{"id":141881,"date":"2025-09-13T21:33:07","date_gmt":"2025-09-13T21:33:07","guid":{"rendered":"https:\/\/www.newsbeep.com\/ca\/141881\/"},"modified":"2025-09-13T21:33:07","modified_gmt":"2025-09-13T21:33:07","slug":"carmichael-canadas-prospects-are-grim-and-the-bank-of-canada-can-only-dull-the-pain","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/ca\/141881\/","title":{"rendered":"Carmichael: Canada\u2019s prospects are grim, and the Bank of Canada can only dull the pain"},"content":{"rendered":"

The Canadian Chamber of Commerce this week released a Polaroid camera for the economy. Its new nowcasting tool<\/a> crunches 45 indicators as they are updated to give real-time forecasts of where the economy is at. If you\u2019ve had your fill of bad news, you might want to wait to take your first snapshot: the model currently has the economy teetering on the edge of a recession.\u00a0<\/p>\n

Recession or no, the damage from U.S. President Donald Trump\u2019s trade policy is already done. Bank of Canada governor Tiff Macklem and his deputies see the spike<\/a> in the U.S. effective tariff rate and related bullying as a \u201cstructural shock to the global and Canadian economies,\u201d according to the summary<\/a> of their most recent policy meetings.\u00a0<\/p>\n

What they mean is that the economy\u2019s capacity to generate non-inflationary growth has shrunk. There\u2019s a chart on the 52nd page of the central bank\u2019s latest quarterly economic report<\/a> that shows what that looks like. Three lines plot the trajectory of gross domestic product under three tariff scenarios. Each of them\u2014including the most optimistic scenario, which assumes a de-escalation of the trade war\u2014is below where economic output was headed before Trump was re-elected.\u00a0<\/p>\n

\t\t\"\"\t<\/p>\n

Capacity matters to the Bank of Canada because it dictates how much it can cut interest rates without overheating the engine. The Canadian dollar was weaker this month because traders anticipate the central bank\u2019s current round of policy deliberations will conclude with a quarter-point cut on Wednesday, dropping the benchmark rate to 2.5 per cent. Sentiment shifted after Statistics Canada reported<\/a> the economy has lost more than 100,000 jobs this summer. What was an interesting debate became a conversion. RBC chief economist Frances Donald was the only expert on the C.D. Howe Institute\u2019s shadow monetary policy committee who advised<\/a> the central bank to leave rates unchanged.\u00a0<\/p>\n

Central banks are omnipresent, but like the Greek gods, their powers are specific, not all-encompassing.\u00a0<\/p>\n

Monetary policy has considerable influence over demand, but virtually no power over supply. There\u2019s nothing Macklem can do when Algoma Steel chief executive Michael Garcia says<\/a> the U.S. is the only \u201cpractical\u201d international market for his merchandise. Lower interest rates won\u2019t create markets that don\u2019t exist for Canadian goods. The Bank of Canada could maybe help Algoma by making a concerted effort to depreciate the currency, but that would cause problems elsewhere in the economy.\u00a0<\/p>\n

Algoma\u2019s problems\u2014like those of so many others in industries dependent on U.S. demand\u2014are for its shareholders and governments to sort out. The reality of the situation is that some of those problems might be beyond fixing. Canada is facing a grim period of adjustment and all the Bank of Canada can do is dull the pain.\u00a0<\/p>\n

The central bank dropped interest rates to essentially zero during the global financial crisis in 2008 and again during the COVID-19 pandemic because it was facing deflation. The situation we\u2019re in now is different. In part because of those capacity constraints, inflation remains a worry. Statistics Canada reported<\/a> Friday that Canadian industry used about 79 per cent of its production capacity in the second quarter, somewhat weaker than earlier this year, but nothing like what happened during the latter part of Great Recession, when capacity use plunged to the low seventies.\u00a0<\/p>\n

Inflation is why RBC\u2019s Donald refused to join the pack that\u2019s betting on an interest-rate cut Wednesday. Year-over-year changes in the consumer price index have dropped<\/a> below the Bank of Canada\u2019s two-per-cent target, but mostly because Prime Minister Mark Carney dropped the consumer carbon tax. Wages are growing faster than inflation, and that tends to stoke cost pressures. The gauges that the central bank uses to filter volatile prices all are flickering near their red lines. \u201cThat\u2019s not really \u2018job done\u2019 yet if you\u2019re trying to fight inflation,\u201d Donald said<\/a> this week on the Wonk podcast.\u00a0<\/p>\n

Donald also said this: \u201cI don\u2019t think anyone should live or die by their Bank of Canada call. We have to write something down as to an appropriate base case. If we\u2019re wrong, they may have another cut or two coming forward, but it won\u2019t be 100 basis points. It won\u2019t be going back down to zero.\u201d\u00a0<\/p>\n

I don\u2019t think those are the words of a forecaster feeling sheepish about her call. Rather, it\u2019s Bay Street\u2019s newest chief economist recognizing that central banks no longer are the only game in town. The political and business classes will determine the outcome of this economic crisis. Works like those on the federal government\u2019s \u201cmajor projects<\/a>\u201d list are the only thing that will push Canada\u2019s economy back on its pre-Trump trajectory.\u00a0<\/p>\n

The next inflation numbers are set for release on Tuesday, a little more than 24 hours before the Bank of Canada updates its interest-rate policy. It\u2019s unusual for such an important variable to come so late in the deliberation, and a surprise could force an 11th-hour rethink.\u00a0<\/p>\n

But probably, Macklem will decide the economy could use some aspirin. He opened<\/a> the door to a cut in July, observing that output was falling below even the country\u2019s diminished capacity to generate non-inflationary growth. The poor hiring numbers suggest economic slack has continued to widen. \u201cI think we stepped through that door,\u201d said Laurentian Bank chief economist S\u00e9bastien Lavoie.<\/p>\n

Lavoie this week released<\/a> a revised forecast that predicts quarter-point cuts at each of the central bank\u2019s next three meetings. Like Donald, Lavoie wouldn\u2019t be surprised if he\u2019s wrong. His updated outlook notes that the Bank of Canada has never cut interest rates when core inflation<\/a> is as high as it is currently. But these are unprecedented times. Statistics Canada reported<\/a> this week that less than half of us are highly satisfied with life. Some pain relief from lower interest rates might help, provided we don\u2019t get addicted. There\u2019s only one path to a resilient economy: the hard one<\/a>.\u00a0<\/p>\n

Kevin Carmichael is The Logic\u2019s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"The Canadian Chamber of Commerce this week released a Polaroid camera for the economy. Its new nowcasting tool…\n","protected":false},"author":2,"featured_media":141882,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[52,45,49,48,8515,46,135,9316,4992,25902,29423],"class_list":["post-141881","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-bank-of-canada","tag-business","tag-ca","tag-canada","tag-comment","tag-economy","tag-inflation","tag-interest-rates","tag-tariffs","tag-tiff-macklem","tag-u-s-canada-trade"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/141881","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=141881"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/141881\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/141882"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=141881"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=141881"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=141881"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}