... Congrats to all - good read on what might comeCANADA ECONOMICS FEATURE: CIBC's Shenfeld Asks, If It Gets Ugly, How Ugly Will It Get?
02:45 PM EDT, 10/28/2022 (MT Newswires) -- "For us," CIBC's Avery Shenfeld said in his 'The Week Ahead' column, "the Bank of Canada's call for a period of stagnation -- growth of close to zero for a few quarters -- had a familiar ring to it, because it's exactly what we have in our own forecast. That doesn't of course guarantee that outcome, but it's relevant because it reveals that the central bank doesn't think it needs an outright recession to bring inflation to heel, and isn't explicitly aiming to have one as it sets the path of interest rates."
"But," Shenfeld added, "there's a band of uncertainty on how the economy will respond to a given level of interest rates, and room for new shocks to emerge; one certainly can't rule out that the combination of monetary tightening here and abroad ends up in an unintended recession. And so, the question we're being asked is, if it gets ugly, how ugly will it get? Just what kind of recession are we likely to see in Canada if it turns out that we're overdoing it on rate hikes?"
According to Shenfeld "it might not be a very short-lived downturn, because of where we are in this cycle." Unlike 2020, or 2007-08, when core inflation was "reasonably well-contained" when the recession hit, the Bank of Canada won't be rushing to the rescue with rate cuts at the first whiff of trouble, because it's actually looking to open up some economic slack, he said.
Shenfeld noted economic data are reported with a lag, and "a stall in growth might not look that different from an outright recession at first." As a result, he said, many months could tick by before it's clear that the slowdown is more severe than intended, and that inflation is set to tumble below the Bank's 2% target.
He added: "Fiscal policy was the big weapon in fighting the COVID recession of 2020, both in the US and Canada. There too, the response this time might be delayed until it's clear we're getting more of an economic hit than we needed to cool inflation."
When it does come, fiscal relief could also be more limited, Shenfeld said. He noted: Stateside, if Republicans gain control of Congress in the midterms, they are likely to weigh in against new spending measures, as they tend to become more hawkish on deficits during a Democratic presidency. And in Canada, while some provinces aren't in bad shape and the federal deficit is now "melting away", the level of federal debt is obviously much higher than it was prior to 2020.
"If there's a silver lining," Shenfeld said, "it's that while monetary easing won't come quickly, and we could remain in a recession for several quarters, it's likely to offer a greater boost to Canada's economy than it could in 2020. Back then, overnight rates started from a peak of 1.75%, leaving very limited room to ease. There was much more easing in the offing in 2007, when rates could be slashed from 4.5% in 2007 down to 0.25% by 2009."
Shenfeld added: "It would take a very deep recession to see that sort of response this time, but as in 2007-08, the Canadian economy is well placed to get a nice lift from any significant monetary easing. Back then, having not had a wave of mortgage defaults akin to what the US experienced, the Canadian economy enjoyed an earlier recovery, levered off of housing, when rate cuts were delivered on both sides of the border."
Prior to this year's spike in mortgage rates, Shenfeld noted in concluding, there was again "considerable pent-up demand" for housing in Canada given "brisk" immigration and difficulties in keeping pace in homebuilding. He said that sector could turn from bust to boom again should we need a monetary easing to dig us out of a bigger economic hole than was intended to battle inflation. "So." he added, "while housing is feeling a disproportionate share of the pain from monetary tightening, it's waiting in the wings as the key to preventing what might be a protracted recession from turning into a very deep one."