U.S. bank failure could warn of recession
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Friday’s Labour Force Survey for February found employment holding steady in Canada from January to February and the unemployment rate holding at five per cent. The data suggested the Canadian economy was recovering nicely from the depressing effects of the COVID-19 pandemic.
The sudden collapse on Friday of the California-based Silicon Valley Bank, however, showed there are weak spots in North American industry that could trigger a wider loss of confidence, leading perhaps to a recession.
Finance Minister Chrystia Freeland has promised a federal budget for March 28 in which she must support economic expansion and employment growth without adding to the inflation already impoverishing Canadian households.
She should curb the free-spending method that helped Canadians through the pandemic. She should keep room for manoeuvre in case she needs to cut taxes or launch new spending programs to fight a recession.
Employment grew rapidly in the late months of 2022. Employment trended upward since September. The number of employed people in Canada reached 20,054,000 in February, an increase of 348,000 since August.
The Bank of Canada has been raising interest rates rapidly for the past year in the hope of curtailing business expansion and employment growth as a means of curtailing the inflation that has driven up consumer prices. The February employment data suggested employment growth has slowed down from the rapid pace set in December and January.
The February employment data suggested employment growth has slowed down from the rapid pace set in December and January.
Bank of Canada governor Tiff Macklem and his colleagues believe the interest rate increases they had already imposed will slow Canada’s economic growth in the second half of this year. They announced a pause in rate increases to await developments.
The latest development was the failure of the Silicon Valley Bank, whose inventory of U.S. government bonds had dropped sharply in value on account of rising U.S. interest rates. Small and growing high-tech firms financed by the bank had increased their loans owing to rising expenses, to such a point that California bank regulators put the bank out of business on Friday. Federal authorities urged calm to prevent a wider run on the banks.
Ms. Freeland should draw a sobering lesson from the Silicon Valley Bank failure. Aggregate employment numbers that show steady growth may conceal business contractions in specific industrial sectors, such as the business of financing small and growing high-tech firms. In the current economic climate, a bank failure that would shake public confidence in the banking system is entirely possible.
In the current economic climate, a bank failure that would shake public confidence in the banking system is entirely possible.
As long as she has been finance minister, Ms. Freeland has been pouring borrowed money into the hands of Canadian households and businesses to overcome the effects of the pandemic. If the Bank of Canada induces a recession by its high interest rates, she will need every dollar in the federal treasury to finance the new programs and tax cuts that would eventually pull the country out of recession.
Governments typically express their values by promising generous spending on purposes such as better health care and a cleaner environment. If, however, Ms. Freeland follows that pattern and spends every available dollar on worthy projects, the recession that may lie ahead will put her in a tight spot. It would require her to borrow heavily once again in the bond market and drive up inflation once again.
Canadians will not thank her for borrowing and spending in such an open-handed way.