Economy
Explainer: Why is the Canadian economy strong despite record pace of rate hikes?
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OTTAWA, June 12 (Reuters) – Despite the fastest monetary tightening cycle in the country’s history, Canada’s economy is still running hot, which forced the central bank to crank its key interest rate even higher to a 22-year high of 4.75% last week.
Analysts are betting on another rate hike in July, to help the Bank of Canada bring inflation back down to its 2% range. Here are some factors that are keeping demand robust in the Canadian economy.
EXTENDED MORTGAGE AMORTIZATIONS
Many of Canada’s major banks allowed holders of variable rate mortgages to extend their amortization period in order to keep their payments at nearly the same level, temporarily blunting the impact of higher borrowing costs.
As a result, higher borrowing costs have so far caused less financial stress for home buyers than they had expected, so the market has not seen a spike in supply from forced sellers.
That has partially helped the recovery in home prices, which have jumped 17% in the three months since January, after a year-long slump.
“It’s really something that has been a game changer in terms of how monetary policy is transmitted to the economy,” said Randall Bartlett, senior director of Canadian economics at Desjardins.
“A lot of households have been able to continue spending in a way that they wouldn’t otherwise be able to, and to stay in their homes in a way that they wouldn’t otherwise be able to.”
POST-PANDEMIC SPLURGE
Canadian consumers have been splurging on interest-rate sensitive sectors including durable goods like furniture and appliances, despite a 1% decline in disposable income in the first quarter, drawing down their pandemic savings. The savings rate has halved to 2.9% in the first quarter from the fourth quarter of last year, Statistics Canada said.
“It seems like a lot of Canadians are looking to catch up on experiences that they weren’t able to have for a couple of years,” like traveling and eating out, Bartlett added.
GOVERNMENT SPENDING
To offset the impact of inflation, which peaked at 8.1% last year, the federal and provincial governments have passed affordability measures, such as a federal C$2.5 billion ($1.9 billion) one-time grocery rebate for low earners that was in this year’s budget.
Provinces have enacted a number of different measures, including cutting taxes on fuel. Provincial stimulus measures are estimated to total about C$12 billion in fiscal year 2023-2024, Bartlett said, compared with more than C$20 billion in mid-2022.
Taken together, “they all exacerbate inflation when you’re in an environment of excess demand,” Bartlett said. But he estimated it will add “much less” than one-tenth of a percentage point to inflation this year.
The central bank says the fiscal spending is not adding to inflation, but it is not helping bring it down either.
($1 = 1.3347 Canadian dollars)
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
The Canadian Press. All rights reserved.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
The Canadian Press. All rights reserved.
OTTAWA – Statistics Canada says manufacturing sales in August fell to their lowest level since January 2022 as sales in the primary metal and petroleum and coal product subsectors fell.
The agency says manufacturing sales fell 1.3 per cent to $69.4 billion in August, after rising 1.1 per cent in July.
The drop came as sales in the primary metal subsector dropped 6.4 per cent to $5.3 billion in August, on lower prices and lower volumes.
Sales in the petroleum and coal product subsector fell 3.7 per cent to $7.8 billion in August on lower prices.
Meanwhile, sales of aerospace products and parts rose 7.3 per cent to $2.7 billion in August and wood product sales increased 3.8 per cent to $3.1 billion.
Overall manufacturing sales in constant dollars fell 0.8 per cent in August.
This report by The Canadian Press was first published Oct. 16, 2024.
The Canadian Press. All rights reserved.
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