I wish to thank Prof. Whitcombe for the opportunity to write on the matter of his opinion piece in the October 27 edition of The Prince George Citizen because I am not impressed with the national financial media on the issues at all.
In the fall of 2021, there was not much going on and the government’s program to keep the economy afloat during the pandemic -- a real success -- began winding down. At the same time, inflation began to show up on economists’ radar and the sources, initially, appeared to be pandemic exasperated global supply chain issues. Then it is difficult, on a global scale, to ignore the effects of war in Ukraine given the nation is a leader, like Canada, in the supply of grain.
The Bank of Canada began raising interest rates to mitigate inflationary pressures, as monetary policy is expected to do, in March of 2022 which although critics claim to be late does genuinely appear to be the first prudent opportunity for our central bank to do so. For at that time the economy and pandemic were more stable than they had been five months earlier. It takes six to 18 months for the effects of an interest rate increase to manifest in the economy and inflation. We are six months into a monetary tightening phase and it would appear inflation is receding very, very slowly. It’s such a difficult fight upon such an economically destructive force.
We have enjoyed the lowest interest rates in a very long time for reasons which already have disappeared into the past. But the helicopter money, as a U.S. central banker once called such monetary easing, really drove the economy for those years. The pandemic was a disaster economically, and when the time came for the people to return to more normal living and spending levels, they were all happy to do so. Factors also led to a tight labour market and low unemployment, which spur spending and economic growth, to almost a boom after the real estate bubble.
So now interest rates are at as high level as I recall over the past 20 years with the potential for some more increase given inflation is at levels not seen in, what is that, 40 years?
The higher interest rates have the effect of slowing business growth for the simple reason that there are projects they would take on but the costs, which include financing, no longer are greater or as great than the potential benefits. Clearly real estate sales will slow and house prices will recede, but it looks like the entire place was asking for it. I check numerous national and international sources weekly and at present, the prediction for our economy in 2023 is between one and two per cent; a contraction but not strictly speaking a recession. You will hear the contraction called a technical recession in the national media even if nobody heard that term before. A recession is two quarters of negative GDP. Thus there is a possibility of a recession. And that is not bad given the level of inflationary pressures., believe it or not.
It is not wise to encourage anything but organic’ growth about the upcoming economic contraction. Spurring growth will only fuel inflation and that economically destructive force must be tamed, which is the opposite. We need to reduce spending and not increase. We need to cap wage growth as wage growth becomes a part of inflation. We need more of a pile of unpopular economic actions in order to have much of anything in even a medium term. It is true that a global economic slowdown is in the cards. We do not have control over many of the factors. We have the strongest financial system on the planet and our central bank is not a mess nor a problem. There will be no economic stimulation and the nation will have to get used to it after all that helicopter money.
The solution? Really grin and bear it.
Ken Berry
Prince George
