Economic Roundtable: A follow up on our marquee event, The Future of the Canadian Economy
SPEAKERS
Moderator:
Panelists:
KEY TAKEAWAYS
Speakers discussed the Bank of Canada's interest rate decisions, with some expressing concerns about the Bank's reactive approach to monetary policy. They also debated the importance of reducing interprovincial trade barriers and creating a hospitable environment for business investment. Additionally, they touched on the interconnected issues of immigration policy, housing affordability, and labour market growth in Canada, with some expressing concerns about the potential for civil unrest and anti-immigrant sentiment.
Overall, the conversation highlighted the complex economic challenges facing Canada and the need for comprehensive solutions to address them, including the following suggestions:
Interest rates and housing market response
Interest Rate Reductions: The Bank of Canada has signaled gradual interest rate reductions, with two cuts expected this year and four in 2025, aiming for a neutral stance by the end of next year.
Housing Market Reaction: Brendon Bernard noted that the housing market has been less reactive to recent rate signals compared to last year. Higher interest rates have begun to strain investor appetite and reduce homebuyers' purchasing power, particularly in the Toronto condo market.
Bank of Canada's policy stance
Policy Bias: Benjamin Tal argued that the Bank of Canada is biased towards avoiding inflation at all costs, even at the risk of recession. He believes the Bank is overshooting with high interest rates, leading to a per capita recession masked by immigration-driven population growth.
Inflation Targets: The 2 per cent inflation target is outdated, according to Tal, and maintaining this target forces the Bank to keep interest rates higher than necessary.
Economic fundamentals and consumer sentiment
Soft Landing and Weak Economy: Stephen Tapp discussed the likelihood of a soft landing for the economy, despite weak fundamentals and negative per capita spending for over a year. Immigration is propping up headline numbers, masking underlying economic weakness.
Consumer Confidence: Rising rents and mortgage payments contribute to consumer dissatisfaction. Real wage growth is a mitigating factor, but confidence remains low as people save more and delay big purchases.
Measurement of inflation
Complex CPI Measures: Tal criticized the complexity of CPI measurements, which allow the Bank of Canada to selectively interpret data to fit its narrative. He argues that without mortgage payments included, inflation is already below target.
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Shelter Costs: Bernard pointed out that shelter costs, driven by high interest rates, are keeping inflation above 2 per cent, while other prices grow slowly due to squeezed household budgets.
Labour market dynamics
Productivity and Investment: Bernard emphasized that productivity and business investment are crucial long-term challenges. Layoffs are low, but job switching and new entries into the workforce have declined.
Economic Restructuring Post-COVID: Tal noted that the private sector must drive productivity improvements, as it faces tighter profit margins and the need to replace labour with capital.
Policy recommendations
Tax and Trade Reforms: Panelists advocated for comprehensive tax reform and the removal of interprovincial trade barriers to boost productivity and competitiveness.
Business Investment Incentives: Immediate expensing of capital expenditures and creating a hospitable environment for business investment were suggested to drive economic growth.
Immigration Policy: Tal criticized the current immigration policy for overwhelming housing and infrastructure. He advocated for capping the number of foreign students and focusing on housing affordability.
Future economic outlook
Choppy Growth: Tapp expects slow, choppy growth with high interest rates gradually coming down. The economy will face future shocks, such as potential strikes or natural disasters, impacting overall stability.
Mid-to-Long-Term Housing Market: Desjardins expressed skepticism about restoring housing affordability by the end of the decade, given the massive scale of required construction and current labour market constraints.
The panel underscored the challenges facing the Canadian economy, including high interest rates, housing affordability, and the need for productivity-enhancing policies. While the Bank of Canada’s cautious approach aims to curb inflation, structural issues in housing and immigration policies pose significant hurdles. Comprehensive reforms in tax, trade, and business investment are essential for sustainable economic growth.
Audience interaction
The session concluded with a Q&A segment, addressing macroeconomic concerns and the interplay between immigration and the labour market, highlighting the complexities and urgent need for policy adjustments to navigate the current economic landscape.
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