Higher Interest Rates Producing a Predictable but Avoidable Recession
By Jim Stanford, Economist and Director, Centre for Future Work
New labour force
data from Statistics Canada confirm that Canada’s economy is already slowing
down sharply as a result of aggressive interest rate increases begun by the
Bank of Canada in March.
With the U.S.
economy (Canada’s largest trading partner) already in technical recession (with
two consecutive quarters of real GDP contraction), and monthly GDP data showing
no growth since May, this new report adds to worries that Canada’s economy is
heading into recession as well.
The labour force
data confirm that the aggressive monetary tightening begun by the Bank of
Canada in March is having a negative impact on employment and participation in
Canada’s labour market.
in July for the second consecutive month, with a cumulative loss since May of
74,000 jobs. That’s the worst decline unrelated to COVID lockdowns since the
Employment is now
lower than it was in March when the Bank of Canada began lifting interest
sign is the accelerating drop in labour force participation, which has fallen
0.7 percentage points since March. That represents the loss of 225,000 workers
from the labour market, at a time when many employers still complain of a
upsurge in inflation was obviously not caused by labour market conditions. The
Bank of Canada itself agrees it was sparked by supply chain disruptions, the
global energy price shock, and changes in consumer buying patterns.
arises mostly from supply-side constraints, it is self-defeating to respond by
chasing hundreds of thousands of workers out of the labour market. That doesn’t
fix supply chain problems, it makes them worse.
rates also discourage investment in new capacity and supply infrastructure.
This will also make the underlying cause of today’s inflation worse, not
wage growth has increased, it still lags well behind current inflation. This
means that average real wages (and the living standards of Canadian workers)
continue to fall.
In the 12 months
to June, average real hourly wages declined by 2.7%, and are now below
bankers acknowledge that the causes of this inflation are unique and—to some
extent—temporary side effects of the pandemic. They admit that this is
different from the wage–price spiral of the 1970s that neoliberal monetary
policy wrestled to the ground.
But after some
initial hesitation, they have now invoked that textbook policy response with
renewed vigour. Interest rates will be increased to reduce inflation back to
the target of around two per cent in most countries, no matter what.
Over 50 central
banks around the world have increased interest rates this year, led by
especially aggressive upward moves in the U.S., Canada, and Australia. The Bank
of Canada has already boosted its key rate 4 times, by a combined 2.25
in interest rates, applied indiscriminately to all borrowers (whether making
productive real investments or speculating on financial assets), will have
harsh effects on the economy.
have been roiled by higher rates and the slowing flow of cheap credit assets:
equity markets have fallen into ‘bear’ territory in most countries, and more
speculative assets (like cryptocurrencies, high-yield debt, and emerging market
bonds) are teetering on the verge of meltdown.
inflated by years of ultra-low interest rates, are also turning down sharply.
While this might seem to ease the housing affordability crisis, for most buyers
any savings will be offset by higher interest costs.
The impact of
higher interest rates on real spending and investment will take longer to be
fully felt (likely between 12 and 18 months), but that, too, will be painfully
contractionary: reducing business investment and spending on consumer durables.
The latest jobs numbers indicate the contraction in the real economy is
As a result of
this aggressive monetary austerity, the global economy is slowing down sharply.
After an encouraging rebound in 2021, global GDP growth is expected to be cut
in half in 2022: from 6.1% last year to 3.2% this year. The World Bank expects
this year to mark the sharpest single-year downturn in world growth in 80
is that this potential recession, like others caused by overzealous monetary
policy in the past, is not an accident, but the outcome of deliberate policy.
By throwing ice
water over the entire macroeconomy to address inflation that has unique and
more concentrated causes, the Bank of Canada’s actions will exacerbate the
decline in workers’ living standards.
movements need to reject the underlying arrangement in which permanent excess
capacity—in essence, a reserve army of workers—is always available to
discipline labour and control inflation, and a single, blunt policy instrument
(the interest rate) is used to regulate the whole macroeconomy.
macroeconomic policy should invoke a much broader, more flexible, and more
discriminating set of tools—including fiscal policy, regulatory measures,
public service provision, and even public ownership—to achieve and maintain
full employment with stable inflation.
It will take
years of educating, organizing and struggle to win any of those remedies. In
the meantime, however, unions and other progressive movements must simply
resist the effort to make workers pay for a crisis they didn’t create. This
Labour Day is a good time to start.