Former Bank of Canada governor Mark Carney told a Senate committee Thursday that Canada is likely headed for a recession amid “difficult economic times,” but backed the Liberal government’s current “fiscal discipline” in tackling high inflation.
“I think a recession is most likely globally and probable in Canada,” he said, citing slowdowns in the U.K., Europe and China.
While the United States’ economy has some “momentum,” Carney said a recession will probably be required south of the border to get inflation fully under control and Canada’s close ties to the U.S. will make it hard to be a “full exception”’ to the trend.
“It’s a bit like air travel these days. We know where we’re headed but we don’t know when we’ll get there,” he said.
Carney, who now works for a private investment fund after stints at the central banks of Canada and the U.K., told the Senate committee on banking, commerce and the economy that global forces such as higher commodity prices and supply chain constraints are continuing to put some price pressures on Canadian households.
But, he said, inflation fuel has increasingly shifted to domestic sources such as a growing demand for services.
“Really, inflation is principally a domestic story,” Carney said. “We have seen the contributors to inflation broaden.”
His comments come a day after Statistics Canada’s latest Consumer Price Index figures showed the annual inflation rate slowed to 6.9 per cent in September, even as food prices soared to a new 41-year high.
The Bank of Canada will need to continue to respond to domestic inflation pressures with higher interest rates, Carney said, echoing recent comments from current governor Tiff Macklem.
Carney had positive things to say about the “fundamentals” of the Canadian economy even as he forecast negative growth on the horizon.
He said Canada’s close ties to the U.S. will ultimately soften the blow of an eventual recession, and the country’s tight labour market and strong financial sector could see it “accelerate” quickly out of the downturn compared to other world economies.
“We can come out of this much stronger than others, but we have to be clear-eyed about what we’re heading into,” he said.
Carney also backed the current fiscal approach from Finance Minister Chrystia Freeland.
He said the Liberal government’s tact focusing on “temporary and targeted relief” for Canadians who need help the most is the “appropriate stance on policy” during a period of high inflation.
“Fiscal discipline is imperative,” Carney said.
Freeland herself was asked Wednesday whether the country is heading into a recession.
While she conceded that Canada is facing some “difficult days ahead,” she said the government would reveal its forecast in its fall economic update, a date for which is expected to be announced in the coming days.