Canada's Economy Due to Population Surge — BoC Lowers Rates

Bank of Canada (BoC) Releases Brakes — Moving Toward Neutral

Today, The Bank of Canada reduced its target overnight rate by ¼ percent to 4½ percent.

Canada's economy has grown slowly in the first half of the year (1½ percent), but not as fast as the number of people living here is increasing. Since population growth outstrips economic growth, unemployment has risen to 6.4 percent. This means more people are looking for jobs than there are jobs available.

Population Growth Greater Than Jobs Growth

Canada's economic engine, once a paragon of steady growth, is sputtering. While the nation continues to attract newcomers at an unprecedented rate, the economy has failed to keep pace. The latest data suggests that GDP growth has moderated significantly in the first half of the year, raising concerns about the country’s ability to generate sufficient jobs and prosperity for its burgeoning population.

The discrepancy between population growth and economic output is a stark reality. With an influx of immigrants and a rising birth rate, the labour force is expanding rapidly. However, job creation has not kept up, resulting in a widening skills gap and increasing pressure on social services.

Consumer spending, a key driver of economic growth, has also shown signs of weakness. The housing market, once a pillar of the Canadian economy, continues to grapple with challenges as elevated borrowing costs deter potential buyers.

The labour market, once a source of resilience, is now showing cracks. The unemployment rate has ticked upward, and job seekers are facing longer periods of unemployment.

As the nation grapples with these economic headwinds, policymakers face a complex challenge. Balancing the need to stimulate growth with the imperative to contain inflation will require deft manoeuvring. The government's ability to navigate this delicate equilibrium will be crucial in determining the trajectory of the Canadian economy in the months ahead.

The Interest Rate Outlook

The Bank of Canada expects core inflation to reach 2½ percent in the second half of 2024 and ease gradually toward 2 percent through 2025. As a result, we should expect the policy rate to drop toward the neutral range.