Central bank offers 'rosy outlook' on recession and inflation but warns of risks and pain

If you are one of those Canadians who remain confident that central bank governor Tiff Macklem has a good handle on the economy, the future looks pretty bright.

"It's working," Macklem boasted at Wednesday's monetary policy news conference.

Yes, another quarter-point rate hike means Canadians paying off their mortgages will now be forking out 4.25 percentage points more than they expected just two years ago. And yes, interest costs on those lines of credit so many Canadians still carry will rise above seven per cent instead of the two per cent when the bank lent them the money.

But according to Wednesday's monetary policy report, not only does the Bank of Canada seem to think it may have inflation pretty well licked, Macklem said he expects the Canadian economy will pay a relatively mild price over the next six to nine months compared to some of the most worrying predictions.

Not everyone shares his optimism. And even Macklem admits it won't be painless.

Macklem is projecting "roughly zero growth for two or three quarters," referring to the three-month periods economists use to break up a year. "What that means is, it's just as likely that we'll have two or three quarters of slightly negative growth as slightly positive growth. So yes, it could be a mild recession."

Macklem said "it's not going to feel good" to Canadians who have been used to economic growth rates of more like three per cent, but it will be nowhere near as deep or as long as the kind of economic slump that has happened in previous downturns.

"It's not a major contraction," he said.

As Macklem and Senior Deputy Governor Carolyn Rogers explained in their Wednesday meeting with financial reporters, what the central bank is trying to do is bring the economy back into balance.

According to the bank's analysis, money borrowed at rock bottom interest rates plus a flood of savings that rushed into the economy following the pandemic bounce-back meant that Canadians wanted to buy more than the economy could provide.

In an oversimplified form, this is how economic theory tells it: With access to all that cash, people wanted more stuff.

They wanted bigger and more expensive houses. They wanted new trucks and cars and the gas to put in them. They had money to spend on nicer appliances and more and better food and many other things.

The problem was that the Canadian economy could not build houses fast enough to satisfy all that pent-up demand. The truck and appliance markets were seized up by broken supply chains. And the Russian attack on Ukraine sent the price of gasoline soaring, which was passed down to all the other products like food that needed to be sent by truck. 

Meanwhile, to satisfy all that consumer demand, retailers and other businesses bid up the price of products and inputs that were available and passed on those costs on. At the same time, to get a piece of the action, employers were desperately trying to hire new employees just as the skilled baby boomers were waltzing off stage into retirement.