‘Severe Recession’ Unlikely, Says Bank of Canada Governor

Governor of the Bank of Canada Tiff Macklem speaks at a press conference in Ottawa on June 9, 2022. (Patrick Doyle/The Canadian Press)

While economic slowdowns are likely, Canada will not experience a “severe recession” in upcoming months, says Bank of Canada (BoC) Governor Tiff Macklem.

“Growth for the next three quarters is roughly zero, which means we’re just about as likely to have a couple of quarters of negative growth as we are to have a couple of quarters of positive growth,” Macklem told the Senate banking committee on Nov. 1.

“It’s not a severe recession. It’s not a major contraction, but you could certainly get a couple of quarters of negative growth.”

A recession is defined as two straight quarters of negative economic growth.

The Bank of Canada raised its key interest rate by 50 basis points, or half a percentage point, on Oct. 26, bringing the rate up to 3.75 percent. The bank’s interest rate has now increased by 3.5 percent since March, and the BoC’s governing counsel said it expects the rate still needs to “rise further” in the future.

“Our projection does have a path for interest rates,” Macklem told the banking committee.

“We’re getting closer to the end of this tightening phase, but we’re not there yet, and we think interest rates will need to go up further.”

Macklem added that the BoC is forecasting a “very material slowdown ... with growth close to zero for the next few quarters,” but said it won’t be “as severe as some other countries” because of Canada’s exporting power.

“The stuff that we sell to the world is now worth more,” he said. “That’s bringing more income into our economy.”

Macklem said he expects Canada’s inflation rate—which is currently sitting at 7 percent—to fall to 2 percent by the end of 2024.

Although Macklem said the bank isn’t projecting a severe recession, he didn’t rule out the possibility of one occurring if high inflation rates persist despite increased interest rates.

“Canadians will continue to endure the hardship of high inflation and they will come to expect persistently high inflation, which will require much higher interest rates and potentially a severe recession to control inflation,” he said.

“If we do too much, we could slow the economy more than needed.”

Need for Competition

High inflation rates over an extended period of time could cause Canadians to become accustomed to higher-than-normal prices, which then takes away economic competition and prolongs inflated costs, said Macklem.

“We need to get back to a situation where companies are more worried that they’re going to lose their customers if they raise their prices,” he said.

Right now, Canada’s economy is in a state of excess demand coupled with low supply, said Macklem, which can lead to higher prices.

“When you’ve got an economy in excess demand, if you’re a company and you can deliver the product, then it’s easier to pass through those prices.”

Sen. Hassan Yussuff pointed out that inflation unequally affects Canadians, with low-income earners most acutely feeling the hardship of their money becoming less valuable.

“How do they survive?” asked Yussuff.

“We share your concern,” said Macklem. He added, however, that Canada’s economy still needs “a period of low growth” to bring prices down.

“Unfortunately, that will affect the most vulnerable workers the most,” he said. “It will be a difficult transition for some, but there’s not really an alternative.”

“We’ve got to get through this period to relieve those price pressures, to get inflation back down, so that we can get back to sustainable growth with low inflation.”

Rahul Vaidyanath contributed to this report.