Is Canada headed for a recession? CCPA says BoC’s interest moves may come at great cost

There are growing fears of an impending recession, with a major Canadian think tank warning raising interest rates could throw the economy into one.

The Canadian Centre for Policy Alternatives say the Bank of Canada hiking interest rates too quickly could lead to big problems.

In an analysis posted Tuesday, David Macdonald, a senior economist with the CCPA, writes that “using rapid interest rate hikes to deflate the economy is a blunt, non-targeted approach that creates tremendous collateral damage.”

“The promise of the rapid interest rate increases from the Bank of Canada has been that we can get a soft landing, which is to say we can decrease inflation but do so in such a way that we don’t get a recession. So my question was, has this actually ever happened before? What’s our success rate at getting this kind of soft landing when we need to decrease the inflation rate from where we’re at — 7.7 per cent — down to the bank’s target, which is two per cent,” he told CityNews.

However, he says the answers to those questions were “a bit disappointing.”

“We have a zero per cent success rate of getting there. We have had three instances where we have seen that level of decline, the trouble is each one of them was accompanied with a recession,” Macdonald explained.

Those three times were between 1974-76, 1981-83 and 1991-92. On average over those three periods, the economy would have lost around 850,000 in today’s population, he notes.

“That’s the cost of doing it that way, and I think that cost is often underappreciated when we’re talking about getting inflation down, looking to the Bank of Canada to increase interest rates. That’s a very costly way of doing it. Interest rates are very non-targeted, they’re a blunt instrument, and they cause tremendous collateral damage, particularly when they increase rapidly,” he said.

While the Bank of Canada may be successful in solving the problem of rising inflation, Macdonald says it will come at a cost to Canadians.

Alternatives are key, he explains, adding loosening inflation goals could also help lessen the blow.

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The odds aren’t by any means “good,” but Macdonald says should the Bank of Canada expand its target to four per cent inflation rather than two, there would be a 33 per cent chance of a soft landing. It’s not much, but it’s not zero, he adds.

But it’s not just raising the interest rate that could address cost of living challenges.

Macdonald understands there are factors that are out of our control, such as the war in Ukraine, affecting certain aspects of inflation. However, the CCPA says the federal government could take a number of steps to help Canadians amid these challenging times. The group points out many of these actions are things that could have been done even not in the context of trying to address record inflation rates.

For one, Macdonald says the federal government could target house prices, particularly investors.

“Changing mortgage rules to make real estate investing less profitable; lowering fees for public programs (like child care); limiting rent control increases; implementing stronger competition rules and enforcement to keep prices fair,” are other suggestions Macdonald has listed in his analysis.

When it comes to the recession and job losses that could come with it, Macdonald says those will not be immediate.

“The economy’s going strong right now. So a recession that would be created would be an engineered recession, a pointless recession created by the Bank of Canada in order to get inflation down,” he told CityNews.

“If we continue to see these big rate increases, this would start to take a bit of wind out of the sales but it would likely result in an overshoot, where interest rates go up too quickly, there’s too much money being paid out in interest rate payments, and we start to see big impacts in economic growth.”

That would likely be seen in the real estate industry first, given how sensitive it is to interest rates. Macdonald says on the job side, construction would probably be hit first.

With Canada being only about four months into this rate-tightening cycle, Macdonald says it probably wouldn’t be until next year that Canadians will start to see the increases “really start to bite, in terms of jobs as well as GDP.”

The Bank of Canada is expected to increase its interest rate again next week.