Canada’s sluggish economy might be headed for a ‘shallow downturn,’ but it’s unique in the sense there’s also pent-up demand for motor vehicles, said BMO Financial Group chief economist Douglas Porter during an industry event last week.
“Anybody here who has tried to buy a car in the last couple of years has an idea of just how short supplies [are]…,” Porter said during the Centre for Study of Insurance Operations’ (CSIO) members’ meeting and reception. “So, we can have a very unusual situation of an outright, small downturn in the economy where auto sales actually rise.
“We’ve never seen that before,” Porter said during his keynote address, Outlook 2023 — Cold in the forecast. “Usually auto sales are at the leading edge of any kind of downturn; they’re usually the first things to go in any kind of economic downturn.”
In effect, recent supply chain issues meant supply just wasn’t able to keep up with the demand for vehicles over the last couple of years, Porter explained.
Another unusual factor during this economic cycle is “just how very tight the job market is,” he said. “It’s tough for me to describe just how unusual the situation is.”
In Canada, the unemployment rate is about 5% — a rate that hasn’t been seen in decades, Porter said. He added he’s reluctant to call the current economic situation a recession. “I call it a shallow downturn because I don’t think it’s going to be what many of us have associated with a recession — 10% unemployment and you have lots and lots of business going out of business and real pain.”
Then there’s ‘the Great Resignation’ or ‘the Big Quit,’ Porter said, referring to a trend of people quitting their jobs during the COVID-19 pandemic.
“That’s a bit of a myth, especially in Canada and Europe,” he said during his keynote speech. “People didn’t really drop out of the labour force. In fact, we’ve got more people working now aged 15 to 65…as a share of the population than we’ve ever had before.”
In addition, employers realize inflation is starting to come down and they don’t want to get locked into big wage settlements, Porter said. “And so, we have this fundamental friction that I think is going to be with us for a little while yet.”
Porter attributes the frenzied increase in inflation to five different elements:
- Energy prices — Although prices increased, “energy has pretty much left the building as a driver.” Both gasoline and (to a lesser degree) natural gas prices have dropped.
- Pandemic reopening pressures — Airfare and hotel rates increased a lot initially, but that has started to fade as a driver since costs are levelling out.
- Supply chain issues — “Just this tidal wave of demand for durable goods like furniture, appliances, autos, electronics, just washed over the global supply system,” Porter said. “I would still say a lot of the supply chain issues we heard about was actually just overheated demand pressing up against a limited supply chain and just overwhelming it.” Demand (except for autos) is now moderating.
- Grocery and food prices — Grocery prices in Canada and the U.S. have increased 8% to 9%, partly attributable to a bad grain crop in 2021, the Russian invasion of Ukraine (which drove up fertilizer prices), and the avian flu, which increased egg prices. “This is not a Canadian story; this is a global story,” Porter said, adding that food prices are up 17% year-over-year in Britain and more than 20% in Germany.
- Housing boom — Rents are under pressure, and home prices were on the rise for a while. This ultimately drove up interest rates.
Feature image by iStock.com/sefa ozel
