Benjamin Tal, Deputy Chief Economist, CIBC Capital Markets, one of Canada’s top economists, offers his unique interpretation of economic data for the year ahead.
IN REVIEW: BEN TAL: Inflation. Inflation. Inflation.
It’s all about expectations
The Bank of Canada (BOC) cares about inflation expectations and Ben suggests we are not reliving the 1970s. While the 1-year inflation expectation has climbed, the 5-years trend line has remained stable, illustrating expectations are considerably cooler than fifty years ago. “Alternative” facts are contributing to expectations and the growing role of social media as the source for “news” has to be considered. Social media – the likes of Tik Tok, Twitter, and FaceBook – ranked higher on a credibility score than traditional news media outlets and government.
Goods vs. Services
Core goods inflation is approaching zero (month-over-month) and lower commodity prices and easing supply chains are helping. [Side bar: The EU is slowing under climbing interest rates but there is a risk of this reversing as China reopens and Putin’s actions will also have an impact on commodity prices if Russia’s games continue.] Services are a trickier story: rent inflation equals 40% of core inflation in the US. And rent inflation is no longer an “if” scenario but a “when” as flow of new leases is approaching zero.
COVID and Employment
Job creation continues to outpace forecasts. While the participation rate has normalized, there is a gap between employment and hours worked leading Ben to say, “COVID is not dead”. Long covid is real with 16 million people in US diagnosed with the disease. Employment numbers reflect the need for businesses to back fill positions while employees are sick or caring for those who are sick. Excess hours lost due to illness or family issues were higher in 2022 than in either 2020 or 2021. Ben notes, this means the labour market may not be as tight as it seems.
The composition of wage inflation is as important as wage inflation itself
The pandemic has left the largest gaps in the lower wage jobs, but increased demand and limited supply has not driven up wages for this employment class (bottom 20%). Ben notes it’s because small businesses employ 80% of low-wage workers and these companies cannot afford to increase wages or are holding off in the face of recession news. Ben suggests this is positive news for BOC as wage inflationary pressures are decreasing.
- Ben correctly predicted the BOC rate hike on January 25th. Factoring in this increase he suggested a “wanna be” recession would follow in the next six months. The labor market remains too strong for a real recession. The probability of a real recession was 25-30%.
- First BOC rate cut will come in early 2024. Ben suggests it will take full year for the bank to see that inflation is truly dead. BOC will cut to 3% remaining focused on its target rate of 2%.
- 2023 will see slow growth with real recovery starting in the second half of 2024.
- Supply chains based on “just in time” will be replaced with a “just in case” mentality which means less globalization, higher inventories, growing labour costs and profit margins being pinched. CEOs will be challenged to decide how to allocate capital: labour vs. investment.
- EU is likely to see a full recession. EU’s energy crisis is real, and the EU is heavily exposed to Putin. The European Central Bank will continue to raise interest rates resulting in EU growth lagging behind North America.
- In the US – the Fed will increase to 5-5.25%. The Canadian dollar will remain neutral with this increase but may see upward pressures as commodities increase but the gains will be slight (a few cents).