However, according to Deputy Chief Economist of CIBC, the Canadian economy is still doing “relatively well”.
“We got very strong numbers for the first quarter and everything points to a relatively strong spring,” said CIBC’s Benjamin Tal.
Also, given the pent-up consumer demand associated with the opening of the economy, Tal said there would likely be a shift in consumption from goods to services. It’s a good thing, he said, because tThe supply of services is more elastic than the supply of goods.
“In other words, it’s much easier to start a new restaurant than to establish a new manufacturing facility,” Tal said. “Therefore, the shift from goods to services that we are seeing now is actually disinflationary.”
Nonetheless, he said inflation remained a major threat to the global economy.
While the energy sector will stabilize soon, Tal said Covid-related supply chain issues have only worsened due to the ongoing conflict between Russia and Ukraine and that they will probably stay another year.
Lockdowns in China have further destabilized supply chains, leading to weaker global growth forecasts.
Tal said the most permanent element of inflation is the labor market. “Wages are rising and will continue to rise, and that’s something that’s going to be with us for some time,” he said.
Moreover, rents will also continue to be inflationary as the supply of available housing does not meet demand.
Tal said the Bank of Canada will likely raise interest rates by 1% to 2.5%, which he says will not only be important in slowing the economy, but it will also slow down the housing market.
But he thinks the central bank can stop there.
“We believe that reducing inflation coming from the supply chain and decreasing the impact of energy prices on the economy means that a lot of the inflation-fighting work will be done. outside,” he said.
However, there is always a risk of excessive tightening leading to a recession. Tal said if rates go from 2.5% to 3.5%, it would be the difference between a soft landing and a recession.
“Every economic recession has been helped, if not caused, by a monetary policy error in which central bankers raised interest rates too quickly and caused the recession,” he said.
Tal also noted the impact of deglobalization on business. For more than 20 years, profit margins have increased due to globalization, just-in-time inventory and cheap, available labor, he said.
This is no longer the case.
“We have a situation where just-in-time inventory is turning to just-in-case inventory, and clearly labor is not available and not cheap,” Tal said.
Instead, companies began to replace labor with capital, a strategy seen in the 1990s that increased productivity, leading to falling wages and inflation. “That’s exactly what we’re starting to see now,” Tal said.
He expects business investment to continue, which will help fight inflation: “Productivity is the main shield against inflation,” he said.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without the contribution of the sponsor.