A glance at the business headlines over the past week might have left you thinking the world was on a fast track to economic Armageddon.
Markets crashed. There were renewed warnings about the inverted yield curve, which, almost bizarrely, has moved from economic arcana to bar chatter. Banks in Denmark offered to pay interest to mortgage seekers to encourage them to borrow money. The world seemed to have turned upside down.
And whether we are whistling past the graveyard, or somehow strangely sheltered from the global economic turmoil, there are plenty of indications Canada is not following a path insinuated by the past week’s gnashing of teeth. At least not yet.
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“We are currently at a time of a lot of uncertainty,” said economist Farah Omran last week. “Domestically the Canadian economy is doing fine. Housing seems to be rebounding while employment is good.”
Out of sync?
Omran, a policy analyst with the C.D. Howe Institute, a Canadian economic think-tank, was co-author of a report last month examining why Canadian inflation was out of sync with the wider economy.
One factor, the research concluded, was that economic improvements for those with lower income tended to spur higher inflation, because people strapped for cash are more likely to spend everything. That spending helps to bid up prices.
When the economy instead is rewarding people at the high end, they are more likely to invest than spend, and inflation stays lower.
And while the latest employment numbers showed Canada lost jobs, employers are still crying out for workers to fill some 400,000 empty positions if only they could find the right people.
“Employment is still strong and wage growth actually went up really well,” said Omran. “It was the strongest increase in wages since 2009.”
But as Omran said, in a complicated world, no single cause shapes the inflation figure.
In general, higher inflation is a sign of a strong economy, showing that consumers and businesses are using up spare capacity, including labour.
But when food prices fall because the Canadian harvest comes in, that makes people better off while recirculating money in the domestic economy. Energy costs, which have been falling in spite of fear mongering over carbon pricing, have a dual effect, making consumers better off but starving the oil-producing regions of income and jobs.
Americans still shopping
On Friday a poll of bank economists by the business wire service Bloomberg showed a consensus that inflation would fall from two per cent to 1.6 per cent, with retail sales declining by 0.3 per cent, as falling auto sales weighed on dealers.
However, gloomy prognostications south of the border did not pan out. Last week U.S. core inflation, a figure that leaves out volatile food and energy prices, rose sharply for the second month running. On Thursday, sharply higher retail sales surprised U.S. markets, seemingly indicating that consumers have not been put off by global signs of distress.
As to the wider machinations of the global economy, Omran says they will have an effect in Canada. New economic stimulus abroad in the form of low or negative interest rates will make Canadian imports cheaper, pushing inflation lower. But by pumping up the economy they may also stimulate foreign demand, including for Canadian products.
A general weakening in global manufacturing, notably in Germany and China, damaged by the U.S.-China trade battle, may hit Canadian exports of raw materials, though there will still likely be demand for products such as food and gold.
A general fall in demand for oil is likely to hit expensive producers first, one possible reason why the Koch brothers sold out of Canadian oilsands investments earlier this month.
Relatively isolated from oddities
So far the Canadian and the North American economy, based on services and on trade within the NAFTA area and most of all dependent on consumer spending, has been relatively isolated from oddities such as negative mortgage rates.
But with consumers so crucial to the economy, negative headlines and global gloom may already be having an effect.
New data from the U.S. released on Friday showed that consumer sentiment fell to its lowest level in seven months, partly motivated by interest rate cuts by the Federal Reserve, said Richard Curtin, the economist in charge of the survey conducted by the University of Michigan.
“Consumers concluded, following the Fed’s lead, that they may need to reduce spending in anticipation of a potential recession,” said Curtin.
Ironically, the rate cuts that U.S. President Donald Trump championed as a means of stimulating the economy may actually be having the opposite effect.