Treasury Board and the union representing 122,000 striking workers resolved their differences relatively quickly, but perhaps not quickly enough to keep their work stoppage from tipping economic growth into negative territory, Bay Street economists said.

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Mona Fortier, the head of Treasury Board, and the Public Service Alliance of Canada (PSAC) agreed to a contract in the wee hours of May 1 that includes a wage increase of 12.6 per cent over a four-year period, retroactive to June 2021. Treasury Board employees work in areas from port inspections to passport offices. Some 35,000 Canada Revenue Agency workers remained on strike.

Economists figure the eight-day work action, which began on April 19, will trim 0.1 to 0.3 percentage points off of gross domestic product in April. The economy was already slowing, so that could be enough to cause overall output to drop this spring, Douglas Porter, chief economist at BMO Capital Markets, said in an email.

To be sure, whatever economic losses come from the strike could be recouped in May — when PSAC members return to work with bigger salaries. “That hit should be more or less fully reversed this month,” Stephen Brown, an economist at Capital Economics, said in an an email, adding that “the hit from the strikes in April still raises the chance of second-quarter GDP growth being negative.”

A little less growth might help the Bank of Canada get inflation under control. Year-over-year increases in the consumer price index peaked at 8.1 per cent in June 2022, the most in four decades. Inflation has been dropping steadily since, but policymakers have been clear that they’re worried that wage increases based on last year’s cost-of-living increases could keep inflation from dropping back to the two per cent target.

Average hourly wages rose 5.2 per cent in March, according to the most recent data released by Statistics Canada. That was higher than headline inflation, which increased 4.3 per cent in March.

But, it was only the second time in this inflationary run that wages outpaced the consumer price index. Nathan Janzen, an economist at Royal Bank of Canada, said wages have been playing catch up, one of the reasons the PSAC agreement doesn’t have him too worried.

“Inflation has been running faster than wage-growth, particularly for unionized employees. So to date, we’ve really been seeing wages following inflation higher and not the other way around,” Janzen said in an email. “The result of these negotiations will very likely be used as a benchmark for other unions, so we should expect to see more larger-than-usual wage increases coming as prior contracts that didn’t anticipate the inflation of the last couple of years are re-negotiated.”

We should expect to see more larger-than-usual wage increases coming

Nathan Janzen, economist, Royal Bank of Canada

Brown at Capital Economics said he didn’t think the deal would fuel inflation, as it covers a small number of workers as a share of total employment, roughly 0.5 per cent of the Canadian workforce. “From the (central) bank’s perspective, the key point is that the wage deals for this year, at 3.5 per cent, and for next year, at 2.25 per cent, are consistent with the bank’s two per cent inflation target,” he said.

Charles St-Arnaud, chief economist at Alberta Central, said the increase in wages “is much less inflationary than initially demanded.” Further, for this year wages are expected to rise less than inflation. Initially, PSAC sought an increase of 13.5 per cent in wages over three years.

“Also, by spreading the wage increases on four years rather than three years, you spread the inflation pressures,” St-Arnaud said. “This is much better than if all the adjustment was front-loaded.”

Still, BMO’s Porter said the concern persists that this deal could set the floor for future contract negotiations, thereby complicating the Bank of Canada’s efforts on inflation. “It seems that at the margin, this deal could make the Bank of Canada’s job of getting inflation back down to two per cent and keeping it there will be a bit tougher,” he said.

The extent to which the strike slowed growth could determine the central bank’s response. Statistics Canada issued an advance estimate for March GDP on April 28 that predicted a decline of 0.1 per cent. Statistics Canada said the economy eked out growth of 0.1 per cent in February.

Marc Ercolao, an economist at Toronto-Dominion Bank, noted that the April GST rebate could offset the negative impact from the strike. St-Arnaud at Alberta Central is also skeptical the strike will trigger a decline. While there could be a “drag” from the strike, “at this point, some quick estimates suggest flat growth in Q2,” he said in an email. “It would require much more weakness in the rest of the economy to see negative growth in Q2.”

• Email: gmvsuhanic@postmedia.com | Twitter: gsuhanic