Where Canada stands in the world if the global economy weakens

The latest forecast for the global economy shows a grim outlook of the world torn by the COVID-19 pandemic and Russia’s war against Ukraine.

Almost all countries are expected to experience slower growth in 2022-23 due to the ongoing Russia-Ukraine war, according to a recent report by the Organization for Economic Cooperation and Development (OECD).

With the ongoing Russia-Ukraine war, OECD recently lowered its estimates for global growth, slashing it to 3 per cent in 2022 from 4.5 per cent projected last year.

In 2023, the global growth is estimated to decline further to 2.75 per cent.

Current inflation across OECD countries in 2022 is 9 per cent, twice its earlier projections. The organization said that with the ongoing humanitarian crisis, high inflation could persist in rich countries and create food shortages for poorer ones. It called for global cooperation to prevent a food crisis by avoiding mistakes similar to those that led to the inequity in vaccine distribution.

“The price of this war is high and will need to be shared,” said Laurence Boone, the OECD’s chief economist.

The report said if the war continues to escalate, European economies relying heavily on Russian fuel may worsen, because alternative energy sources may not be enough or easy to ramp up.

“Governments also have to play a role through support targeted to those most vulnerable to rising food and energy inflation,” Ms. Boone said.

SO, WHERE DOES CANADA STAND?

Canada’s economy has largely recovered from the pandemic but the OECD report said the Bank of Canada should continue to raise its policy rate and shrink its balance sheet in order to return to its target inflation.

Along with income from high resource prices, a large part of the recovery, the report said, is due to its limited trade ties with economies that have been hit hard by the war in Ukraine.

Current inflation in Canada is 6.8 per cent– the highest since 1991 – but the country could follow the same path of the U.S. Federal Reserve’s aggressive rate hike last week, the largest since 1994.

OECD expects the Bank of Canada to move towards a faster policy tightening so that the domestic productive capacity is not strained by the rising demand.

The Bank of Canada has been raising interest rates to curb the impact of inflation.

In a recent speech in Montreal, Bank of Canada deputy governor Toni Gravelle said, “sharp rebound in global demand for goods, along with pandemic-related restrictions and some weather-related events, created the perfect storm.”

With growing demand, the federal and provincial governments should focus on strong resource revenues to reduce the public debt, while targeting temporary income support for households facing living-cost pressures, the report said.

In its recent Financial System Review, the Bank of Canada said the share of highly indebted households had risen.

“In Canada, elevated levels of household debt and high house prices remain two key interconnected vulnerabilities,” the bank said in its annual Financial System Review.

INCREASE IN THE POLICY RATE

Following the relaxation of containment measures in late January, Canada has seen large output gains in contact-intensive services and strong contributions from resources sectors, construction, and manufacturing.

But the report has warned about the supply chain disruptions, exacerbated by labour shortages and high inflation. The food and energy price rises are already reducing an average Canadian household’s purchasing power and will negatively impact private spending, even as saving rates return to more normal levels, according to OECD.

OECD said more rate rises from the Bank of Canada could help tame the price pressures and “bring the monetary policy to neutral settings, where it neither stimulates nor weighs on the economy.”

According to the OECD, Canada’s policy rate is projected to increase to 2.5 per cent by early 2023. In case of continuing inflation, the organization forecasted an additional increase in rates.

In June, a second increase of 50-basis points by the Bank of Canada brought the benchmark interest rate to 1.5 per cent.

“We are taking these large steps because inflation has been persistently high, the economy is overheating, and the risk that elevated inflation will become entrenched has increased,” Bank of Canada’s Deputy Governor Paul Beaudry said in his remarks.

STRONG GROWTH TO CONTINUE AMID EXTERNAL SHOCKS

OECD projects Canada’s real GDP is to grow by 3.8 per cent in 2022 and said the country can withstand the economic shocks from the Russia-Ukraine war since it has limited trade links with hard-hit economies.

OECD reported that most economies are relatively tight and are now experiencing labour shortages with a sharp rise in vacancies. Recent data from Statistics Canada showed that the job vacancies climbed to 957,500 in the first quarter, the highest quarterly number on record.

The pandemic resulted in huge declines in international migration which contributed to the labour shortages in some countries.

For Canada, OECD said higher immigration in the country will help ease these labour shortages and the wage pressures in supply-constrained industries.