Inflation Main Risk

The main risk currently facing the Canadian economy is inflation, says Martin Delage, Canadian chief investment officer at Optimum Asset Management Inc., in a ‘Financial Outlook.’ In the second quarter, the central banks adopted more aggressive rhetoric in response to persistent inflation and took bold action by raising interest rates significantly, with hikes of 1.25 per cent in the United States and one per cent in Canada. Inflation’s sensitivity to slowing growth is debatable, he says, given that it originates partially on the supply side. Moreover, even if it seems that inflation in goods has peaked, the services side is not as clear. As well, high commodity prices continued to underpin the Canadian economy’s growth. These actions created a very high level of volatility on financial markets with several factors pointing to an economic slowdown. These include high energy prices, consumers’ loss of purchasing power, and the conflict in Ukraine. This economic slowdown could lead to a recession. However, he says while there are always risks, the labour market is still healthy, which, combined with strong household and corporate balance sheets, could act as a mitigating factor if a deep recession occurs.