?? The Productivity Problem, The Great Rate Reversal, and a Case for Openness Around Open Banking
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You would think a soft landing after such a long, turbulent flight would feel different. Shouldn’t we be a little more—I don't know—optimistic?
In case you missed it, the official numbers are in and it appears the Canadian economy narrowly avoided a recession with real growth domestic product (GDP) expanding by an annualized rate of 1 percent in the final quarter of 2023. Is that good news? Well, for central bankers tasked with tightening monetary policy and raising interest rates to reign in 40-year record high inflation all without somehow plunging the economy into a deep and prolonged downturn, it’s great news. But throughout all the economic turbulence and all the tension around achieving that elusive and unlikely soft landing, was anyone ever worried about how long we could stay grounded?
Inflation isn’t our only problem.
Avoiding a technical recession (so far) surely isn’t bad news. But without a recession, some economists believe there’s still no urgency for the Bank of Canada to cut rates, while others argue that failing to make its first rate cut at the next policy meeting in April could be another mistake—this time in the other direction. ?
The Bank of Canada wouldn’t be the first central bank among its global peers to move to rate cuts following the surge of inflation that followed in the aftermath of the pandemic and was largely driven by supply constraints, excess demand, and surging energy prices caused by Russia’s war on Ukraine. This past month, the Swiss National Bank, Switzerland’s central bank, was the first to symbolically declare victory over inflation, kicking off what will undoubtedly be a historic central bank rate reversal, as the world’s central banks begin to cut rates and reverse course on tight monetary policy.
With Canada’s inflation rate cooling to 2.8 percent in February, the Bank of Canada will likely want to see inflation closer to its two percent target before it begins cutting rates. ?
Looking longer term, industry experts are now focused on a deeper issue—one that’s rooted in the country’s sluggish economic growth: Canada is facing a “productivity emergency.” How bad is it? One central banker believes it’s time to break the glass. ?
A report co-written by former BoC governor David Doge late last year highlighted the need for the government to refocus spending on boosting investment and skills development. Now, the central bank’s senior deputy governor, Carolyn Rogers, is doubling down, arguing that Canada has fallen behind most of its G7 peers and must swiftly confront low productivity to protect the economy against factors that will drive future inflation, including a retreat from globalization and shifting global tensions. ?
Improved productivity can help establish a high-growth, low-inflation environment, and with Canada’s ongoing structural decline in productivity, living standards will only continue to deteriorate.
Can it really get any worse? According to one report, it can.
In fact, it can get a lot worse.
A secret RCMP report released this past month warns that Canadians may revolt when they realize the hopelessness of their economic situation. The report also warns that Canada’s economic situation will “deteriorate further in the next five years,” and that “many Canadians under 35 are unlikely ever to be able to buy a place to live.”
If you’re one of those Canadians under 35 and the money in your bank account isn’t enough to convince you that you can’t afford a place to live, someone prepared these 10 charts that illustrate why you can’t buy a home.
Speaking of both a problem with productivity and a desperate need for competition and innovation, open banking is still on its way. While that’s something you’ve been hearing since 2018, legislation around the sharing of our financial data is finally expected alongside next month’s budget, and economist Kevin Carmichael made a strong case for openness around open banking based on how democratic capitalism is supposed to work.
And in an exit interview from his role as Canada’s open banking lead, Abraham Tachjian is confident that the industry is ready for it and banks and fintechs will like what they see.
Sure, it took 6 years for open banking to get this far.
At least we’re acknowledging our productivity problem. ?
(Photo Credit: Twentieth Century Fox)
ICYMI | Hand-Picked Fintech & Finance News from Feb. 2024
CBC
The Canadian economy continues to beat recession fears, posting modest growth in the fourth quarter even as high interest rates weighed on consumers and businesses.
FINANCIAL POST
The Canadian economy hung tough in the final quarter of last year, expanding one per cent on annualized basis after contracting in the third quarter, Statistics Canada said on Feb. 29. Here’s what economists are saying the latest gross domestic product numbers could mean for inflation and interest rates.
REUTERS
The Swiss National Bank cut its main interest rate by 25 basis points to 1.50% on Thursday, a surprise move which made it the first major central bank to dial back tighter monetary policy aimed at tackling inflation.
REUTERS
The world's biggest central banks are on the starting line of reversing a record string of interest rate hikes but the way down for borrowing costs will look very different from the way up.
FINANCIAL POST
领英推荐
It’s time for the Bank of Canada to stop being scared of its own shadow. The central bank made a mistake in one direction (as did most central banks) when it was late on the inflation surge, and now risks making a different mistake in the other direction.
CBC
Canada's annual inflation rate cooled to 2.8 per cent in February, with the cost of cellular services, groceries and internet access services contributing to slower growth, Statistics Canada said Tuesday.
THE LOGIC
As Ottawa prepares to unveil its long-awaited plan, Abraham Tachjian thinks banks and fintechs alike will like what they see.
FINANCIAL POST
Canada must tackle weak productivity to inoculate the economy against factors that will drive future inflation, such as the pullback from globalization, said Carolyn Rogers, senior deputy governor of the Bank of Canada.
NATIONAL POST
"Right from the get-go, the report authors warn that whatever Canada’s current situation, it 'will probably deteriorate further in the next five years.'"
GLOBE AND MAIL
The Bank of Canada governor is urging all levels of government to work together to boost the supply of homes across the country, arguing that the rising cost of housing, which has become the biggest driver of overall inflation, can’t be addressed by monetary policy alone.
THE LOGIC
This is a column about how the government should think about regulating the sharing of financial data. Last fall, Finance Minister Chrystia Freeland promised to present legislation alongside next month’s budget. It could be the most important thing she does this year because that bill will determine the extent to which open banking brings competition and innovation in finance at a time when Canada’s economy is in desperate need of both.
ICYMI | Notable Quotables
“Productivity isn’t everything, but in the long run it is almost everything.”
Paul R. Krugman, Economist, The Age of Diminished Expectations?(MIT Press, p.11, 1994)
“An economy with low productivity can grow only so quickly before inflation sets in. But an economy with strong productivity can have faster growth, more jobs and higher wages with less risk of inflation.”
?
“The Bank of Canada would be well advised not to make another mistake in a different direction, unless creating the conditions for a destabilizing recession has suddenly become part of its mandate.”
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