The Canadian economy is in excess demand while inflation is too high although wage growth ‘now looks to be plateauing’, the Bank of Canada’s Tiff Macklem explained.
There is scope to cool labor market without causing the kind of unemployment surge we have typically experienced a recession.
Suggest unemployment rate will rise somewhat if the job vacancy returns to more normal levels, but it would not be high unemployment by historical standards.
Slightly negative growth is possible over the next few quarters.
That’s not a severe recession, but it is a significantly slowing of the economy.
Right now we need the economy to slow down.
To reach 2% inflation target we need to rebalance labor market and that will be a difficult adjustment.
In recent months we are seeing additional signs that exceptionally tight labor market conditions have started to ease, wage growth looks to be plateauing.
Much of the inflation Canada is experiencing reflects domestic factors, namely excess demand in economy.
Will be watching broad set of indicators to gauge health of labor market.
We will be looking beyond headline unemployment numbers to gauge how different groups and labor market are adjusting.
It will be hard to know when we have reached maximum sustainable employment since it is not directly measurable.
Meanwhile, the Canadian Dollar is under water following the US inflation report, losing some 1% and below 1.34 the figure. The price fell from a high of 1.3571 to a low of 1.3333.
On a 1-hour basis, there are prospects of a full 50% expansion of the recent range to test 1.32 the figure for the days ahead.