Front Burner - Are we in an economic 'vibe-cession'?

Episode Date: December 13, 2024

The Bank of Canada cut interest rates again this week. Economists say wages are up, inflation is on target and the stock market is in the green.But most everyday Canadians are living a very different story. One of insanely high grocery prices, impossible housing costs and a suffocating economic squeeze.Recently, Canadian finance minister Chrystia Freeland announced a temporary GST holiday on a bunch of stuff to give relief to people feeling the pinch.But she went on to muse that the economic pain people were feeling might be the result of a "vibecession". Think recession – but you know – only in your head.Today, so are we in a 'vibecession'? Economist Armine Yalnizyan is our guest.For transcripts of Front Burner, please visit: https://www.cbc.ca/radio/frontburner/transcripts

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hey, I'm Jamie Poisson. If you talk to a Canadian economist today, they might tell you that since the pandemic, real wages have rebounded.

Inflation is back on target at 2% and the stock market is in the green. But for most everyday Canadians, you're likely to get a very different story. One about insanely high grocery prices, impossible housing costs, a suffocating economic squeeze. Recently, Canadian Finance Minister Christia Freeland announced a temporary GST holiday on a bunch of stuff to give relief to people feeling the pinch. But she went on to muse that the economic pain people feel might be the result of a vibe session. Think recession, but I guess just in your head? Today, are we in a vibe session? I'm going to go through all of this today with Atkinson Fellow and Economist Armin Jarnizian. Hi, Armin. Hi, Jamie. So let's start with vibe session, the idea that many economic indicators are in the green,

yet lots of folks feel like they're underwater. And what do you think when you hear terms like vibe session being used? Is it accurate? Is it off base? Well, actually, it might actually be more on the money than you think, because it dismisses the idea that some people are hurting, though these huge macroeconomic indicators like inflation rate, like GDP growth, are not doing what we thought they were going to do so quickly after the worst bout of inflation we had seen in 40 years. So we

had back-to-back crises, the pandemic, huge unemployment, huge inflation. And when the Bank of Canada and other central banks around the world finally got their act together to try and tame inflation, though lots of us, including me, said, this isn't the type of inflation you can tame with jacking up rates. They did it anyway. They jacked up rates at the fastest rate in history. And everybody expected that to create a recession. Because when you slow down the economy deliberately that fast, you're going to throw a lot of people out of work. And lo and behold,

the unemployment rate did not plummet. And so we were told we got a soft landing. We ducked a recession. And we did on paper. GDP is higher. Unemployment is up a bit, but it's not really like the highest rates we've ever seen, though it's starting to continue to climb. And that's nerve wracking. Right. I think it's 6.8, right? Which is the highest it's been in many years. Yeah. Yeah. 6.8%. Yeah. It's not good, especially for young people and immigrants. It's the worst it's ever been for young people. So yeah, people are saying, we're hurting. Why are you telling me that everything is good? good news, but can you not scale it up? And how does shaping your economic behavior in ways that are not great for the community? So why are people feeling like it's not good?

You mentioned wages are up too, but wages aren't up as much as prices are. So there's a distinction between inflation, which is the pace of growth of prices, and the level of prices. So when you take a look at where prices were at before the pandemic hit, we're seeing mortgage rates that are 50% higher now than they were in early 2020. We're seeing groceries that are 25% higher, rents that are 25% higher. When you take a look at the entire basket of what we buy, prices are 18% higher. Most people have a look at the entire basket of what we buy, prices are 18% higher. Most people have not seen 18% increases in their wages. Definitely not.

So people, most people are losing ground. However, the pandemic was also really good for some people. People that had equity were borrowing money to buy other stuff, like big assets, like other houses. And some people got to work from home. They had good jobs, so they got to save money. So savings went up. People were able to buy more stuff. So one group of people did extremely well and are still doing well today. The other group of people are the people normally that get hit the hardest, people that have got low wages, people that got unemployed, people that have to pay more for rent or groceries or the basics. But then a new group is getting hit,

which is the middle of the pack. So when the people at the top tell you, unemployment's, relatively speaking, not as bad as we thought it was going to be, inflation is now in the sweet spot and we're still growing. We ducked a recession and they're saying, but I am losing ground every month. There seems to be a disconnect between institutions like the central bank or the finance minister and what people are, growing number of people are feeling. Tell me more about this middle of the pack. Like, who are we talking about here? Okay, so if you live on your own, the very middle of the pack makes around $40,000 after taxes. If you live in a family, the very middle of the pack is around $40,000 after taxes. If you live in a family, the very middle

of the pack is about $100,000. That's about three, for the family is about $3,000 more after tax than it was before the pandemic started. For the individual is about $2,000 more. If you have to pay $200 more for rent than you used to, that's more than the income growth that happened. So you're already falling behind where you were at the beginning of this process. So you can see how quickly income growth at the top means more than income growth at the bottom. And even though wages have been outstripping inflation now

for months and months and months, it's still nowhere near 18% increase in groceries for most people. And just elaborate for me a little bit more on what that's done to that bottom of the pack. I would imagine it's had really horrendous consequences for those making the least amount of money. Look, every time a central bank jacks up rates, every time there is some kind of external shock like a pandemic, it is the people at the bottom of the economic spectrum that get hurt the most. They lose the most jobs. They have less income and they have to spend more money on the basics. It's a terrible squeeze play. And so people get quite desperate. And there's a lot of them.

That's why you're hearing about, you know, 2 million people going to food banks and children going hungry, like the rate of child poverty has soared. So young families in particular, newcomers, older people that live in areas that are depopulating are really having a tough time meeting their basic needs for a whole host of reasons, not just inflation, not just because the Bank of Canada raised rates,

but because at the same time, we want our tax cuts, we want those $200 checks, and we're not spending on the things we need to spend to offset the costs. I mean, the federal government did a fair bit of stuff in that direction, national school food program, dental programs, reducing the cost of child care, but they're not getting any of the credit for that. That has been some of the biggest changes to household spending capacity. And yet we just want tax cuts left, right and center, and that hobbles our ability to offset the costs of the basics. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix.

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To listen to this podcast, just search for Money for Cops. What do you think the politicians, including our Deputy Prime Minister, Finance Minister Chrystia Freeland, are thinking when they call this a vibe session out loud? Maybe they think they're, maybe the finance minister thinks it's a term that is so much in use there, it makes her look like she's plugged into a conversation. But I have to say that the finance minister and everybody surrounding the finance minister and everybody in my profession, which is economics, has been until very recently perplexed about why people don't feel better. Why don't people feel better that we didn't go into a recession?

Why don't people feel better that unemployment didn't climb as much? Why don't people feel better that we've wrestled inflation to the ground? Because they're not looking at the other side of it. Look, economists always talk in macro terms. So do finance ministers. They have to look at the big numbers

and how the system is moving. But retail politics is about micro everything. It's about your pocketbook. It's how you're feeling the world. And just because inflation rates have come down, price levels are up at levels that people feel like they're falling behind. And many of them are. Some of them are doing really well.

And I bet there's a whole bunch of them that are circling the finance department that did really well throughout the pandemic. And it's just they don't associate with people that are hurting. So it's not really anecdotally accessible to them. It's not every everyday talk. The Bank of Canada made a major cut to interest rates this week. Today, we lowered the policy interest rate by 50 basis points. This is our fifth consecutive decrease since June and brings our policy rate to three and a quarter percent. A jumbo size cut, a big size cut. It's the second cut of this size in just the last few

months. And what is the message that the central bank is sending with this cut? Is it a sign that things are going to get better or more affordable for people or that we are heading into dangerous waters? I'm not going to opine on what the message is saying. I'm going to repeat what the central bank governor said this message is about, that we don't need as restrictively high interest rates as we have had because it looks like they have controlled the rate of inflation. And so that merits a jumbo-sized cut in policy rates. Monetary policy has worked to bring inflation back to the 2% target. Our policy focus is now keeping inflation close to target. What he also said is we may cut further because all of their forecasts show that we're going to hit about a 2% level next year.

So we may cut further, but we won't cut jumbo sized anymore. Like that's it. to what's coming down the line at us because of things like the rollback in immigration because of the threat by Donald Trump for tariffs and see if that affects price levels again, pushes them up. And I think the one message I took away from the Bank of Canada's presser yesterday

is how uncertain everything is for them. All the forecasts we have were generated in October, before the November 5th election in the United States, before the announcement to roll back immigration targets, and both of those things really, really change. Since I've got you here, this is something that we've talked on the show quite a bit about recently. But I would love to hear your thoughts on what tariffs could do to this country if Donald Trump goes ahead with those threats or some of those threats, 25% on all imported goods to the U.S. or even less than that? So in both countries, consumer spending is the driver of the economy. And in Canada,

our rate of growth of the economy is around 1%, which means it wouldn't take much to push us over into a recessionary place. About 80% of our exports go to the United States and our biggest export is energy. And if the consumer in the United States has to pay more for everything that they import, then they will be buying less. They just will spend less and that will affect how we make our money. So we will lose jobs here. And if the tariffs go through on some of the items that they've gone through on before, like steel previously, then we'll get retaliatory tariffs.

A tariff is a tax and the consumer pays for it. So not only will we lose jobs because of what happened to demand from the US for our exports, but we will pay more for the things we import, and about 50% of our imports come from the United States. So it's a bad news bear scenario. Okay. Sticking with the U.S., a lot of these same economic tensions

seem to be at play in the recent election, but data actually shows that while the economic growth in the U.S. and Canada has generally ticked in tandem, in recent years they've been pulling away from each other. The U.S. is doing better than us. Why? Oh, what a great question. I mean, a lot of us are scratching our heads on it, but you mentioned that the stock market's in the green, and a lot of what's propelling it is the, you know, information stocks. They're called the Magnificent Seven, NVIDIA, Amazon, Alphabet, Google, all of these different IT stocks that have exploded. And they're all based in the United

States. So they're attracting a lot of capital from markets that are flush with cash. And that is what's causing their economy to grow more rapidly. And as ours slows, and theirs will too, but that difference is going to mean a difference in policy rates. And that means that our Canadian dollar, the value of our Canadian dollar will fall in relation to the United States. And that's happening to currencies all over the world because nobody's performing the way the United States is right now. Just how could that affect people like me, people like you? You know, I think now a thousand Canadian dollars is equal to six hundred and something U.S. dollars. So yesterday, one American dollar bought one dollar and 30 cents worth of Canadian goods.

So, you know, it took us a lot more to pay for things that we get from the United States. But I just want to caution that when an American dollar will buy 30% more in Canada, we've got fire sale prices going on for assets like housing. And private equity has exploded in the United States, and they have money to buy stuff. So I would really be keeping my eye out for who's going to end up owning our housing stock that we're building left, right, and center when it is that easy to buy more. Right. The second part of it, too, though, is when the American dollar is as high as it is, it's great for the arts and entertainment industry.

Hollywood North really explodes when the Canadian dollar is so low because we've got a really skilled entertainment business in the film industry in particular. And it's also great for tourism because all the businesses that are starting to struggle right now, hotels, you know, basically hospitality, hotels, bars, and restaurants will have more business as people come here because they get more bang for their buck here, especially in the summertime. So it's not all bad news, but for everything we buy from the United States, it's going to cost us a lot more. And we buy a lot from the United States, particularly food and things like cars. I mean, these fire sale prices that you're talking about, this idea that U.S. companies could use their very strong dollar to come in and grab Canadian assets, are you just worried about that affecting housing or could it affect other

sectors too? It absolutely could affect other sectors, especially as our interest rate falls down towards 2% or whatever it is that the bank decides is the neutral rate, because it makes it easier for companies to borrow money at very low costs. Plus, they have more purchasing power in their dollar. So you could look at all sorts of assets and companies like mines, oil and gas, manufacturing being bought up by American entities. They still are here, but the profits flow offshore. I mean, I want to end this conversation just coming back to the people who are feeling bad vibes, right? That middle group that is feeling very stretched, that bottom group that has been clobbered over the last couple of years. And they might listen to this conversation and feel like pretty bummed out that things are not going to get better for them and also anxious

because there's so much uncertainty in the air and what would you say to them well the bad vibes are a real thing and i'm sorry the future is uncertain uh take a look at what is happening in the middle east take a look at what's happening south of the border. I mean, the orange one's secret sauce is uncertainty. If you don't know what he's going to do next, he's in power. He's got one over you. So knowing the future is going to be harder and harder. But when my kids were young, we used to read the paper bag princess, and there is no hero coming to rescue you, right? You have to do it for yourself. And we're seeing, especially younger people, seeing the power of organizing for the first time in their lives. If you do not organize yourself to articulate what it is that you want

to get out of life, and you make those demands, nobody's going to give it to you right now, because the power is all on the other foot. So let's lead with the good foot. Let's talk about what it is we want and we know it's uncertain to get it, but if we don't articulate it, we'll never get there. Okay. Armin, I think that's a perfect place to end this conversation. Thank you, as always. It's really my pleasure, Jamie. All right, that is all for this week. Front Burner was produced this week by Joytha Shen Gupta, Matt Muse, Mackenzie Cameron, Kieran Outshorn, and Matthew Amha. Music is by Joseph Shabison. Our senior producer is Elaine Chao. Our executive producer is Nick McKay-Blocos. And I'm Jamie Poisson. Thanks so much for listening, and we'll talk to you next week.

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