A lot must go right to achieve soft economic landing, David Dodge says

Lead author of the spring economic outlook Bennett Jones says policymakers must work quickly to prevent inflation from stalling


From Russia’s invasion of Ukraine, to supply chain disruptions and rampant inflation, policymakers are facing an unprecedented array of economic challenges – and they’ll need one. Some things to break their way to get through it with as little pain as possible.

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That’s one of the lessons learned from the Spring 2022 Economic Outlook conducted by Canadian law firm Bennett Jones, which examines several potential scenarios and the necessary conditions for each to play out.

In the company’s optimistic scenario, both Canada and the US will be able to steer their economies towards soft landings as global supply chain issues are gradually resolved and monetary tightening soon brings inflation pressure is under control.

David Dodge, former Governor of the Bank of Canada, now a senior adviser to Bennett Jones and lead author of the report, pointed out that rising global commodity prices in particular is a key obstacle to overcome. via.

“If we take oil down (and) we have a break like that, then I think it’s entirely possible (getting a soft landing),” Dodge said in an interview with the Financial Post. “If we don’t get a breakthrough on that front, it’s going to be very difficult.”

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If we drop the price of oil (and) we have such a breakout, then I think it’s entirely possible (to achieve a gentle landing)

David Dodge

Analysts at Bennett Jones expect energy and commodity prices to peak this year before falling in 2023 and 2024, although they will remain up from pre-pandemic levels.

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The optimistic scenario will also depend on a gradual easing of COVID-19 restrictions, especially in China, which is still pursuing a policy of no COVID and less supply chain bottlenecks. A resolution on Russia’s invasion of Ukraine that would allow for some sanctions relief would also be needed to ease supply constraints and alleviate some of the inflationary pressures they are exerting. . On top of that, demand growth will need to be boosted through large retail price increases, tighter monetary policy and reduced financial support.

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Under this scenario, the Bank of Canada would raise its policy rate to 2.75% – within the upper bound of the neutral rate, which would neither help nor hinder the economic growth that economists have seen. central bank executives mentioned in the past few months. This will happen through a series of three half-point increments and two quarter-point increments.

All these factors taken into account, the report suggests under the optimistic scenario that Canada’s real gross domestic product will hit 3.1% this year before slowing to 2.4% in 2023. and 1.7% in the year after the drop in exports. Core inflation could peak in the third quarter of this year before falling to 2% by mid-2024, analysts said.

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However, threats other than geopolitical tensions and troubles in the global supply chain could lead to high inflation extending into next year, forcing the Bank of Canada to drag rates significantly higher than with a neutral rate to 3.5% by March 2023. The report adds that this pessimistic scenario would see inflation, excluding food and energy, peak at 5.2% annually in third quarter of this year with a significant drop in economic growth to 2.7% in 2022 and 1.1% in 2023. Economic growth would then reverse course and rebound to two percent in the next year.

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The prospect of an economic recession while inflation remains relatively high has raised concerns around stagnant inflation.

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To avoid a stagnant inflation environment, policymakers will have to work quickly from a monetary and fiscal policy standpoint to bring prices under control, Dodge said.

“We have to move quickly (reducing inflation), and… for central banks, that means raising interest rates up to the point where they are actually constraining rather than just adapting to growth. ,” said Dodge. “And at the same time, we have to allow price increases to do their job, which is to cut demand where people don’t have enough income – that reduces demand and perhaps some prices. chief. That’s not very nice, but that’s how the market system works.”

“That’s the short term: the outlook isn’t very pleasant,” continued Dodge, “It’s the kind of dealing with the side effects of a wonderfully successful intervention, that we (and) the rest of the world have to deal with. world has implemented into the economy by 2020. “

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Dodge noted that the economy is likely to contract for a couple of quarters as policymakers pull back on stimulus pumped into the market to combat the COVID-19 recession (which the report admits is likely). exceed the needs of the economy). However, Dodge said this is an important trade-off compared to the cost of manpower that could have been made during the pandemic.

“We will most likely have three or four quarters of barely growth… as we work through this,” Dodge said. “It’s not necessarily a bad outcome given what we can save ourselves in 2020.”

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