Even a soft landing will be a "mixed blessing" at best, CIBC's chief economist says
Both Canada and the US could still see a three-quarter period of negligible economic gains despite averting an outright recession, according to CIBC Capital Markets.
“With inflation having been chopped in half without an economic slump, we’re now in good company, not just among private sector forecasts, but importantly including the central banks that are no longer aiming for a recession, but gaining confidence that a soft landing could do the job,” said Avery Shenfeld, managing director and chief economist at CIBC Capital Markets.
However, Shenfeld warned that fundamentally, “a soft landing is still only a mixed blessing … in the sense that the lofty job gains we’ve enjoyed in the past couple of years, or even the mid-2% growth rate the US just posted for Q2, can’t continue if inflation is going to be vanquished.”
In an actual recession, characterized by unemployment increases of 2% or higher, central banks would scramble to adjust their tight policies to “an outright easing stance,” which could lead to benchmark overnight rates plunging to sub-2% levels.
“But a soft landing won’t open up that much economic slack,” Shenfeld said. “That will force central banks to be much more cautious in terms of how much they step on the gas with lower rates.”
Canada’s annual inflation rate plunged to 2.8% in June as gas prices continued to fall, bringing yearly price growth within the Bank of Canada’s target range of 1% to 3%.https://t.co/lhPJyBa8zf#breakingnews #inflation #mortgageindustry #economy
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 18, 2023
Crucially, a stronger-than-expected pace of economic recovery under such conditions could trigger an unmanageable spike in inflation.
Shenfeld said that fortunately for Canadians and Americans, they are not labouring under the same inflationary pressures and threats seen in the ‘80s and the ‘90s.
“Tamer inflation expectations, and a greater role played by temporary supply shocks in driving inflation higher this time, made the task of getting it under control more manageable,” Shenfeld said.
“This time around, the downside risks to investors, workers and political leaders, are tied to the ability of the central bankers to avoid hiking too far, or delay easing too long, and missing their landing zone as a result.”
