Tailwinds from south of the border could give a lift to the Canadian economy and end up pushing back the timeline for interest rate cuts as the Bank of Canada tries to keep pace with the United States Federal Reserve, some economists say.
Canada’s economy showed signs of life to end 2023, data released Wednesday suggests. Statistics Canada states real gross domestic product grew through November and December, setting up a rebound for the economy in the fourth quarter after contracting in the third.
Both economies have had their respective central banks rapidly tighten monetary policy to tame inflation, and both have found success to date in cooling inflation. Though neither the Bank of Canada nor the U.S. Fed has seen price pressures hit their two per cent target yet. If the economy is running too hot and threatens that path toward two per cent inflation, interest rates could remain elevated for longer.
0:56 Bank of Canada holds key interest rate in 1st decision of 2024
The reason the U.S. economy is holding up better under the weight of higher interest rates comes down to the “mighty consumer” in the States continuing to “defy expectations,” says Priscilla Thiagamoorthy, senior economist at BMO.
Canadian households are more vulnerable to shocks from higher interest rates because of their relative debt levels, Thiagamoorthy tells Global News.
While the U.S. consumer largely reduced their debt load in the wake of the 2008-09 financial crisis, Canadians have continued on a “borrowing binge,” she says. Canada’s household debt servicing ratio hit an all-time high of 15.2 per cent in the third quarter of 2023, according to StatCan.
An RBC consumer spending report released Wednesday said that per person spending has declined two per cent since the Bank of Canada started hiking interest rates, with headwinds from record-high financial obligations likely to continue through the first half of 2024.
“Households here are definitely feeling the pinch under the weight of elevated interest rates, and that’s resulting in weaker spending,” Thiagamoorthy says.
Among the pain points ratcheting up the pressure on Canadian debt are looming mortgage renewals. In the U.S., however, the existence of 30-year mortgage terms means some homeowners are more insulated from higher interest rate environments than in Canada where five-year terms are the popular choice.
“There is a much faster transmission of monetary policy into the Canadian economy,” Simon Harvey, head of FX Analysis at Monex Europe and Canada, tells Global News.
U.S. strength lifting Canadian economy
While the Bank of Canada is looking for signs in the Canadian economy to give it confidence that demand is waning and inflation will continue to ease, there are already signs of knock-on effects from the strong growth south of the border.
StatCan noted that GDP growth in November was largely attributed to goods-producing industries like manufacturing and wholesale trade, which BMO chief economist Doug Porter said in a note Wednesday was likely boosted by the U.S. economic juggernaut.
“Since these sectors are heavily influenced by exports, it seems that the surprising resiliency in the U.S. economy is indeed spilling over into some sectors in Canada,” he said.
After Wednesday’s GDP release came in stronger than most economists had forecast, markets slashed odds for a Bank of Canada rate cut in April, instead shifting calls for easing to start in June.
While the Fed is also looking for signs of cooling in the economy before it pivots to interest rate cuts, Harvey says that monetary policymakers in the U.S. likely have less to worry about from a robust economy than their Canadian counterparts.
Looking at Canada’s meek economic growth, it’s currently sustained by a population boom and an unravelling of supply constraints, which are short-term in nature and cover up a long-standing trend of declining GDP per capita, Harvey says.
Stripping that away, the Canadian economy is facing a sharper risk of a recession if interest rates remain elevated for longer, he argues.
The U.S., on the other hand, has a longer runway to work with to achieve a soft landing – an economic slowdown that avoids recession. Thiagamoorthy says the Fed is in a “sweet spot” right now with inflation trending down and the economy holding strong, allowing monetary policymakers in the U.S. to be more patient with their shift to rate cuts.
After announcing the Fed’s fourth consecutive rate hold on Wednesday, chair Jerome Powell signalled that while cuts are indeed in the cards for 2024, they’re not imminent, pouring cold water on hopes for a cut in March.
While both central banks are independent in setting monetary policy, Thiagamoorthy says the Bank of Canada will typically move in “lockstep” with the U.S. Fed’s rate path.
“There isn’t a lot of wiggle room between the Bank of Canada and the Federal Reserve,” she says.
However, the Bank of Canada has been breaking historical norms and diverging from the Fed in some of its decisions over the last few years. Asked in late 2023 whether hints of cuts from the U.S. Federal Reserve would prompt similar action from the Bank of Canada, governor Tiff Macklem said he wouldn’t necessarily follow the Americans’ lead.
“The Fed’s going to do what they need to do, we’re going to focus on what needs to be done here in Canada,” Macklem said.
Currency concerns
But a lot of what binds the Bank of Canada to its American counterpart is the exchange rate of the Canadian dollar to the U.S. greenback.
Harvey explains that when interest rates are higher in one jurisdiction than another, investors are more likely to park their money there and earn a higher return, driving up the relative value.
Prospective interest rate moves are already priced in by money markets, but if the Bank of Canada were to cut faster than expected in a bid to boost the economy, Harvey says that would likely send the loonie’s value down.
There are two implications there for monetary policymakers: first, it would raise the value of Canadian exports to the U.S., giving a boost to the economy. But it would also make imports more expensive, resulting in “inflation shock” with goods brought in from the U.S., Harvey explains.
Both Thiagamoorthy and Harvey expect that the Bank of Canada will jump first when it comes to rate cuts because of the relative economic weakness north of the border. But even if the Bank of Canada cuts before the U.S. Fed, Harvey says the signposts are clear that the two central banks are still moving in broadly the same direction, which should limit inflationary shocks from a slight difference in timing.
While the Bank of Canada surprised markets early in its interest rate hiking cycle with a 100-basis-point hike in July 2022, Harvey says the foundation was laid for such a move by a shift into a more aggressive tightening posture from the U.S. Fed a month earlier.
Harvey says a similar phenomenon is playing out now with the Fed saying it was considering multiple rate cuts for the year ahead in December, followed by the Bank of Canada removing some references to the need for additional hikes in its January decision.
With monetary policymakers on both sides of the border now cuing the eventual denouement of the tightening campaigns, Harvey says markets shouldn’t be too stressed about an earlier move from the Bank of Canada.
“Fundamentally, both the Bank of Canada and the Federal Reserve are moving in the right direction,” he says.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
