Trudeau govt faces tough choices as recession looms large

Amarjit Bhullar

EX-professor, University of Northern British Columbia

THE coming year would be critical for Canadian PM Justin Trudeau’s government. A survey (November 10-12) by Leger, a market research and analytics company, shows that the Liberal government’s handling of the affordable housing crisis and high inflation received the highest dissatisfaction ratings. If his government succeeds in reducing inflation without plunging the economy into recession and initiating effective policies to ease the housing affordability crisis, it will have better prospects in the 2025 elections.

In 2022, the annual growth in the Consumer Price Index rose to a 40-year high of 6.8 per cent, but after that it started to dip. The rate of inflation was 5.9 per cent in January 2023, 4.4 per cent in April and 2.8 per cent in June. After that, it moved up to 3.3 per cent in July, 4 per cent in August and again declined to 3.8 per cent in September and 3.1 per cent in October.

The four main factors for the higher-than-normal inflation were global supply chain disruptions, temporary increase in the pent-up demand for items not available during the Covid-19 pandemic, the Russia-Ukraine war and price gouging by corporate firms.

Inflation caused panic in policy circles. The Bank of Canada went overboard to control inflation by increasing the rate of interest 10 times in two years. The overnight rate of interest, which was brought down to 0.25 per cent at the time of the Covid outbreak, increased to 2.5 per cent in July 2022, 4.25 per cent in December 2022, 4.5 per cent in January 2023 and 5 per cent in July 2023. After that, there has been a pause, but the bank’s Governor has said if need be, there could be more increases.

The increase in the home loan interest rate (called mortgage interest rate) and rent, food, gasoline and electricity prices was mainly responsible for the inflation. From September 2022 to September 2023, the mortgage interest rate’s contribution to the inflation was 30.6 per cent. Rent, food, gasoline and electricity prices contributed 7.3 per cent, 6.1 per cent, 7.5 per cent and 11.1 per cent, respectively.

Inflation has squeezed consumers. Mortgage payments have skyrocketed. The food banks feel the pressure because the dependency of low-income households on them has intensified. A high proportion of households is neck-deep in mortgage and non-mortgage debt. The most vulnerable people are the pensioners, who cannot make ends meet with the money they get as old-age security. New immigrants and international students are also facing financial difficulties.

The increase in the interest rate has compounded the housing crisis in Canada. Policymakers had hoped that the interest rate hike would puncture the house price bubble. Though there is a slight decline in house prices, the increase in the interest rate and harder conditions of mortgage approval have thrown low-income households and first-time buyers out of the market. The demand for houses has gone down and builders have put new construction projects on hold, reducing the supply. The Canada Mortgage and Housing Corporation pointed out that 1.4 million households in Canada didn’t have access to quality housing in 2023. It projects that an additional 3.45 million homes, over and above the base level of 2.2 million homes, need to be built by 2030.

A long-term plan to bridge the supply-demand gap for houses to check price spirals is needed. It must include significant, sustained government investment in non-market housing, such as cooperative, non-profit and public housing. The rental units, in fact, are auctioned in the metro cities as dozens respond to a single unit offering on rental websites.

The unemployment rate, which was historically low, is rising. It is now 5.8 per cent as compared to 5.1 per cent last year. But the silver lining is that it is still below the historic average of 8.06 per cent. Recent reports suggest that the unemployment rate may go up if the recessionary trend in the economy continues. It may especially affect the low-wage jobs segment.

The inflow of migrants and students has continued in Canada since 2014 when the Liberal Party came to power. International students contributed more than C$22 billion to the Canadian GDP and created nearly two lakh jobs. Recently, Canada started tightening up the rules for immigration and international students’ intake. But it is a fact that Trudeau’s liberalised immigration regime made him the first choice of immigrant voters in the last three elections. Will he be able to retain this vote bank?

The Trudeau government was appreciated for deftly handling the Covid crisis and doling out billions of dollars to support Canadians during the stressful period. The economy emerged strongly from the shocks given by the pandemic. Its growth rate was remarkable in 2021 and 2022 when its real GDP grew at the rate of 5.01 per cent and 3.44 per cent, respectively. But this also proved to be a spoilsport for his government as the high growth rate was accompanied by high inflation. Economists termed it as ‘overheating of the economy’ that triggered the inflationary pressure. If the high rate of inflation continues, it would not be a good sign. Policymakers often said that ‘recession is bad but too much inflation will be worse.’ So, they used monetary policy tools, like the rate of interest, to bring the rate of inflation in the range of 2-3 per cent. The end goal is to bring the rate of inflation lower than 2 per cent.

Although both the economy and the rate of inflation have cooled down, policymakers think that there is a possibility of inflation bouncing back. So, the government is confronting a tough choice. If inflation is allowed to continue, it will annoy the voters; if aggressive inflation containment policies are made, they may push the economy into recession and result in higher unemployment.

Signs of recession are already there. The growth rate in the first quarter of 2023 was 0.6 per cent, 0.3 per cent in the second and -0.3 per cent in the third. If an economy goes into negative growth for two quarters consecutively, it is technically in recession. So, if the negative growth rate continues in the fourth quarter, the Canadian economy will be technically in recession. If that happens, the employment rate may decline by 3.7 per cent, with 4,50,000 job losses, as per the estimates of TD Bank’s economists.

Overall, the economy has remained mired in a high-rate inflation (especially higher prices of food, shelter and gas), the housing crisis, increasing household mortgage and non-mortgage debt, high rate of interest and the looming prospect of recession.

Trudeau is heading a minority government with the support of Jagmeet Singh’s New Democratic Party; if the PM scrapes through in the 2025 elections, Jagmeet will be a ‘kingmaker’ once more.

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