Andrew Grantham, Senior Economist, CIBC, joins the Hon. Lisa Raitt to discuss the growth potential of the economy, specifically labour and productivity and to share highlights from his new report ‘More Room at the Inn? Rethinking Canada’s medium-term upside.’
Read the report here: More Room at the Inn? Rethinking Canada’s medium-term upside
Lisa Raitt: Thank you for tuning in to The Raitt Stuff. I’m your host, Lisa Raitt and in this podcast, I’m going to share insights on current hot topics in the areas of public policy, politics and business with some guests along the way. Welcome back, everybody. Today I’m joined by CIBC Senior Economist Andrew Grantham to discuss Canada’s growth potential. Andrew is a Senior Economist with CIBC with a wide range of experience in different areas of economic and financial market forecasting. He joined us in 2011, initially focused on the US and international outlook and its implications for foreign exchange and fixed income markets. Recently, Andrew has taken a more diverse role, including overseeing the team’s provincial, global and Canadian forecasts. Since joining, he’s helped CIBC win MarketWatch’s monthly contest for US forecasters five times. Andrew has a master’s degree in economics from the University of York in England. Andrew, welcome to today’s show and thank you for your time.
Andrew Grantham: It’s great being here. Thank you, Lisa.
Lisa Raitt: So Andrew, the year started with a lot of negativity around the economy. We have high interest rates, people are talking about inflation, they’re talking about a recession possibly, but at the same time, we are seeing growth that may be happening in the economy as well. Is there an inconsistency between inflation coming down and growth happening in the country?
Andrew Grantham: That’s a great question and it’s really kind of the reverse of what we saw last year, because last year, you know, we did have an economy that was growing, but maybe it didn’t grow quite as quickly, quite as much as people expected. Then we also had inflation, which was much higher than people expected, and what we are seeing this year so far is a reversal of some of those things that held back growth contributed to inflation last year. Those are starting to fade now, and that means that the growth potential of the economy is probably higher than everyone expected it to be at the start of the year, which is helping us maintain growth, but also bringing inflation down as well.
Lisa Raitt: Okay. Growth potential. Potential growth, very economistic kinds of terms for us. What does it mean when you say that Canada’s growth potential is higher than what we had assumed? Did we just discover new growth, like what’s happening?
Andrew Grantham: So basically, potential growth is the rate that an economy can grow at without accelerating inflation and without decelerating inflation and generally over a longer time period. There’s two main components to this. The first component is how quickly your labour force is growing, and the second component is how productive that labour force is when they are at work. And what we saw last year is that we saw a lot of labour force growth, but productivity was held back by supply chain issues. Productivity was held back by a lot of people phoning in sick for work so they couldn’t actually go to work. Flights being cancelled, trains being cancelled, restaurants working below their full capacity. But what we are starting to see this year is supply chain pressures are easing and that’s helping productivity in the manufacturing sector. We’re starting hopefully to become a healthier society again. At least that’s what the data is telling us. So that’s improving supply within the domestic economy. And we’re also seeing maybe some of the policy changes that we’ve seen over the last few years add into that potential, we’re seeing increased participation within women in the workforce, which could be the childcare issues and changes that have been made there and of course immigration, and that’s contributing to population growth and labour force growth.
Lisa Raitt: Yeah, and we’ve seen significant amounts of policy work being done in immigration at the federal level and the provincial level too. And I think the Federal Government has set an optimistic target of about 500,000 people a year coming into the country. And you guys say that it’s a really important factor for driving growth in our Canadian economy, immigration. In fact, our CEO, Victor Dodig, had an op-ed on this same topic recently. Tell me a little bit about the importance of immigration when it comes to growth in Canada.
Andrew Grantham: Well, it’s very important when it comes to the growth potential in Canada, because we, like everyone else around the world, have an ageing population. Ageing population means people start to retire. So that limits the supply that you can get from the labour force. And one of the ways to make up for that is through immigration and that is helping us bring down, for example, the big job vacancies that we’ve been seeing. Those have started to come down and I think newcomers into Canada are starting to take some of those jobs. Now, immigration, when it comes to potential growth, is certainly a positive when it comes to inflation. It’s a little more ambiguous because, you know, you bring people into the country that helps supply fill in those jobs, but it also increases demand as well. Know, the one we talk about mostly is can we house all these people that are coming in? But even when it comes to other services, it’s like, do we have enough capacity to be able to have all these people come in and get the food they need, go to restaurants if they want to, medical services, et cetera? I think the one big positive that we’re seeing in terms of the immigration and the employment data recently is that we’re seeing an increase in participation within the labour market for new immigrants into the country, and Statistics Canada kind of has that as a 0 to 5 years, those new immigrants participation among those people have has really increased. And not only are they participating in the labour market, they’re able to find jobs because the unemployment rate of those people as well is a lot lower than it used to be before the pandemic. So, you know, it does improve growth, potential immigration, and I think to a greater extent than maybe even 2019, it’s helping inflation as well because of increased participation within the labour market and the fact that we’ve been able to fill some of those job vacancies.
Lisa Raitt: Okay. So growth potential may be better than we thought. Immigration is important. Inflation may be coming down more naturally than we had expected because supply chain. But what people really want to know is what’s the Bank of Canada going to do about interest rates with all of this information? What are you guys seeing?
Andrew Grantham: That’s what people want to know. Is their mortgage rate going to go up again?
Lisa Raitt: Yeah, I was going to get to that, Andrew. That’s what I care about. But yeah.
Andrew Grantham: Exactly, exactly. So I think this is great news for for the Bank of Canada because, you know, as you mentioned in the in the intro, it means we don’t need a recession to get inflation back to target. If we have a higher potential, let’s say our potential growth this year is 3%, but we’re only growing at 1%. That’s not a recession, but it’s far enough below that potential to get inflation coming back down. And, you know, that’s definitely what we’re seeing in the data. So, you know, the Bank of Canada is going to be looking at their forecasts. They only release new forecasts about a month ago, but they’re probably ready to rip those up already. They’re looking at those forecasts and probably saying, you know what, growth is going to be a bit better than we anticipated. But that doesn’t seem to mean much for inflation because inflation is coming down maybe even quicker than we’d anticipated it was. So I think for them what it means is that they don’t need to raise interest rates again. So good news for people who don’t want to see their mortgage rate go up. But I do think, you know, the improvement in growth that we’re seeing probably means that any interest rate cuts, any relief on that interest rate front is more of a 2024 story rather than a 2023 story.
Lisa Raitt: Okay. Well, you heard it here first, optimism for the new year in terms of what we’re going to be seeing for interest rates. I really appreciate your time, Andrew. Where can somebody find this report that you guys have done if they want to take a look at it in depth? Because it’s more than just the time that we spent here together.
Andrew Grantham: Yeah. So everything’s published to our website, which is freely available to everyone. This report is called More Room at the Inn Rethinking the Growth Potential of Canada. And as we’ve mentioned, it’s just kind of rethinking how much we can grow with still getting inflation to come back down.
Lisa Raitt: Great. Thank you very much for your time, Andrew.
Andrew Grantham: Thank you for having me.
Lisa Raitt: Thanks so much for tuning in. Now, if you have any questions or comments or even requests on topics to discuss, drop me a line at email@example.com. Your interactions actually will make this better. I’m your host, Lisa Raitt, and this has been The Raitt Stuff. I’ll talk to you next week.
Disclaimer: Disclaimer: The materials disclosed on this podcast are for informational purposes only and subject to our Code of Conduct as well as IIROC rules. The information and data contained herein has been obtained or derived from sources believed to be reliable, without independent verification by CIBC Capital Markets and, to the extent that such information and data is based on sources outside CIBC Capital Markets, we do not represent or warrant that any such information or data is accurate, adequate or complete. Notwithstanding anything to the contrary herein, CIBC World Markets Inc. (and/or any affiliate thereof) shall not assume any responsibility or liability of any nature in connection with any of the contents of this communication. This communication is tailored for a particular audience and accordingly, this message is intended for such specific audience only. Any dissemination, re-distribution or other use of this message or the market commentary contained herein by any recipient is unauthorized. This communication should not be construed as a research report. The services, securities and investments discussed in this report may not be available to, nor suitable for, all investors. Nothing in this communication constitutes a recommendation, offer or solicitation to buy or sell any specific investments discussed herein. Speakers on this podcast do not have any actual, implied or apparent authority to act on behalf of any issuer mentioned in this podcast. The commentary and opinions expressed herein are solely those of the individual speaker(s), except where the author expressly states them to be the opinions of CIBC World Markets Inc. The speaker(s) may provide short-term trading views or ideas on issuers, securities, commodities, currencies or other financial instruments but investors should not expect continuing analysis, views or discussion relating to those instruments discussed herein. Any information provided herein is not intended to represent an adequate basis for investors to make an informed investment decision and is subject to change without notice. CIBC Capital Markets is a trademark brand name under which Canadian Imperial Bank of Commerce (“CIBC”), its subsidiaries and affiliates provide products and services to our customers around the world. For more information about these legal entities, as well as the products and services offered by CIBC Capital Markets, please visit www.cibccm.com.