Risk of a hard landing for Canadian economy is up, former Bank of Canada governor says

Former Bank of Canada governor Stephen Poloz says Canada’s economy is at a greater risk of a “hard landing” — a rapid economic slowdown following a period of growth and approaching a recession.

Amid the central bank’s interest rate hikes intended to tame inflation, inflation cooled to 5.2 per cent in February. That’s down from 5.9 per cent in January, after 40-year record highs over the summer, reaching as high as 8.1 per cent in June.

Poloz told CTV’s Question Period host Vassy Kapelos — in a joint interview with former Liberal finance minister John Manley airing Sunday — the Bank of Canada and federal government’s efforts to rein in inflation are working, but the chances of a hard landing remain.

“The risk of a hard landing has definitely gone up, given that so much has already happened, and we're still waiting for the rest of the effects of interest rate rises to work their way through,” he said, adding he is “heartened by the response of the supply side of the economy.”

“That's really where a soft landing comes from,” he said. “It's not fancy engineering on the part of the central bank. But as the supply side continues to grow — such as new entrants into the workforce, from immigration and from parents who are taking advantage of the new childcare policy — those kinds of things are giving us, coming up from below, strengthening the economy."

While Poloz said the supply growth is a good sign, at this point it would require “some luck” to achieve a soft landing and avoid a recession.

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Federal Finance Minister Chrystia Freeland meanwhile is set to table the budget on Tuesday.

She’s long been signalling Canadians can expect fiscal restraint to avoid stoking inflation, but also some significant investments. Namely, the government has been teasing targeted measures to help relieve the impacts of inflation, plus the already-announced $196 billion in health care funding for the provinces and territories over the next 10 years, and clean economy spending to help compete with the U.S. Inflation Reduction Act, which offers billions of dollars in energy incentives south of the border.

Poloz however called last year’s federal budget a “missed opportunity” to “have a different mix” of spending, and in doing so “lower the trajectory of the Bank of Canada’s interest rates.”

He said there’s now less risk government spending will counteract the impacts of the Bank of Canada’s interest rate hikes.

“I think we're mostly beyond that point as an issue,” he said, adding last year would have been a more opportune time to stimulate the economy.

“That might have been better for everybody,” Poloz continued. “But that missed opportunity is behind us and now the economy is clearly slowing down. We got all that news in the fourth quarter, sooner than most people expected.”

“All the interest sensitive parts, such as housing and business investment, had been down three quarters in a row already, so in that sense, it feels recessionary already,” he added. “So in that sort of space, I think that business about causing inflation is off the table.”

With files from CTV’s Question Period Senior Producer Stephanie Ha