TD economist says it can close economic growth gap with US
A TD Bank economist said the Bank of Canada's recent interest rate cut will have a bigger impact on Canada's growth than the US.
The reason? Canadian consumers carry more debt and face more frequent mortgage rate adjustments.
James Orlando, a senior economist at TD, said the central bank’s decision to cut interest rates ahead of the US Federal Reserve will ultimately lead to a 'big tailwind' for the Canadian economy.
Canada's economic growth is currently lagging behind that of the United States. A Bloomberg survey of economists predicts that Canada's GDP will grow just 0.9% in 2024, compared to an estimated 2.3% growth for the US.
Orlando attributed this difference, in part, to Canadian consumers being more sensitive to interest rates. On average, they carry a higher debt burden than American households, and their mortgage rates are adjusted more frequently.
“We’re going to be able to have less of our disposable income go into mortgage payments,” Orlando said in an interview with Bloomberg. “That, in effect, will be able to close a little bit of this gap between Canada and the United States because we have just been suffering under the weight of these high rates for so long.”
The Bank of Canada recently lowered its overnight interest rate to 4.75%, marking the first cut in over four years. They've also signalled further reductions are likely as long as inflation continues to cool. However, the consumer price index rose 2.9% year-over-year in May, up from 2.7% in April, which could complicate further rate cuts in the short term.
Read more: As inflation unexpectedly rises, what's next for the Bank of Canada?
While a resurgence in inflation might put brakes on an additional rate cut in July, Orlando remained confident that rates are headed downwards.
“We had so much uncertainty in Canada — now we’re getting more certainty,” Orlando said, adding that TD economists expect the Bank of Canada to lower the policy rate to 2.25% by early 2026.
The Federal Reserve has not yet started cutting rates, with TD predicting the first US rate cut in December. The US economy, however, has weathered high rates better than Canada.
“They spent a decade deleveraging after the global financial crisis,” said Orlando. “American consumers are in such a better position going into the high-rate environment than Canadians were.”
Orlando explained that this was because the US has a 30-year fixed-rate mortgage option, compared to Canada's shorter mortgage terms, which typically max out at five years.
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