Canadian business investment has declined over the past decade, and is well below historic levels and has led to economic surpluses, pushing inflation down and allowing for structurally lower interest rates.
But that trend is ready to reverse, said David Dodge, an economist and former Bank of Canada governor, as spending rises during the so-called green transition.
“We have major investment efforts to tackle climate change and convert everywhere from fossil fuel use,” Dodge said in an interview with Reuters.
This consumption will lead to a “tendency for prices to have some upward pressure rather than some downward pressure” starting as soon as next year, said Dodge, who headed Canada’s central bank from 2001 to 2008.
Economists around the world are already warning of “green inflation” or higher energy prices and consumer costs as the global economy shifts to cleaner energy sources. Stronger business investment, demand for skilled higher-wage workers and more innovation spending will also boost price increases.
But warmer inflation will lead to higher interest rates, a worrying risk for Canada’s heavily indebted households, which are burdened by $ 2.5 trillion in debt: more than the country’s annual output.
Canadian inflation is at its highest level in 18 years at 4.7 per cent, while the Bank of Canada’s key interest rate has been at a record low level of 0.25 per cent. since March 2020. The central bank has signaled that it may raise this interest rate as early as April, but the money markets do not rule out an increase as early as January.
How inflation may affect the housing market in 2022
Canada, the world’s fourth largest oil producer, has also promised to reduce emissions by 40 percent to 45 percent below 2005 levels by 2030 and committed to achieving net zero emissions by 2050.
The Royal Bank of Canada says it will cost $ 2 trillion over three decades to reach the net zero target.
Ian Lee, a professor at the Sprott School of Business at Carleton University in Ottawa, believes it could cost more, pointing to the widespread use of natural gas as a heating and industrial fuel.
“We’re talking about rebuilding the entire energy-based economy, from oil and gas to electricity, and so it’s going to be on an unprecedented scale,” Lee said.
“I have no doubt it will be inflationary,” Lee added. “You do anything on that scale and it will be inflationary.”
About 54 percent of Canadian homes are heated with fossil fuels, mostly natural gas, and 40 percent of them use electric heat, according to official data. Fossil fuels – mostly natural gas and coal – are used to generate 18 percent of Canada’s electricity.
Homes, schools, businesses and industrial complexes will have to run on renewable electricity rather than gas. Cars, trucks, agricultural equipment and entire transport and industrial vehicle fleets will have to switch to electric.
Increased demand for electricity will also require a greater expansion of the electricity grid.
But some economists argue that it is not clear that the inflation bulge will be renewable, pointing out how quickly energy costs can fall once renewable energy sources are in place.
‘Germany came in and gave pretty much subsidies to everyone to put solar panels on their roofs. It had a big negative impact on inflation because, of course, it brought down electricity prices, ”said Stephen Brown, Canada’s senior economist at Capital Economics.
Ultimately, climate-related restructuring in the short term may feel “hard to swallow,” Bank of Canada Deputy Governor Toni Gravelle said during a panel at the COP26 climate conference in November.
“But in the long run, you actually have a lot more jobs, you have an economy that is a lot more flexible … It’s a win-win at the end of the day,” he said.
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