Canadian economic developments and the outlook for inflation
Governing Council assessed recent data and developments in Canada and judged them to be evolving broadly in line with their January projection. Headline inflation was coming down, and signs of a rebalancing of supply and demand were becoming evident. But Governing Council acknowledged that the labour market was still tight and the slowing in growth would likely come a little later. In general, Governing Council agreed that while the new economic projection was similar to January’s, there was a sense that the economy was proving a little stronger than expected.
On the labour market front, indicators continued to show overall tightness:
- While job vacancies had begun to ease, they remained high.
- Hiring continued to be robust.
- The unemployment rate remained near record lows.
- Wage growth was in the 4% to 5% range.
Members of Governing Council revisited their concern that the current pace of wage growth, if sustained, would not be consistent with getting inflation back to 2% without a substantial increase in productivity (which has been declining in recent quarters). Members also discussed the results of the most recent Business Outlook Survey, in which companies indicated that although the labour market was still tight, labour market pressures were beginning to ease. Businesses viewed current labour shortages as less intense than a year ago and were finding it somewhat easier to fill vacancies.
Governing Council spent considerable time discussing the implications of rapid population growth for the interpretation of recent data and the forecast. The Canadian population grew by about 1 million people in 2022, driven by large inflows of new permanent and non-permanent residents. Governing Council members acknowledged that while this was helping to alleviate labour pressures, it added to demand as well as supply, given that newcomers to Canada are also consumers.
In this context, the strong hiring numbers in the Labour Force Survey in recent months were perhaps not surprising. With faster population growth, employment growth could be stronger than the historical trend without adding to labour market tightness.
Governing Council discussed how it would be important to account for the fact that aggregate consumption is being pushed up by overall population growth, whereas per capita consumption is weakening, reflecting the restraining effects of tighter monetary policy. Governing Council agreed that, overall, consumer spending is anticipated to be subdued in the second half of 2023 and into 2024 as the effects of the tightening in monetary policy work their way through the economy.
Governing Council also discussed the implications for government spending of recent federal and provincial budgets. Overall spending was higher than the Bank had previously projected, and this would add to the growth in gross domestic product over the next couple of years. With the growth in government spending anticipated to be broadly in line with the growth in potential output, federal and provincial fiscal plans were not expected to contribute to the reduction in inflationary pressures. At the same time, given that growth in government spending was not running materially ahead of potential growth, it was not adding significantly to inflationary pressures either. Governing Council noted the advice from the International Monetary Fund that it was important that new spending measures aimed at alleviating the burden of high inflation be targeted and temporary.
Governing Council agreed that the effects of recent global banking stress had been muted in Canada. Canadian banks have seen only a modest increase in funding costs, and credit conditions have tightened slightly. The more important impact is that tightening credit conditions in the United States will likely slow US business spending, with implications for Canadian exports.
The housing market in Canada continued to be subdued because restrictive monetary policy was raising mortgage servicing costs substantially. While the near-term outlook was for the housing market to moderate further, population growth will support underlying demand for housing.
Governing Council noted that total consumer price index inflation, which was 5.2% in February, was coming down in line with the Bank’s expectations. All members agreed that barring any new shocks, it was likely to reach 3% by this summer. This is because past declines in energy prices, easing supply chain bottlenecks and restrictive monetary policy were all being reflected in decreasing goods price inflation.
Members observed that the Bank’s preferred 12-month measures of core inflation had continued to edge down to under 5%, and 3-month measures remained at about 3.5%. Core services price inflation in Canada was still higher than overall inflation and showing persistence. Food price inflation continued to rise at double-digit rates. High rates of inflation in essential items, such as groceries and shelter, are particularly painful for low-income Canadians.