The Canadian Economy Is Overheating

My estimate is that the Canadian natural unemployment rate is between 7.1% and 7.4%, but it is almost certainly not less than 7%.

In March, the unemployment rate was 6.9%.

In April, the unemployment rate was 6.8%. [the quotation below is from this link, as well]

These are clear signs that the Canadian economy is overheating.

South of the border, signs of better growth are leading to higher American interest rates -- a trend Canada will eventually have to match, central bank governor David Dodge said Friday.

But Dodge also made it clear he isn't in as much of a hurry as his counterparts at the U.S. Federal Reserve.

The American economy has been growing more rapidly than expected during the last 18 months, Dodge noted following a breakfast speech to the Ottawa Chamber of Commerce.

"In those circumstances, of course, you would expect the Federal Reserve would be raising rates and over time, we will have to raise rates as well," Dodge said in reply to a question.

As I posted last week, I do not see how the Bank of Canada can continue to inflate the money supply by 10% per year and not overheat the economy. And even if Dodge does not take any explicit actions to raise interest rates, the Fisher Equation predicts that with rising inflationary expectations, interest rates will rise anyway.

Let's hope it isn't too late for a soft landing.