Canadian spending per household trends show the country’s economy is experiencing a recession, said Stephen Poloz, former governor at the Bank of Canada and a special advisor at Osler, Hoskin & Harcourt LLP, during a session at the Canadian Investment Review’s 2024 Investment Innovation Conference.
Consumer spending numbers have declined around two per cent for roughly six quarters in a row, he added. “As a matter of fact, we are in a recession in Canada and we’ll call it that because, officially, it’s still being propped up by roughly year-on-year three per cent growth in the number of people, therefore, number of households.”
There’s an agreement in recognizing that central banks waited longer than usual to begin normalizing interest rates after the coronavirus pandemic, said Poloz, which led to an inflation overshot upside in 2022 and now a projection for an undershoot inflation target in 2025. The actions of central banking authorities, like the Bank of Canada, in relation to inflation targeting can take years to show their impact in the day-to-day economic cycle, he noted.
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With the Bank of Canada beginning to cut interest rates in 2024, Canadians won’t likely feel the results until 2026, he added. “Believe me, it’s easier to do monetary policy from the peanut gallery than actually doing it.”
While discussing economic projections, Poloz said he doesn’t think it’s possible to project economies anymore as they’ve become unforecastable. “Economists who give you concrete numerical forecasts with decimal points in them are just trying to show you that they have a sense of humour.”
Moving forward, he suggested institutional investors be prepared for the possibility of a new downcycle in interest rates in Canada and possibly in the U.S. as well, depending on the actions of president-elect Donald Trump in his second presidential term.
“Right now, I would hedge that bet and say I have to wait and see what [Trump] says and what he actually does.”
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Poloz gained notoriety in the pension management industry when he was appointed by the federal government in 2024 to lead a study in ways to incentivize domestic investment by plan sponsors. During his consultations, he has heard a lot about real return bonds, a point of contention for Canadian pension plan sponsors since the government decided to stop issuing them in 2023.
While he said he’s in favour of real return bonds and their role in keeping a government in check, he also noted they can be seen as a slightly more costly method for a government to raise funds.
On larger trends for pension plan sponsors, Poloz noted longevity risk is one of the biggest challenges with the gradual disappearance of defined benefit plans as the standard for most workers. He sees this shift leading workers to over save for retirement without the ability to pool their longevity risk in a pension plan. He’d like to see more work on a public objective to ensure more people are covered.
“We’re switching from DB to [defined contribution plans] or just dumping plans altogether became a fad and I think it’s very unfortunate.”
Read more coverage of the 2024 Investment Innovation Conference.