The Canadian economy is still weathering an uncertain and shallow growth environment. Now the Bank of Canada (BoC) is preparing to deliver another quarter point cut. Despite positive economic indicators, our nation’s recovery is proving to be both vulnerable and fragile. In September, the BoC reduced the interest rates to 2.50% and analysts expect another cut to 2.25% in October. This decision is taken in the context of high inflation and worries over potential job loss in almost every other industry.
Despite the bleak outlook, Canadian employment figures showed a surprising gain of 60,000 jobs in September, keeping the unemployment rate stable at 7.1%. Wage growth expectations for the coming year hover around just 3.1%. In turn, a considerable number of Canadians have been more conservative with their spending. The economic backdrop remains hampered by the cloud of trade-related uncertainty, which has already started to eat away at business confidence and investment.
Economic Outlook Remains Bleak
Yet a string of recent reports have painted a decidedly gloomy picture of the Canadian economic outlook. Further complicating matters, the ongoing impacts from trade wars and tariffs have created a greater level of uncertainty for firms to operate under. Bank of Canada Governor Tiff Macklem recently sounded an alarm on these dangerous trends in hiring. He noted very soft hiring, particularly in industries hit hard by tariffs.
A significant portion of Canadian firms share this sentiment. 63% expect either unchanged (50%) or reduced (13%) workforce levels in the coming months. Employers are waiting because they don’t know what the economic future holds. This concern is leading them to play even more defense with their hiring and investment decisions.
Indeed, in October the NFIB “future sales” indicator returned once again to negative territory. Such a decrease is indicative of businesses starting to get dour regarding sales expansion. This decline compounds the ongoing burden to the Canadian economy. Now businesses are faced with the double whammy of volatile market conditions and the spector of abrupt trade disturbances.
Canadian Dollar Shows Resilience
In a somewhat stunning turn, the Canadian dollar has actually fared better than most other major currencies. It displays a weaker negative correlation to the strength of the US dollar. At the moment, the Canadian dollar stands just 2.5% overvalued against its short-term fair value. This relative strength is due to a few factors such as a continued strong flow of commodity exports and positive investor sentiment.
For all the largess implied by this resilience, analysts warn that the Canadian dollar’s continued strength is a poor harbinger of overall economic health. The strength of the currency would undermine export competitiveness and add further to uncertainty within the economy. Businesses will need to tread very carefully through all of these complexities. Few are asking how long this can continue without a significant shift in global market conditions.
Inflation Concerns Persist
Inflationary pressures are spreading in Canada, with national overall inflation hitting 2.4% in September. Core inflation measures, median and trim, have risen 0.1 – 0.2% over 3.0%. The increase foreshadows current and future labor market pressures that will be felt in future monetary policy making.
Considering all of the above, the Bank of Canada will be happy to continue with their policy easing course. Analysts are guessing that there will be one last cut—25 basis points in January—taking the policy rate down to 2.0%. This strategy will protect and strengthen our unprecedented economic growth while taking on dangerous inflationary pressures that are hurting consumers and American businesses today.
The BoC’s decisions will be closely monitored as they balance the delicate interplay between stimulating growth and managing inflation expectations. Governor Macklem’s emphasis on the importance of monitoring labor market conditions suggests that the central bank will remain vigilant in its approach to policy adjustments.