We are in a paradigm shift as to how we view and measure the global economy: Frances Donald
Manulife Investment Management Chief Economist Frances Donald warns there will be significant challenges in unwinding the unprecedented monetary and fiscal supports put in place to cushion the economic hit from the COVID-19 pandemic.
In a television interview, Donald said while the supports were necessary to prevent the Canadian economy from plunging into a depression, the intertwined nature of the fiscal and monetary response has led to a blurring of the lines between the role of central banks and government. That could complicate the country's long-term economic outlook, she added.
“We saw the largest monetary policy and fiscal policy response that we have seen in modern history, and thank goodness because otherwise we probably would have felt a financial crisis or even a depression,” she said.
“The challenge now is that central bank easing has become so substantial, the Bank of Canada now owns over 30 per cent of all Government of Canada bonds. By the end of next year, maybe as much as 50 per cent.”
“They’re also moving their focus away from just inflation, talking a lot more about climate change and inequality, topics we might have thought were more related to government.”
The Bank of Canada is what is known as a single-mandate central bank, charged with maintaining stable inflation in the two-per-cent range, rather than a central bank with a broader mandate to also target low and stable unemployment rates.
While she doesn’t think headline inflation will spiral out of control in the coming months and years, Donald said inflationary pressures at the household level are beginning to become apparent.
“The risk to me isn’t so much ‘Are we going to two-and-a-half per cent inflation and therefore,rates are going to skyrocket and everyone’s mortgages are going to be more expensive.’ The risk is that we see some of those price pressures actually translate into everyday lives. I think Canadians are already starting to feel that,” she said.
“We know that food prices are higher, for example. House prices are higher. You’re not, however, going to see that all in the [consumer price index]. Most of those rising costs of living are not seen in that headline CPI, things you and I are just going to feel in our day-to-day lives.”
Given the scope of the economic disruption and uneven impacts on consumer behavior and household spending, Donald said policymakers and economic forecasters may have to turn to newer, unconventional metrics to help fully understand the impact of the pandemic.
“Things like GDP and CPI don’t always give us a real pulse for what’s happening, so my suspicion, and we’re already starting to see this, is that private sector economists maybe stop advocating so much for GDP, maybe start looking at more inequality type components, even happiness components,” she said.
“That’s my hope, because it would give us a more holistic sense of what’s happening in the economy and I think help develop better policy over time as well.”