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 – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
