Inflation is down – but unemployment is up and the labour market is cooling
Canada’s economy is cooling rapidly – and the central bank is increasingly wary about the prospect of inflation falling too far.
That’s according to Bank of Montreal (BMO) chief economist Doug Porter (pictured top), who told Canadian Mortgage Professional the Bank of Canada’s recent language has contained a clear message that it’s carefully monitoring the risk of a larger-than-expected economic slowdown.
The likelihood of a flurry of interest rate cuts in the Bank’s upcoming meetings appears to be increasing with every emerging indicator of a flagging economy. “What really does stand out to me, and why I think they might become a bit more forceful [on rates], was [Governor Tiff Macklem’s] line that we need to increasingly guard against the risk that the economy is too weak, and inflation falls too much,” Porter said.
“That’s interesting. He said something similar, in a different way, in July – but I think he’s really driving home a message that they’re more worried about that now. Interest rates are still above what they consider to be normal or neutral, so they might find themselves having to get rates to normal faster than what the market expects.”
Sluggish economy shows little pickup
The national unemployment rate rose by more than expected in August, jumping to 6.6% as the economy added a net 22,100 jobs – a meeker performance than economists surveyed by Reuters had anticipated.
At last reading, inflation was also at its lowest level for more than three years (2.5% in July), with Statistics Canada due to reveal its next consumer price index (CPI) update on September 17.
While the second quarter of 2024 saw the Canadian economy expand by more than expected, it continued to show underlying signs of softening.
How concerning is that protracted slowdown? While the economy has so far failed to manage the “soft landing” that the US appears on course to achieve, prospects of a crash still appear distant.
Porter noted that the increase in the unemployment rate is partly a reflection of the rapid population growth at play in Canada. “It’s not like we’re seeing people losing their jobs,” he said. “It’s more just really tough for new entrants to find a job at this point. And of course, debtors are struggling – I think somebody with a big mortgage at this point probably doesn’t really see this as a soft landing.
Bank of Canada Governor Tiff Macklem believes that while rental prices may decrease due to falling mortgage rates and more supply, home prices could still rise.
— Canadian Mortgage Professional Magazine (@CMPmagazine) September 7, 2024
Read more: https://t.co/QGp1jo8YBP#mortgagetrends #houseprices
“So it’s been a bit bumpy to this point – but the economy is just keeping its head above water. It’s still scratching out modest growth, and just as we were more sensitive to the higher rates on the way up, the Canadian economy is probably going to benefit more than some others as interest rates start to come down and the pressure is taken off. So I actually think the economy will improve a little bit in 2025.”
What’s next for the US Fed?
Bank of Canada watchers are also closely following the outlook of the Federal Reserve south of the border, whose path will have a strong bearing on how quickly and by how much Canada’s central bank can afford to bring rates lower.
The Fed has given clear indications in recent weeks that it’s ready to start cutting rates, potentially at its next meeting (scheduled for September 17-18).
Still, a potential curveball is the looming federal election, set to take place on November 5, with some suggesting the central bank could be prepared to stay on the sidelines at a politically charged moment.
While it may prefer not to be part of the election conversation, “over time, there have been instances where the Fed has both raised and cut interest rates before and after an election,” Porter noted.
“And [Fed chair] Powell has said time and time again [that] they will do what is necessary for the economy. Inflation has come down enough. The economy has weakened enough. It’s unfortunate that the first rate cut happens to be right before the election but frankly, this is something we were predicting months ago, that the September meeting was the one that made sense from an economic standpoint and I think that’s the way the Fed sees it as well.”
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