Rate Cuts Offer Limited Relief in the Near Term
Canada's economic outlook is presenting a puzzling picture. The global economic backdrop is showing signs of improvement, with the eurozone and U.K. economies picking up steam after contracting in the latter half of 2023. The U.S., although experiencing a slight softening, maintains a resilient labor market, prompting the Federal Reserve to delay interest rate cuts. Meanwhile, Canada's economy stands in stark contrast.
Underperformance at Home
Per capita GDP in Canada has been declining year-over-year, falling short of 2019 levels and lagging behind the U.S. by a staggering 10%. This translates to a decade of stagnant economic growth on a per-person basis. The Bank of Canada's (BoC) decision to cut interest rates in June, the first such move in four years, offered a glimmer of hope. However, Canadians are still grappling with the effects of previous interest rate hikes, leading to higher debt servicing costs that continue to squeeze household budgets and dampen business investment.
Unemployment on the Rise
Canada's unemployment rate is a growing concern. Unlike other regions where unemployment has remained relatively stable, Canada's jobless rate has climbed steadily, surpassing figures in the U.S., U.K., and the Eurozone. This trend is particularly worrisome as it coincides with slowing economic growth.
Limited Relief for Home Buyers
The BoC's rate cuts provide minor relief for new home buyers, but affordability challenges remain deeply entrenched. A structural undersupply of housing keeps a floor under home prices, while planned federal caps on non-permanent resident arrivals are expected to slow population growth, impacting demand in both the housing and labor markets. This creates a precarious situation where affordability may not improve significantly despite lower interest rates.
If the bank is lowering rates in 0.25 percent increments, rates would need to drop another seven times before they would significantly affect the property market.
Beyond Interest Rates - Addressing Productivity
While interest rate cuts can stimulate economic activity in the short term, they are not a panacea for Canada's long-standing issues. The country faces a significant productivity challenge that has hampered economic growth for years. Lowering interest rates won't address this underlying issue. Canada must invest in areas that will boost worker skills, innovation, and overall business competitiveness.
Canadian workers can not expect to earn more year-over-year when, statistically, they are producing less economic value for every hour worked.
