Canadian Economy Poised for Soft Landing Despite Slow Rate Cuts
Economists are forecasting a “soft landing” for Canada’s economy, anticipating a gradual deceleration in interest rate cuts by the Bank of Canada, despite exhibiting signs of economic weakness. The projections, derived from a survey of 28 economists conducted between September 20th and 25th, anticipate the benchmark overnight rate will fall to three per cent by April 2025, a more moderate pace than previously expected. This scenario hinges on the belief that the central bank’s aggressive interest rate tightening campaign has successfully brought inflation under control.
The survey indicates confidence that inflation will sustainably reach the Bank of Canada’s two per cent target beginning in the second quarter of 2025. This is an earlier timeline than indicated in the July Monetary Policy Report and earlier forecasts, reflecting a belief in the effectiveness of the Bank’s previous actions. The projected stabilization of the policy rate is anticipated to remain at this level until early 2026, signifying a period of relative stability for monetary policy.
However, the economic picture in Canada presents a more nuanced and potentially concerning context. While inflation appears to be receding, the Canadian economy is demonstrating signs of slowing growth. Consumption growth has moderated despite robust population growth, a factor that typically fuels economic expansion. Furthermore, the unemployment rate has risen significantly, climbing to 6.6 per cent in August, an increase of 1.6 percentage points since the beginning of 2023. Notably, unemployment rates are particularly elevated among youth and immigrant populations, adding further weight to the economic challenges.
Economists within the survey have revised their forecasts for peak unemployment, now projecting a rate of 6.8 per cent at the end of this year and extending into the initial months of next year. This upward revision reflects concerns about the economy’s ability to maintain momentum amidst the current headwinds. On Friday, Statistics Canada released data indicating economic growth tracking around one per cent in the third quarter of 2024, falling short of both economists’ and the Bank of Canada’s expectations. Policymakers have previously stated a desire for growth to accelerate above two per cent to prevent an undershoot of the inflation target, highlighting the delicate balance they are navigating. Bank of Canada Governor Tiff Macklem has emphasized the need for consistency and precision – a “stick the landing” approach – as the central bank seeks to manage the economy responsibly.
Despite these projections, markets are displaying a degree of skepticism. Overnight swaps currently assign a slightly above 50/50 probability to a 50 basis-point rate cut at the Bank of Canada’s next policy meeting. Moreover, traders are anticipating the policy rate to decline to 2.5 per cent by the end of 2025, a quarter of a percentage point lower than the 2.75 per cent estimated by the economists within the survey. This suggests greater confidence that the rate will decrease more substantially than initially anticipated. The disparity between economists’ forecasts and market expectations underscores the inherent uncertainty surrounding the future path of monetary policy. These observations suggest that the Bank of Canada will need to carefully monitor evolving economic data and adapt its strategy to maintain confidence and ensure a sustainable transition towards a stably growing economy.
