Introduction to Canada’s Economic Situation
The Bank of Canada (BoC) recently released its January Monetary Policy Report (MPR), which presents a mixed picture of the country’s economic performance. While the report suggests that the economy is doing better than expected, a closer examination of the data reveals a more complex reality. In this article, we will delve into the details of the report and explore the implications for Canadians.
Economic Growth: A Statistical Mirage
The BoC forecasts that Canada’s economy will continue to grow, but at a slow pace. The headline GDP growth is expected to slow from 2.0% in 2024 to 1.7% in 2025, and further to 1.1% in 2026. However, this growth is not expected to translate into improved living standards for households. In fact, the central bank believes that the 2025 gain was "essentially flat" on a per-capita basis, and that consumption per person is expected to slow as the temporary relief from rate cuts fades.
The Reality of Per-Capita Recession
The BoC’s report highlights the discrepancy between headline growth and per-capita growth. The central bank links moderating headline growth to the slowing population, which suggests that Canada’s previous growth relied heavily on adding more people rather than improving productivity or value. This means that the national economy is masking household stagnation by simply adding more households, resulting in a decline in quality of life and living standards. In essence, the recession may already be here for the average Canadian.
Inflation: The Housing Conundrum
The BoC expects inflation to calm down, but its reasoning is based on a contradictory position on housing. The central bank describes the market as "flat or declining" in some cities, yet acknowledges that the cost of shelter continues to rise at a breakneck speed. The BoC forecasts that housing starts will remain "elevated," which will eventually slow rent inflation. However, this theory ignores the fact that new supply often sets a higher price floor, not a lower one.
The Demand Conundrum
The BoC’s expectation that increased construction will lower prices is based on a flawed assumption. Demand doesn’t just apply to finished housing; it applies to the materials, labor, and land required to build them. Accelerating building places demand on these input costs, which then need to flow to end-users. Developers aren’t charities, and they won’t build to lose money. The end of a housing boom often marks the end of the business cycle, and it’s not the new supply that reduces prices, but the job losses and inability to pay rents that do.
Magic Math: GDP Revisions and Output Gap
The BoC has demonstrated an odd disconnect between economic models and reality. Recent GDP revisions from Statistics Canada reveal that the economy was significantly stronger than thought, driven by higher investment and consumption. However, these revisions weren’t matched with upward revisions to income, implying that the "new" funds were previously assumed to be savings, not additional funds from missed job growth. The central bank adjusted its "potential output" model to keep the output gap virtually unchanged, effectively insisting that the economy is bigger on paper while arguing it doesn’t actually matter.
Conclusion
In conclusion, the Bank of Canada’s January Monetary Policy Report presents a complex picture of Canada’s economic situation. While the report suggests that the economy is doing better than expected, a closer examination of the data reveals a decline in living standards, a per-capita recession, and a housing conundrum. The BoC’s expectations for inflation to calm down are based on flawed assumptions, and its magic math on GDP revisions and output gap raises more questions than answers. As the economy continues to slow down, it’s essential for Canadians to understand the reality of their economic situation and the implications for their quality of life.
