February 22, 2024
This will seem odd, but the economy is performing too well for the Bank of Canada to provide Canadians with interest-rate relief. The consensus prediction of economists is that the Bank won’t start cutting rates until June or July.
Why not start cutting now? Most Canadians believe the country is in recession and needs the economic stimulus of reduced borrowing costs. Economic growth is barely perceptible, though Canada is expected to end the year with respectable GDP growth of 0.8 per cent to 1.4 per cent.
Indeed, the International Monetary Fund’s latest forecasts have the Canadian economy outperforming its advanced economy peers in 2025, with GDP growth of 2.3 per cent. The IMF forecasts U.S. economic growth of 1.7 per cent next year. But for now, the Canadian economy has been stagnant since last summer and shelter costs are intolerably high.
Equifax, the credit rating firm, says overall Canadian consumer debt hit $2.4 trillion in last year’s third quarter, the most recent data available. That number is not far shy of total Canadian GDP.
And the trend of corporate layoffs that was pronounced in the tech sector last year has since migrated to the general economy. In recent months, large layoffs have been announced by Bell Canada parent BCE (about 4,800 job cuts), Toronto-Dominion Bank (3,000 job cuts), gas utility Enbridge (650 job cuts) and other big employers.
So, it’s not surprising that about 55 per cent of Canadians polled recently by Maru Public Opinion are worried about their personal finances. That’s the highest reading since Maru began tracking that leading indicator in 2020. It is an increase of just three points from the previous survey in December, but it’s the direction that matters.
That managing household expenses has become more rather than less difficult gives Canadians canvassed in that survey ample reason to feel the economy is going in the wrong direction. That, in turn, suppresses consumer spending and economic growth. The Bank of Canada is counting on sufficient economic weakness to further reduce inflation so that it can end one of its most aggressive rate-hiking campaigns in history, dating from March 2022.
The Bank believes the economy is still running too “hot” to take a chance on commencing a rate-cutting regime. Until Feb. 9, many economic observers expected a first rate cut from today’s two-decade-high policy rate of five per cent as early as April. But that day, they pushed their expectations ahead to the summer.
Statistics Canada reported Feb. 9 that the economy created 37,000 new jobs in January, more than double what experts had predicted. The jobless rate slipped to 5.7 per cent, the first decline in unemployment in a year. And average hourly wages rose by an annualized 5.3 per cent. That was down from December’s 5.7 per cent but remains well above historic averages.
“The BoC shouldn’t even be talking about rate cuts,” says Scotiabank economist Derek Holt. He cites likely continued wage gains in 2024 among factors contributing to inflationary pressures that remain too strong to justify rate cuts. The reaction of Doug Porter, chief economist at BMO, to the Feb. 9 numbers was: “A decent job gain, a slide in the jobless rate, and persistent five per cent wage growth are hardly the stuff of an urgent call for rate cuts.”
In November, Porter identified soaring shelter costs as the new “chief villain” in inflation. True. High shelter costs, notably soaring rents, now account for most of the remaining inflation in the economy. The central bank couldn’t help noticing the Toronto Regional Real Estate Board’s exuberant forecast for Toronto house prices released early this month.
TRREB predicts a 3.5 per cent increase in the average Toronto house price, to a 2024 average of $1,170,000, the second-highest level on record. Jason Mercer, TRREB’s chief analyst, said 2024 marks the beginning of a “multi-year recovery” in the Toronto housing market. That is not the most welcome news for the Bank of Canada.
Minutes from the Banks’s governing council meeting prior to its January rate-setting decision show the Bank’s concern about a real estate rebound that “could keep CPI inflation materially above the (Bank’s two per cent inflation) target even while price pressures in other parts of the economy abated.” A defensive Tiff Macklem, the Bank’s governor, acknowledges the role of the Bank’s high interest rates in pushing up shelter costs.
But in a Montreal speech this month Macklem was at pains to blame factors over which the Bank has no control for the shortage of affordable housing. They include municipal zoning restrictions, construction worker shortages and economic uncertainty for homebuilders.
Of course, when everyone’s to blame, problems don’t get solved. It might help if the Bank set out a timeline for rate cuts — conditional, of course, on continued progress in subduing inflation. That at least would reduce uncertainty, which is likely the biggest factor holding the economy back.
