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Appearing before a Parliamentary Committee on Finance, Governor Macklem, in no uncertain terms, stated that “the Canadian economy remains overheated and clearly in excess demand, and this continues to put upward pressure on many prices.” (Testimony). Moreover, he stressed that developments in the labour market support the contention that the economy is running too hot; unemployment is near historic lows and worker shortages are widespread. The Bank relies exclusively on “potential growth”, the growth of the labour force plus growth in worker productivity. Bank economists argue that there is no output gap between actual and potential growth. and the economy is using all its resources to the max. Viewed differently, the economy cannot grow any faster without an acceleration in the general price level. 

A recent CIBC economics report, (more room to grow) argues that the economy has space to grow without setting off another bout of inflation. The CIBC contends that the Bank could be underestimating the prospects for non-inflationary growth, citing several developments currently underway, to wit:

• The labour force is expanding rapidly because of a surge in immigration; the Federal government continues to raise its immigration targets in response to labour shortages in key sectors;
• There appears to be a rebound in worker productivity, as worker absenteeism declines and working remotely becomes more commonplace and efficient in the service sectors; 
• Supply restraints are no longer the order of the day, as overseas shipping costs fall dramatically, and wait times shrink; 
•  Basic material costs have dropped sharply as inventories-to-sales ratios return to more normal levels.

The forecasts adopted by CIBC clearly reveal an economy that is at best expanding slowly. Real economic growth for 2023 and 2024 is expected to be 1%. This growth rate, by no measure, suggests an “overheated” economy. 

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The CIBC, rightly argues, that the “ extra room for non-inflationary growth over the medium term is key to our view that while the Bank of Canada will cling to at least its current 4.5% overnight rate this year, it will find itself with ample room to ease policy and accelerate growth in 2024.” In other words, the pause in rate hikes, recently announced, will extend well into 2024.

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