy to overcome to reach the BoC’s target inflation rate of two per cent.

Among those is the tight labour market that is increasing wage demands coupled with falling productivity.

As well as the Canadian economy is doing relative to the G7 countries, Canada continues to have one of the lowest rates of productivity growth in the G7, said Rogers in her first public appearance in her hometown after joining the BoC in December, 2021.

If productivity increases employers would be able to afford higher wages.

“But, if we continue to see the above-average wage growth that we’ve been seeing in Canada without stronger growth in productivity, it will be difficult to bring inflation all the way down to 2 per cent,” she said.

Meanwhile, labour productivity in Canada fell for a third straight quarter, “So productivity isn’t trending in the right direction so far,” Rogers said.

Speaking with reporters, Rogers acknowledged that the labour market activity post-pandemic has been a surprise to the BoC governors.

“It has been incredibly tight and staying tight even as we see the economy slowing down a bit,” she said.

In its rate announcement on Monday the BoC said it expects weak economic growth for the next couple of quarters that should put downward pressure on prices of goods product and labour markets.

“We can all agree that inflation is still too high,” she said. “It has started to come down, but, at 5.9 per cent, we still have a way to go to get back to our 2 per cent target.”

On a few occasions Rogers pointed out that Canada develops monetary policy to suit the domestic economy, but there is the question of how the country will be impacted if the U.S. continues to raise rates as its Federal Reserve suggested this week might be the case.

In his note to clients this week, Douglas Porter, chief economic with BMO, said, “With the Bank of Canada becoming the first major central bank to step to the sidelines, even as Fed Chair Powell is breathing fire, the question becomes how much the two can realistically diverge.”

The Canadian dollar exchange rate versus the U.S. dollar is already coming down which means imports are more expensive which will inject additional inflationary pressure.

Rogers said, “There’s no question the U.S. is our biggest trading partner and what happens there will feed into Canada. In creating monetary policy we will look at their decisions (regarding interest rates) and see what they are reacting to and the degree to which it will affect us.

“It is true if our dollar depreciates … that means imports coming into the country are more expensive. That can put upward pressure on inflation,” Rogers said. “If that happens, that will have to get built into our forecast.”

In here speech she said while the world is interconnected, the Bank of Canada needs to do what’s best for Canada, while other central banks do what’s best for their countries.

“While we’re always thinking globally, we have to act locally,” she said. “We must tailor our policy to Canadian circumstances.”

Rogers parsed out global and domestic circumstances that caused runaway inflation, noting that the Bank of Canada’s rate hikes are geared toward addressing homegrown inflation.

She said what started off as a run-up in prices caused by high commodity prices, a surge in global demand for goods and disrupted supply chains then became a domestic phenomenon as the Canadian economy got overheated.

Though the central bank expects to hold its interest rate steady, it has made it clear that the pause is conditional on the economic performance and inflation cooling as expected.

On Thursday, Rogers made that point once again.

“If economic developments unfold as we projected and inflation comes down as quickly as we forecast … then we shouldn’t need to raise rates further,” Rogers said.

“But if evidence accumulates suggesting inflation may not decline in line with our forecast, we’re prepared to do more.”

In her speech, Rogers also discussed Wednesday’s rate decision, noting that the governing council found a “mixed picture” when evaluating recent economic data.

“Overall, though, things are unfolding broadly in line with our outlook,” she said.

Economic growth has slowed noticeably, with the Canadian economy posting no growth in the fourth quarter.

— with files from The Canadian Press

martin.cash@freepress.mb.ca