Investing.com -- Canada is staring down the stagflation abyss after the most recent inflation report surprised to upside at time when potential trade war with the US threatens to add fuel further price pressures and leave big dent in an economy that is wrestling with excessive household debt.
"Canada may well be the leading edge of the DM economies most at risk," MRB Partners said in a note Friday, warning that the country could be the "global stagflation canary."
The brewing trade war with the U.S., meanwhile, adds further gusto to stagflation winds.
"The mounting (but still highly uncertain) trade war between Canada and its number one export market (and exports are a much larger part of the Canadian economy than in the U.S.), along with prospects for higher inflation, point to a stagflationary outcome," it added.
The latest Canadian CPI report showed a larger-than-expected increase, with both headline and core inflation remaining stubbornly high. This comes at a time when economic clouds have darkened more in Canada than in other developed market economies.
The latest Canadian CPI report showed a larger-than-expected increase, with both headline and core inflation remaining stubbornly high. This comes at a time when economic clouds have darkened more in Canada than in other developed market economies.
While the Bank of Canada may ignore a trade-induced pop in inflation and maintain its accommodative monetary stance, this is unlikely to lift economic activity, MRB Partners noted. Even if growth were to improve, it would only worsen the inflation backdrop, potentially forcing the BoC to be less accommodative.
The Canadian dollar has remained weak against the U.S. dollar, reflecting the economic challenges facing the country. The unemployment rate in Canada has also diverged from that of the U.S., with the gap widening in recent months.
MRB Partners suggests that investors should keep a close eye on Canada as an indicator of potential stagflation risks in other developed economies. The U.K. is identified as another candidate for stagflation, facing the possibility of both sluggish growth and sticky inflation well above its target.