Unemployment rates will rise significantly in the case of an economic slowdown in Canada this year, say economists advising the Liberal cabinet this week, who also say the likelihood of such a slowdown in 2023 is high.
“We can expect the economy to slow significantly. We can expect that the unemployment rate will rise both here in Canada and in other jurisdictions like the U.S., Europe, the U.K.,” said Carolyn Wilkins, a senior researcher at the Griswold Center for Economic Policy Studies at Princeton University, while speaking to reporters in Hamilton, Ont., on Jan. 24.
Wilkins, along with University of British Columbia economist Kevin Milligan and Statistics Canada’s Chief Statistician Anil Arora, was in Hamilton to advise the federal cabinet during its post-holiday retreat focusing on affordability issues.
“Many forecasters say it’s really going to be in the first three quarters of this year that we see the effects [of high interest rates] on GDP growth and unemployment,” said Wilkins.
The Bank of Canada (BoC) raised its key interest rate on Jan. 25 by 25 basis points, bringing it up to 4.5 percent.
Rates have now risen by 425 basis points in less than a year.
“Whether or not we’ll have a hard landing is something that no one really knows, but I wouldn’t rule it out,” said Wilkins.
Wilkins said that before the pandemic, many believed that a 6 percent unemployment rate was the “natural” level at which it would not contribute to inflation, but added that Canada’s unemployment rate is now around 5 percent and inflation is still high.
“Clearly, it means that to get inflation down, in that way of thinking—especially in services, where wage pressures tend to feed into—we’re going to need an increase in unemployment.”
Wilkins and Milligan were asked by reporters to give their thoughts on a recent report released by Bennett Jones and the Business Council of Canada that said the federal government’s economic outlook for 2023 is too optimistic, and that it is underestimating the likelihood of a severe recession hitting the country this year.
Milligan said the federal government should be cautious of “going too far, too fast” in terms of fiscal policy, which he said could cause the BoC to simply raise interest rates to even higher levels.
“There are some serious risks for the next year as the economy’s most likely scenario is we hit a soft spot,” he said.
“That’s going to impact interest rates, it’s going to impact inflation, it’s going to impact government revenues and the budget situation, so I think we ought to be aware of those short-run pressures.”
In terms of rising interest rates, Wilkins said it will take time for their impact to be felt in the economy.
“It may seem really difficult now to go through this period of slower growth that we’re expecting to see and there’ll be higher unemployment, but at the same time on the other side, we’ll then be in much better shape than if we’re impatient,” said Wilkins.