Layoffs and sluggish growth: is this the cure for inflation?

It is at this point in our difficult economic situation that predicting a little stagflation passes for optimism.

Canada’s former central banker Stephen Poloz sees higher prices, volatile oil markets and weaker growth prospects. And what he sees as the best-case scenario is stagflation — that oxymoron that tripped us up in the late 1970s, a simultaneous, toxic combination of slowing growth, lost jobs, and stubbornly high prices.

Only this time it doesn’t need to be so brutal – as long as central banking authorities act cautiously and the world doesn’t throw more extreme crises at us.

“The best we can handle, in this situation, is to endure a period of what people will call stagflation,” Poloz said in an interview.

With oil and gas prices so high and the ripple effects rippling through everything else, consumers are feeling a drop in purchasing power, he explains. This bite will eventually reduce our economic momentum, especially as the central bank raises interest rates at the same time. The economy will therefore slow down, which will lead to fewer hirings, even if consumer prices are still high.

That’s the definition of stagflation, Poloz points out, but it doesn’t mean we’re about to go back to the 1970s, when the oil shocks pushed the unemployment rate up alongside inflation.

“People think it’s ugly, which of course it can be,” Poloz said.

But that’s not his most likely scenario.

Poloz served as head of the Bank of Canada from 2013 to 2020, beginning his tenure during the Stephen Harper era, maintaining it throughout Justin Trudeau’s first two terms, and managing monetary policy through the early dark days and confusing of the pandemic.

He’s a pro and isn’t going to criticize his successor, Tiff Macklem, or dive into the Conservative leadership race and discuss candidate Pierre Poilievre’s explosive comments about using bitcoin to control inflation and Macklem’s firing for having been the stooge in financing Trudeau’s expenses. .

Instead, he has his eye on how to engineer a soft landing.

The trick, of course, is that the Bank of Canada and other central banks stifle inflation by raising interest rates and curbing growth, but not to the point of leading to a recession and job losses. massive.

Poloz divides current inflation into two parts. On the one hand, there is inflation, which Canada cannot do anything about: the rise in prices caused by oil and the problems of supply in the world, notably due to the invasion of Ukraine by Russia and restrictions imposed by China due to COVID-19. On the other hand, there are domestic sources of inflation – stemming from many government spending both during the pandemic and which persist today – that the Bank of Canada’s interest rates can really influence.

However, to avoid a recession, central bankers will need to constantly reassess the effects of higher rates as they rise. And it will take the public to maintain confidence in the central bank’s ability to get it right, Poloz said.

“They need to do it just enough (rate hikes) that people are confident that inflation is going to stay under control, after the big bump passes,” he said.

“It could mean a slight increase in unemployment, it could mean that. At the moment, the markets seem convinced that this means (also) having a recession. I don’t really agree, but I have to admit there could be one,” he explained.

“There is still a window to go through this without having one. Just a downturn in the economy. Probably a small increase in unemployment, just enough to contain this domestic inflation story while the external inflation story runs through the economy and people pick it up as it goes.

That’s not to say we should prepare for widespread layoff notices. Right now, there are more jobs than workers these days, and higher unemployment is justified in the name of returning to a balanced labor market.

Poloz is far from alone in contemplating a simultaneous slowing in growth, a moderation in the labor market and persistently high prices, but only some will take risks and call it “stagflation” – mainly because it evokes pictures from the 1970s.

Jimmy Jean, Desjardins’ chief economist, calls it “stagflation-lite.” Slow growing but still growing. Fewer hires, but no massive layoffs. High energy prices mean Alberta and Saskatchewan will prosper even if the rest of the country stagnates.

However, Jean says there could come a time when things get worse – if companies try to pass on the higher costs that are coming their way due to global supply issues or energy prices, and consumers don’t could not absorb higher prices.

In this scenario, “they have to reduce their overall costs to stay profitable. Unfortunately, one of the surest ways to do this is to lay off workers. For this reason, I fear that potential stagflation is actually a transition to a recession, rather than some sort of new “equilibrium,” Jean says.

A few months ago, economists at the Conference Board of Canada modeled what stagflation would look like, but it was just a thought experiment at the time. Then came the Russian invasion of Ukraine, renewed restrictions in China and the realization that none of these crises were going to go away quickly, says forecaster Ted Mallett.

The stagflation scenario now looks uncomfortably close, he says, although it’s still not his baseline forecast.

“It becomes a difficult situation,” he says.

Whether you call it stagflation, stagflation-lite, or a crushing situation, it comes down to the same thing: walking a fine line between discomfort and disaster — and hoping the Bank of Canada doesn’t blow it up.

Leave a Comment