Skip to main content

The Bank of Canada has joined the chorus of experts worrying that a rare reversal of short and long-term interest rates may point to darker days ahead for the global economy, and even a recession.

These unusual financial-market conditions “reflect concern about the prospects for growth,” Carolyn Wilkins, the bank’s senior deputy governor, told a business audience in Calgary Thursday.

Rates on longer-term bonds are typically higher than on short-term ones because of the greater risk for lenders of not getting paid over a longer time period.

In recent weeks, however, there has been an inversion of the yield curve in Canada and elsewhere, with some longer-term rates falling below shorter ones. Some economists say the pattern has been a harbinger of recessions in the past.

“When yield curves flatten and they invert, we need to pay attention,” Ms. Wilkins, the No. 2 official at the bank behind Governor Stephen Poloz, told reporters after her speech. “Historically, that has been one signal among others that, if nothing else, growth will be slower. And if it inverts quite a bit and is there for a long time, maybe it could signal a recession.”

But she cautioned that with interest rates lower around the world, these kinds of yield inversions may become more frequent.

Ms. Wilkins said she and the five other members of the bank’s governing council spent “some time talking about prices in financial markets” as they prepared for this week’s interest-rate decision. On Wednesday, the Bank of Canada held its key rate steady at 1.75 per cent.

Ms. Wilkins said there are other relatively innocent reasons for the inversion of the yield curve, including a move by many of the world’s central banks to abruptly halt recent rate hikes. As well, she said, there may be more demand in financial markets for “long-term, fixed assets.”

A recession is not in the Bank of Canada’s most recent official forecast, released in April. The bank says the Canadian economy will grow 1.2 per cent this year, which would be the slowest pace since 2016, and 2.1 per cent next year.

Ms. Wilkins said the central bank is grappling with “conflicting” economic signals. The labour market has been strong in recent months, with solid job and wage growth. And yet companies are reluctant to invest.

The divergence is due mainly to the behaviour of companies in the construction and oil and gas industries, according to Ms. Wilkins. She said these companies have been keeping their employment levels steady, while cutting the hours their people work.

The bank interprets this behaviour as a sign that companies believe the economy is going though “a temporary soft patch,” rather than something more lasting, she said.

Ms. Wilkins also blamed the “brutal winter,” as well as floods and wildfires, for “choppiness” in recent economic data.

The central bank is also preoccupied about the “long-term implications” of rising global trade tensions, she said.

The removal of U.S. duties on Canadian steel and aluminum is good news for Canada, and it “should improve the chances” that the renegotiated North American free-trade agreement will get ratified, she said.

But Ms. Wilkins said the bank is concerned by the escalation in the U.S.-China trade dispute, the “potential for more friction” between the United States and Europe, and Chinese restrictions on some farm exports, including canola.

Resolution of these disputes would give a lift to the Canadian and global economies, she said.

But the opposite is also true.

“If the disputes were to worsen and become long lasting, the outlook would be quite different,” Ms. Wilkins explained. “Not only would we see weaker economic demand, but the supply side of the economy would also take a hit as companies deal with disruptions to their supply chains.”

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe