The latest trade numbers suggest consumer demand is weakening, which, in theory, would allow the Bank of Canada to leave interest rates on hold because higher borrowing costs could be starting to bite.
Statistics Canada reported May 4 that the value of imports dropped 2.9 per cent in March from February, and 5.9 per cent in volume terms.
“The ongoing weakness in import volumes, particularly in consumer goods and motor vehicles, suggests elevated interest rates may be weighing on household purchases heading into the middle of the year,” said Bartlett.
Seeking a ‘sweet spot’
The Bank of Canada would welcome weaker economic growth. Governor Tiff Macklem reiterated during a talk in Toronto that the economy still is in a state of “excess demand,” stoking inflationary pressure because suppliers can’t keep up with orders.
In other words, the Bank of Canada is open to leaving the benchmark interest rate at 4.5 per cent, which is four percentage points higher than it was this time a year ago.
However, the consumer price index, which the Bank of Canada uses to guide interest rates, is still increasing at annual rates that are well above the central bank’s target of two per cent. Headline inflation was 4.3 per cent in March, and while policymakers are confident it will slow to three per cent by the summer, Macklem told an audience assembled by the Greater Toronto Board of Trade that he’s worried inflation could then get stuck there.
The value of exports fell 0.7 per cent to $63.6 billion, the lowest since February 2022, mostly because of lower energy prices. Because the decline in imports was bigger, Canada recorded a trade surplus of about $922 million in March after recording a deficit the previous month, Statistics Canada said.
Rough patch
There are other signs that households are retrenching.
National Bank economist Jocelyn Pacquet observed in a note that Statistics Canada’s advance estimate of retail sales in March is for a drop of 1.4 per cent. “Household spending went through a bit of a rough patch at the end of the first quarter,” she said.
Cargo volumes fell three per cent in 2022, according to data from the Vancouver Fraser Port Authority. There were also reports of “full warehouses” near major centres such as Toronto and Montreal, as inventory piled up in March, the port authority chief executive, Robin Silvester, told The Canadian Press.
Stephen Brown, economist for Canada at Capital Economics, a research firm, said he revised his forecast for annualized growth in the first quarter to two per cent, down from 2.5 per cent. The Bank of Canada’s current forecast calls for an annualized rate of 2.3 per cent.
Bartlett at Desjardins said the drop in imports “should provide more support for the (Bank of Canada) to maintain its pause on interest rates.”
Still, consumption of goods is only one expression of consumer demand. The cost of services remains elevated, and Macklem reiterated that he won’t be satisfied until services inflation slows.
“There are some things we need to see happen that we haven’t seen yet,” he said. “If those things don’t fall into place, we are going to have a problem.”
