Perfect economic storm: Scotiabank cites rising risks of stagflation in Canada

Scotiabank says the risk of stagflation in Canada is increasing.

Stagflation is a situation marked by stagnant economic growth, high inflation, and high unemployment.

It is considered a perfect economic storm, which requires controlling prices and, at the same time, trying not to slow economic activity further.

Scotiabank’s Nikita Perevalov mentioned the outlook in a report on Monday (May 16).

Perevalov, who is director of economic forecasting, was commenting on data released the same day by Statistics Canada on manufacturing and wholesale sales.

“Today’s double feature from Statistics Canada cast some doubt on the durability of Canadian economic growth, with manufacturing and wholesale sales disappointing in March,” Perevalov wrote.

The bank’s economist noted that while Canadian manufacturing company sales rose 2.5 per cent month-on-month in March 2022, “volumes were flat, with higher prices making up the difference.”

“Further along the supply chain, Canadian wholesale sales increased +0.3% m/m in dollar terms in March, again entirely driven by higher prices,” Perevalov also stated.

Additionally, wholesale volumes declined 0.6 percent month-on-month, with weak performances from personal and household goods, and machinery and equipment.

“While the weakness in the data released this morning could be attributed to volatility in the context of closures and reopenings during the wave of Omicron in Canada, it also fits into the overall global macro narrative where strong price increases for all types of goods and services services are combined with a weakening of growth in what is called ‘stagflation,’” Perevalov wrote.

The Scotiabank economist continued: “While Canada’s strong resource sector could help it escape the outcome, risks are increasingly tipping in that direction as the ongoing global geopolitical crisis has led to high prices for commodities. consumer and industrial sectors and has reduced growth prospects. in some of Canada’s trading partners (for example, the European Union)”.

Stagflation was also mentioned by Toni Gravelle, deputy governor of the Bank of Canada, in his remarks before the Association des économistes québécois in Montreal on May 12.

Gravelle essentially ruled out the prospect of stagflation in Canada.

“Inflation at 30-year highs naturally leads to comparisons with the stagflation period of the 1970s. Such comparisons are not warranted,” the central bank’s deputy governor said.

Rather than a stagnant economy, Gravelle said the current situation indicates “just the opposite.”

“The Canadian economy, by many measures, is doing quite well,” he said.

For the first half of 2022, Gravelle said the economy is forecast to grow about 5 percent.

“The last time we saw that rate of growth was a 12-month stretch that ended in mid-2000, 22 years ago, the last time we raised our policy rate by 50 basis points,” he said.

Gravelle also pointed to the current job market.

“Unemployment averaged about 8% from about 1976 to 1982, the peak of stagflation. How is today? Well, the labor market is very tight, much stronger than it was back then,” he said.

The current unemployment rate is at a “record low” of 5.2 percent, Gravelle noted.

“Some of you will say it’s all very well, but couldn’t we see stagflation appear in the next year or so? Won’t growth slow as the Bank of Canada raises policy rates? stated the lieutenant governor.

Gravelle continued: “Yes, growth will slow: the point of higher rates is to reduce excess demand and achieve a better balance with supply. That should reduce inflation, undermining the inflationary part of stagflation.”


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