A lot has to go right for a soft economic landing to happen, says David Dodge

Lead author of Bennett Jones Spring Economic Outlook says policymakers must act quickly to avoid stagflation

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From the Russian invasion of Ukraine to supply chain failure and rampant inflation, policymakers are staring at an unprecedented mix of economic challenges — and they’re going to need a few things to navigate their way to it with as little pain as possible.

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That’s one of the conclusions of the Spring 2022 Economic Outlook, prepared by Canadian law firm Bennett Jones, which examined several possible scenarios and the conditions for each.

In the company’s optimistic scenario, both Canada and the United States could lead their economies to a soft landing as problems in the global supply chain are gradually resolved and early monetary tightening brings inflationary pressures under control.

In particular, David Dodge, the former governor of the Bank of Canada who now serves as senior advisor to Bennett Jones and was the lead author of the report, pointed to high global commodity prices as a major obstacle to overcome.

“If we get oil prices down (and) we get a break like that, then I think it’s very possible (to get to a soft landing),” Dodge said in an interview with the Financial Post. “If we don’t get a breakthrough on that front, it’s going to be very difficult.”

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If we get the oil price down (and) we get such a break then I think it’s very possible (to get to a soft landing)

David Dodge

Bennett Jones analysts expect energy and commodity prices to peak this year and fall in 2023 and 2024, although they will remain above pre-pandemic levels.

The optimistic scenario would also depend on easing COVID-19 restrictions, especially in China, which still has a zero-COVID policy, and fewer supply chain bottlenecks. A resolution on Russia’s invasion of Ukraine that would allow for the easing of some sanctions would also be needed to ease supply restrictions and alleviate some of the inflationary pressures they create. In addition, demand growth should be driven by strong increases in retail prices, tighter monetary policy and reduced fiscal support.

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Under this scenario, the Bank of Canada would raise its key rate to 2.75 percent — within the upper bound of the neutral rate that would neither help nor hinder the economic growth that central bank executives have referred to in recent months. This would be done through a series of three half point raises and two quarter point raises.

Taking all these factors into consideration, the report found in the optimistic case that real Canadian gross domestic product would reach 3.1 percent this year, before slowing to 2.4 percent in 2023 and to 1.7 percent the following year. declining exports. Analysts added that core inflation could peak in the third quarter of this year, before declining to two percent by mid-2024.

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However, threats other than geopolitical tensions and global supply chains could cause high inflation to persist next year, forcing the Bank of Canada to raise interest rates significantly above neutral to 3.5 percent by March 2023. The report added that this pessimistic scenario sees inflation, excluding food and energy, peaking at 5.2 percent a year in the third quarter of this year, with economic growth slowing to 2.7 percent in 2017. 2022 and 1.1 percent in 2023. Economic growth would then change course and return to two percent the following year.

The prospects of an economic slowdown while inflation remains quite high has fueled concerns about stagflation.

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Dodge said that to avoid an environment of stagflation, policymakers from both a monetary and fiscal standpoint will have to work quickly to get prices under control.

“We have to act very quickly to bring inflation down, and…for central banks, that means raising interest rates to levels where they are actually restrictive rather than just accommodative to growth,” Dodge said. “And at the same time, we need to let the price increases do their job, which is to reduce demand where people don’t have enough income – that reduces demand and maybe some prices. That’s not nice, but that’s how the market system works.”

“That’s the short term: the outlook isn’t very bright,” continued Dodge, “it’s kind of dealing with the side effects of an extraordinarily successful intervention, which we (and) the rest of the world did in the economy in 2020 .”

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Dodge noted that the economy can expect a several-quarter slowdown as policymakers pull back the stimulus pumped into the market to combat the COVID-19 recession (which the report acknowledged likely exceeded the economy’s needs). However, Dodge said it is an important trade-off compared to the human costs that could have been realized during the pandemic.

“It’s very possible that we’re going to have three or four quarters of almost no growth … as we work our way through this,” Dodge said. “That wouldn’t necessarily be a bad outcome, given what we were able to get out of in 2020.”

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