Canada May Be Headed Toward a Recession, Says Former Central Bank Governor

Then-Bank of Canada governor David Dodge responds to questions at a news conference in Ottawa on Jan 24, 2008. Tom Hanson/The Canadian Press

A former Bank of Canada governor says the country is most likely headed for a recession, while criticizing the central bank’s messaging on inflation during testimony before a Senate committee on Sept. 22.

David Dodge, who retired from the post in 2008, told the banking committee that economic growth will go down to zero and “unemployment is going to rise,” according to Blacklock’s Reporter.

Sen. Pamela Wallin, chair of the committee, sought to obtain clarification from Dodge.

“You stepped back from using the word ‘recession’ but let’s ask you about that,” she said.

“Zero growth rates after a period of three percent growth at annual rates that we’ve recently had is not going to feel so good,” answered Dodge. “Putting a number on it, I would say zero over that period is a good guess, but I think ‘guess’ is the operative word.”

During a lecture he gave at the University of Waterloo on Sept. 20, current Bank of Canada (BoC) Deputy Governor Paul Beaudry was asked by a student whether rising rates would lead to a recession. He responded that it was “certainly too early to call.”

Other central bankers have also been cautious about uttering the word “recession,” as admissions and projections have real-world impacts.

“No one knows whether this process will lead to a recession or if so, how significant that recession would be,” U.S. Federal Reserve Chair Jerome Powell said on Sept. 21 after raising interest rates by 0.75 of a percentage point for a third straight time.

The projections from central banks about the current inflationary bout have missed the mark, with some of them saying inflation would be kept under control or would be simply “transitory.”

Sen. Clément Gignac, an ex-chief economist at the National Bank and a member of the committee, criticized central bank officials on their messaging.

“In 2020 the central banks, not only in Canada, mentioned interest rates would remain low for a while,” he said. “As a result in Canada a lot of people bought houses at variable rate mortgages.”

“In 2020 the Bank of Canada mentioned, ‘You know what? Inflation will be transitory.’ Whoops,” said Gignac. “They give the impression they know a lot of things, more than us, and we start to realize they have no better clue than Wall Street economists.”

‘Mistakes Made’

The core mission of central banks is to keep inflation in check, but Dodge noted that “in August 2020 they changed their rules and basically said, ‘We’re not going to care about inflation.'”

A former deputy finance minister, Dodge said the BoC’s use of the word “transitory” to describe inflation was “unfortunate,” saying economists could understand “but in plain English, it wasn’t very helpful.”

“So I think there were big mistakes made,” he said.

The federal government has often blamed inflation on global circumstances and supply chain woes, and has defended using financial support programs to compensate for lockdown measures imposed by provincial governments.

“We’re up against global headwinds dealing with inflation,” Liberal House Leader Mark Holland said on Sept. 20.

Not every country is experiencing the same levels of inflation, but those that applied similar monetary and financial policies as Canada are in similar circumstances.

Beaudry admitted recently that an earlier pullback by the BoC would have reduced inflation.

“It’s likely a somewhat faster global (stimulus) withdrawal process could have made all countries better off,” he said.

Conservative Party Leader Pierre Poilievre commented on this assertion in a Twitter post on Sept. 21.

“Bank of Canada comes around to what I said for 2 [years]: overspending & cash creation made today’s inflation worse. Now we pay the price: higher costs & interest rates.”