Canada's rocketing employment and food prices spell inflation worries

Just one month ago, a lot of smart people were worried that the global economy was about to follow a trajectory similar to that of Thursday's launch of the SpaceX Super Heavy rocket.

The comparison is only slightly far-fetched.

Following a soaring post-pandemic recovery fuelled by low interest rates and generous government spending, as banks in the United States failed and contagion spread, many feared the recovery would end in tears.

But according to testimony before two parliamentary committees this week, the Bank of Canada's leading pilots say that unlike the world's most powerful rocket that exploded into bits after its launch, the Canadian economy appears to be coming to a much softer landing.

But a grilling by parliamentarians from the upper and lower houses revealed that although there's confidence the economy will continue to grow in spite of eight consecutive interest rate hikes starting in March 2022, there are many uncertainties for the Canadian, U.S. and world economies.

Shortly after Elon Musk's rocket came crashing to Earth on Thursday, Sen. Pamela Wallin, chair of the Senate's standing committee on banking, commerce and the economy, warned of what she called mixed signals for the current economy.

"There's lots of good news stories, which in the end might not be good news," she told Bank of Canada governor Tiff Macklem and his senior deputy, Carolyn Rogers. A surging job market, Wallin said, could lead to higher wages and prices, and the hot U.S. economy could add to imported inflation. Overspending by the Canadian government could boost inflation and interest rates.

"We have some economists saying these things ... could lead to a recession in the fourth quarter," she said. "Do you have any such fears?"

Wallin's question did not represent some strange minority view. A survey of top U.S. economists last week by the Wall Street Journal showed most expected a too-hot economy would lead to inflation — forcing the U.S. central bank to further raise interest rates, ultimately leading to an economic decline.

"With both inflation and interest rates persisting at higher levels than previously expected, economists put the ... probability of a recession at some point in the next 12 months at 61%," the Journal wrote. And unlike various market signals, most of the economists surveyed saw no interest rate cuts until 2024.

As Macklem has said before, Canada's central bank does not expect rate cuts this year either. And while he forecasts a slowdown, not a recession, he makes it very clear that such predictions are inexact and that slightly positive growth could easily slip into a slight decline. We get a fresh reading of Canada's GDP on April 28.

So is Macklem worried?'

"It's our job to worry," he replied to the Senate committee chair. "We're always worried."

Despite his confidence in a soft landing, there is plenty to worry about. Inflation, he said, is still too strong.