In today’s tightly-knit global economy, it’s hard to go rogue. In last week’s Commentary, I argued that OECD nations are in danger of misinterpreting today’s rising inflation rates in a way that could cause them to abort the up-shift in global growth – which I also argued is quite sustainable. Is Canada in the same mix, or is our situation a bit different?
The word ‘different’ has gotten a lot of economists in trouble over the years. Misinterpretations of interim data shifts as structural developments has cost more than one of us our jobs. I don’t generally subscribe to the word; there is so much that appears to be new that’s just the same old corpus in new robes (or rags, depending on the situation).
Canada’s economic differences
But there are distinctives in Canada’s recent economic history. We had a public debt crisis one cycle ahead of everyone else. That led to fiscal austerity that produced a ‘jobless recovery’ in the 1990s – one that other countries bypassed. Toward the end of the cycle, Canada participated in that turbocharged final few years, but while it was pure excessive activity for the others, we were still filling in austerity’s massive crater. The Great Recession hit us as it did others, but with a roughly balanced domestic economy, we rebounded rapidly. Unlike in many other places, fiscal and monetary stimulus really took hold here, and helped to generate growth that was the envy of the OECD.
Trouble is, we rebooted to domestic growth that was somewhat overdone. We now have sky-high consumer debt levels that have ballooned well in excess of US levels, which themselves are headed in the other direction. And our housing markets have been adding units well in excess of actual requirements.
Our prices are a bit more tame
Add to this tight labour supplies and high capacity utilization rates and you’d expect that our inflation numbers would be at least as peppy as everyone else’s. Not so – although here have been recent spurts, core inflation is well within the Bank of Canada’s targets, and while on a year-to-year basis the CPI has crept above the magic mark, the growth in recent months has been very contained. What’s going on?
Canada may turn out to be the luckiest place on the planet. When the Great Recession pummelled our external economy, we had a robust internal economy. Today, the internal economy is showing hints of weakness, and interest rate increases have yet to have their full impact. But hotter global growth seems to be firing up our externally-focussed economy – again, just at the right time. It would be a modern marvel if we actually pulled it off for the second time in a row. Depending on the timing, the transfer of growth could indeed nip any potential inflation in the bud, giving our monetary magnates an easy ride.
Can we transition sales from ‘inside’ to ‘outside’?
That’s far from guaranteed, though. To pull it off, the resources – both labour and capital – displaced by domestic weakness would have to be near-perfectly transferable to the export sector. Given specialized skill requirements and the specific needs for plant and equipment of exporters, that could be tricky. However, on the bright side, when we polled exporters in the recession’s aftermath about coping strategies, one of the top initial responses was to sell the same outputs into the domestic market. If it works one way, it makes sense that it works the other; notionally, it is possible.
So, smooth sailing on the inflation front? Maybe, but it hardly ever works out that way. First, the timing may not be perfect. Second, the transition period might well elevate costs, albeit temporarily. In either case, it would likely result in a transitory price jump. Misinterpretation of the circumstances could lead to an overreaction on the policy front, and if it were serious, it could interrupt the orderly transition, inviting more permanent fallout.
The bottom line?
Canada’s position in the current economic cycle does have unique features. But they don’t give us a bye from the delicate dance monetary policy must do the world over in the coming months. The tune will be the same, but we’ll be swingin’ with our own select step pattern.