In a lot of ways, the U.S. and Canadian economies are similar. They’re both seeing progress in the fight to rein in inflation. They both have robust employment levels.
But the American economy is growing by 4.9 per cent, while ours has been flat.
Economists warn the numbers aren’t even capturing the full extent of the differences.
“Things are actually worse than the data would suggest,” said Royce Mendes, managing director at Desjardins Capital Markets.
He says explosive population growth has inflated economic growth in Canada. Without that, the economy would be decidedly worse than it is right now.
So, why are the Canadian and U.S. economies performing so differently?
Two key factors are driving that. One is Canadian, one is American. One is well-known, the other caught almost everyone by surprise.
The first is simple. Higher interest rates are having a disproportionately harsher impact in Canada than in the U.S.
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Canadians have higher debt loads. Those debt loads renew more quickly in Canada. That means higher borrowing costs bite harder, faster here.
Most Americans have a 30-year mortgage, so rising rates don’t have as big an impact as they do in Canada, where the average mortgage comes with a five-year term.
Americans spending more, saving less
Millions of Canadian households are bracing for their renewal in the next couple of years, so they’re spending less and saving more. In the United States, households are spending more and saving less.
“The U.S. is unique insofar as Americans are actually spending down their excess savings,” Royce said. “Canadians are continuing to sit on that pile of savings because they know what’s going to happen when their mortgage comes up for renewal.”
As a result, one economy is chugging along, while the other has stagnated. Canada’s GDP has been in neutral for seven months.
A customer investigates a vehicle at a Cadillac dealership in Lincolnwood, Ill., on January 31, 2023. (Scott Olson/Getty Images)
But the way high interest rates are shaping behaviour doesn’t totally explain the disparity between the two economies, says Bank of Montreal chief economist Douglas Porter.
He says the U.S. government has been on a spending spree, introducing programs like the Bipartisan Infrastructure Deal, the CHIPS and Science Act and the climate-focused Inflation Reduction Act.
The first rolled out billions of dollars in spending to address decades of backlog in federal infrastructure, while the CHIPS act provides billions of dollars in incentives to the American semiconductor industry.
They’re all desperately needed. But they also amount to trillions of dollars in new spending.
“I would call it a sugar rush,” said Porter. “Just a wave of fiscal spending from the U.S. which has actually led to the U.S. economy doing better this year than it did last year.”
National accounts data in both Canada and the U.S. was released at the end of October.
The figures showed Canada’s budgetary picture was improving. The deficit shrank slightly, to around $35 billion, or a little more than one per cent of GDP.
‘Fiscal strength will wear off in the U.S.’
In the U.S., a very different picture emerged. Joe Biden’s administration posted a $1.695 trillion US budget deficit in fiscal 2023, a 23 per cent jump from the previous year.
All that spending is helping to keep economic growth numbers higher than they would normally have been. Porter says that sugar rush isn’t going to last.
“This fiscal strength will wear off in the U.S.” he said. “It’s actually going to become a bit of a drag over the next year, instead of adding to growth.”
He says the Biden administration introduced those budget initiatives in the hopes that the benefits of the fiscal spending would still be sloshing around the economy when Americans go to the polls in 2024.
But many forecasts show the U.S. economy could start to see a slowdown as early as the fourth quarter of this year.
“They probably peaked too soon on that front,” said Porter.
The diverging economic scenarios highlight the benefits and challenges to central banks on both sides of the border.
The burst of GDP in the U.S. has some wondering if the Federal Reserve will have to hold off on rate cuts, as it may make inflation even stickier than it already is.
In Canada, some expect rate cuts will come sooner. Desjardins’s forecast now shows the Bank of Canada cutting rates in the second half of next year, with the rate at 3.5 per cent by the end of 2024 and all the way down to 2.5 per cent the following year.
Start rowing in the same direction
Last week, Bank of Canada governor Tiff Macklem warned about the perils of government spending that could boost economic growth but also slow progress in the fight against inflation.
“It’s going to be easier to get inflation down if monetary and fiscal policy are rowing in the same direction,” Macklem told reporters.
Tiff Macklem, governor of the Bank of Canada, said recent evidence shows higher interest rates are working to slow the economy. (Gavin John/Bloomberg)
Meanwhile, Jerome Powell, chair of the U.S. Federal Reserve, heralded the positive direction of the American economy as all that fiscal spending kicks in.
“Inflation has moderated since the middle of last year. Readings over the summer were quite favourable. But a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said after the Fed announced it would leave rates unchanged.
But the divergence highlights political challenges.
The American economy is posting big gains now, but will likely slow as the presidential election season heats up over the next year.
The Canadian economy is flirting with a recession now, but is widely expected to pick up next year — perhaps in time for a federal election that could fall in 2025.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
