Canada’s economy is facing serious challenges, but contradictory economic data – and outdated ways of thinking – are complicating the upcoming interest rate decision.
As I recently reported, wage growth is lower now than at any time in the last 20 years. While some jobs are being created, more of the jobs are low-security, and low pay.
Because wages are growing so slowly, Canadians are actually getting poorer, since the cost of living is rising more rapidly than wages are.
This is a result of a rapidly changing job market, and a government that has failed to react and adapt to those changes. Our politicians, and much of the elitist establishment – including the Bank of Canada – appears trapped in a way of thinking that may have fit the old economy, but does not fit the way things are today.
In the past, if a decent amount of jobs were being created it was automatically assumed that the economy was doing fine. When job growth seemed to be on an upward trend, focus would turn towards increasing interest rates to “cool the economy down.”
The goal was to prevent job growth from leading to rapid inflation. Raising interest rates was the key tool to stop inflation from getting out of control.
But this kind of thinking made sense when inflation was getting up into the 5%, 10% range. However, we now face a situation where inflation is low (around 2%), and relatively stable. At the same time, interest rates are already very low (o.5%), and any movement up could slow the economy.
And this is where things get difficult.
The connection between job creation and economic growth (and thus the connection between job growth and inflation) now appears more tenuous than ever. That’s not to say they aren’t connected. More job creation is certainly good for the economy. But the quality of jobs is also important. This is where Canada faces serious problems.
95% of the jobs created last month were self-employment jobs. This includes many people starting their own business, freelancing, and contracting. Those jobs tend to be less secure than others, and are highly susceptible to rapid change in the market.
As a result, self employment jobs often include extremely low wages, and no benefits whatsoever.
This is why the economy can appear to be creating jobs, but wages remain almost flat.
As a result, it makes no sense for the Bank of Canada to “cool the economy down” by raising interest rates at this time.
After all, if people are getting poorer and wages can’t keep up with the cost of living, the economy is clearly not doing well. Canadians can see it, but the leaders of our government and the Bank of Canada cannot. If a Canadian worker has to take two or even three jobs just to get by, that is a sign of a failing economy not a healthy one.
Monetary measures can only go so far
There is only so much the Bank of Canada can do if fiscal policy is not being handled correctly. The federal government is increasing taxes, implementing a carbon tax, adding to the federal payroll, and failing to increase infrastructure investment as promised. The combination of these factors is ensuring that money stays in the hands of the government, rather than in the pockets of Canadians.
This adds to the problem of near-record high personal debt being held by Canadians. This debt reduces the money available for saving or spending, and it puts many Canadians one lost paycheque away from financial disaster.
It also makes many Canadians incredibly vulnerable to an interest rate hike, which means any attempt by the Bank of Canada to “cool off” the economy could tip us back into a recession.
Unfortunately, the elites live in their own bubble, and they rarely – if ever – see the economic suffering many Canadians are experiencing.
Our economy is not recovering
Our economy is not recovering. Canadians can feel it. Something has gone seriously wrong, and there is a disconnect between the numbers the government likes to quote to make the economy seem alright, and the reality on the ground.
That’s why the Bank of Canada must move beyond outdated economic thinking, and recognize that a job doesn’t mean the same thing it once did. An economy full of part-time/contract workers requires very different policies than one based stable, full-time employment.
The monetary and fiscal policies of the past will not work in the present and future. If those in power refuse to recognize that reality, disaster could follow.
Photo – Taxiarchos228