BoC's rate cut is a positive step, but more are needed for long-term economic growth
The Bank of Canada's recent interest rate cut is unlikely to have an immediate impact on mortgage rates, but marks the end of a challenging period for the housing market, according to the Conference Board of Canada.
“The Bank of Canada’s decision to trim interest rates signals a turning point for Canada, but it will likely require several rounds of cuts to significantly influence consumer and business spending,” said Ted Mallett, director of economic forecasting at The Conference Board of Canada.
New research from the Conference Board of Canada predicts that the real GDP will increase by 1.8% on an annualized seasonally adjusted basis in the last half of 2024, up from an estimated 1.4% in the first half.
Mallett anticipates GDP growth to recover further to 2.1% in 2025 as the impact of the rate cuts takes effect across the economy.
“Although the recent interest rate cut alone will have minimal impact on mortgage rates, the move signals an end to a period of rate hikes, potentially shoring up homebuyer interest and rekindling market activity as additional rate cuts begin,” the Board said.
For now, Canadians burdened by high borrowing costs may see a slight easing of pressure, but a significant revival in the housing market might have to wait until the effects of multiple rate cuts ripple through the economy.
However, the organization also warned that the federal government’s initiatives to address Canada’s housing affordability challenges face substantial obstacles which are likely to hinder their effectiveness.
The US economy, on the other hand, is experiencing a slowdown as it enters 2024. Although the labour market remains relatively resilient, signs of weakening are evident, with employment growth slowing and unemployment expected to rise.
Read more: Can Bank of Canada's early rate cut spur economic growth?
Economic growth in the US is forecasted to weaken further in 2024 and decline in 2025. The board expects this slowdown to impact Canada's trade sector. While the completion of the Trans Mountain Pipeline expansion is expected to boost energy exports, weaker US demand is likely to dampen overall export growth.
Import growth is set to accelerate due to improving domestic demand, but exports will still outpace imports, contributing marginally to GDP growth in 2024.
The effects of tight monetary policy are likely to reduce labour demand, even as strong population growth boosts labour supply. This dynamic is expected to push the unemployment rate up, helping to rebalance the labour market after a period of extreme tightness.
Private non-residential investment showed signs of recovery in the first quarter of the year. With falling interest rates, easing labour constraints, and an improving economy, this momentum is expected to continue into 2025.
Major projects, such as Honda Canada’s $15 billion initiative in Ontario and Jansen’s $14 billion project in Saskatchewan, are set to drive growth in the automotive and potash sectors.
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