Perfect economic storm: Scotiabank cites increasing risks of stagflation in Canada

Scotiabank says the risk of stagflation in Canada is rising.

Stagflation is a situation marked by stagnant economic growth, high inflation, and high unemployment.

It’s considered a perfect economic storm, which requires taming prices while at the same time attempting not to further dampen economic activity.

Scotiabank’s Nikita Perevalov mentioned the prospect in a report Monday (May 16).

Perevalov, who is director of economic forecasting, was commenting on data released on the same day by Statistics Canada about manufacturing and wholesale sales.

“Today’s double-feature from Statistics Canada sowed some doubts about the durability of the Canadian economic growth, with disappointing manufacturing and wholesale sales for March,” Perevalov wrote.

The bank economist noted that while Canadian manufacturing firms saw sales expand by 2.5 percent month-over-month in March 2022, the “volumes were flat, with higher prices making up the difference”.

“Further down the supply chain, Canadian wholesale sales were up +0.3% m/m in dollar terms in March, again driven entirely by higher prices,” Perevalov also stated.

As well, wholesale volumes declined by 0.6 percent month-over-month, with the weak performance of personal and household goods, and machinery and equipment.

“While the weakness in the data releases this morning could be chalked up to volatility in the context of lockdowns and re-openings during the Omicron wave in Canada, it also fits the overall global macroeconomic narrative where strong price increases for all manner of goods and services combine with a weakening of growth in what is called a ‘stagflation’,” Perevalov wrote.

The Scotiabank economist continued, “ While Canada’s strong resource sector might help it escape the outcome, the risks are increasingly tilted in that direction, as the current global geopolitical crisis has led to high prices for consumer and industrial goods and pushed lower the outlook for growth in some of Canada’s trade partners (e.g. the European Union).”

Stagflation was also mentioned by Toni Gravelle, deputy governor of the Bank of Canada, in his remarks before the Association des économistes québécois in Montral on May 12.

Gravelle essentially dismissed the prospect of stagflation in Canada.

“Inflation at 30-year highs naturally leads to comparisons with the stagflation period of the 1970s. Those comparisons aren’t justified,” the central bank’s deputy governor said.

Instead of a stagnant economy, Gravelle said that the current situation indicates “quite the opposite”.

“The Canadian economy, across many measures, is running pretty hot,” he said.

For the first half of 2022, Gravelle said that the economy is forecast to grow around five percent.

“The last time we saw that rate of growth was a 12-month stretch that ended in mid-2000—22 years ago, the last time we raised our policy rate by 50 basis points,” he said.

Gravelle also pointed to the current labour market.

“Unemployment averaged about 8% from about 1976 to 1982, the height of stagflation. How is it today? Well, the labour market is very tight—much stronger than it was then,” he said.

The current unemployment rate is at a “record low” of 5.2 percent, Gravelle pointed out.

“Some of you will say that is all well and good, but couldn’t we see stagflation appear in the coming year or so? Isn’t growth going to slow as the Bank of Canada raises policy rates?” the deputy governor stated.

Gravelle continued, “Yes, growth will slow—the goal of higher rates is to reduce excess demand and bring it more in balance with supply. That should reduce inflation, undercutting the inflation part of stagflation.”