BoC Rate Cuts: A Lifeline for the Canadian Economy?
Outlook is uncertain, with risks of decline. Inflation may persist, especially in housing and services.
Saturday, August 10, Week 32.
Navigating the Canadian Macroeconomic Landscape: A Trader's Guide
This report provides a comprehensive analysis of the Canadian macroeconomic landscape, focusing on key developments and their potential impact on currency markets. Over the past quarter, the Canadian economy has shown signs of slowing, with GDP growth remaining modest and the labour market softening. Inflation has eased but remains above the Bank of Canada's 2% target, prompting the central bank to cut interest rates in both June and July. Looking ahead, the economic outlook is uncertain, with risks tilted to the downside. Key factors to watch include household spending, global economic growth, and the Bank of Canada's monetary policy stance.
A Shifting Tide: Canada's Economic Situation
The Canadian economy is currently experiencing a period of modest growth and softening labour market conditions. Real GDP expanded by a modest 0.4% in the first quarter of 2024, accelerating from a flat reading in the previous period. However, this growth was largely driven by population growth, with GDP per capita contracting for the fourth consecutive quarter. The labour market has also shown signs of softening, with the unemployment rate rising to 6.4% in July, its highest level in over two and a half years. Employment fell for a second consecutive month, and the labour force participation rate dropped to a 1998-low, excluding pandemic shocks.
Key economic indicators have generally underperformed market expectations in recent months. Retail sales fell by 0.8% in May, the sharpest decline in 14 months, and the advance estimate for June suggests a further decline of 0.3%. Housing starts also fell by 9% in June, below market expectations. The S&P Global Canada Manufacturing PMI fell to 47.8 in July, indicating the sharpest contraction in operating conditions since December.
Looking ahead, the economic outlook is uncertain, with risks tilted to the downside. The Bank of Canada expects GDP growth to pick up in the second half of 2024. However, this forecast is subject to considerable uncertainty, particularly regarding the strength of household spending and the impact of slowing population growth. The potential for a weaker global economy and increased trade tensions also pose downside risks to Canada's economic outlook.
Several upcoming economic events and data releases could significantly impact market sentiment and currency volatility in the coming months. The Bank of Canada's next interest rate decision is scheduled for September 4th, and the central bank will publish its next full outlook for the economy and inflation in the Monetary Policy Report on October 23rd. Other key data releases to watch include the July GDP report (August 30th), the August inflation report (September 17th), and the August retail sales report (September 23rd). Global economic trends, such as the slowdown in the US economy, could also influence Canada's economic and currency outlook.
Charting a New Course: Monetary Policy in Canada
The Bank of Canada is currently in a monetary easing cycle, having cut its policy interest rate by 25 basis points in both June and July, bringing the rate to 4.5%. The central bank's mandate is to maintain price stability and to support maximum sustainable employment. The Bank of Canada has acknowledged that inflation is still above its 2% target, but it expects inflation to moderate further in the coming months and to return sustainably to target in the second half of 2025. The central bank has also noted that there is slack in the labour market, which is helping to ease inflationary pressures.
The Bank of Canada's recent rate cuts have been driven by several factors, including the softening of the Canadian economy, the easing of inflationary pressures, and the increased uncertainty surrounding the global economic outlook. The Bank of Canada's monetary policy decisions are closely watched by forex traders, as they can have a significant impact on the Canadian dollar. The recent rate cuts have led to a depreciation of the Canadian dollar against the US dollar. However, the Canadian dollar has been relatively stable against other major currencies. The outlook for the Canadian dollar is uncertain, as it will depend on a number of factors, including the Bank of Canada's monetary policy stance, the performance of the Canadian economy, and the global economic outlook.
Navigating Uncertainty: Canada's Macroeconomic Outlook
The macroeconomic outlook for Canada is uncertain, with risks tilted to the downside. The economy is expected to grow modestly in the coming quarters, but the pace of growth is likely to be uneven. Inflation is expected to continue easing, but it could prove more persistent than expected, particularly in shelter and some services excluding shelter. The Bank of Canada is expected to continue assessing economic conditions carefully, with future monetary policy decisions dependent on incoming data.
Here are three key risks that could impact the outlook:
1. Stalled Consumer Spending: Household spending could be weaker than expected due to high debt levels, rising interest rates, and uncertainty about the economic outlook.
- Key Developments: Retail sales fell by 0.8% in May, the sharpest decline in 14 months. (July 19, 2024)
- The advance estimate for June suggests a further decline of 0.3% in retail sales. (July 19, 2024)
- Per capita spending on goods fell for the 10th consecutive quarter in Q1 2024. (May 31, 2024)
2. Global Economic Slowdown: A weaker global economy could lead to lower demand for Canadian exports and lower commodity prices, which would have a negative impact on Canada's economy.
- Key Developments: The terms of trade have fallen in six of the last seven quarters. (May 31, 2024)
- Imports of passenger cars and light trucks declined in Q1 2024 amid lower global production. (May 31, 2024)
3. Persistent Inflation: Inflation could prove more persistent than expected, particularly in shelter and some services excluding shelter. This could influence the Bank of Canada's future interest rate decisions.
- Key Developments: Shelter price inflation remains elevated at around 7%. (July 16, 2024)
- Year-over-year, gasoline prices rose at a slower pace in June (+0.4%) compared with May (+5.6%). (July 16, 2024)
- Prices for food purchased from stores increased 2.1% year-over-year in June, accelerating for the second consecutive month. (July 16, 2024)
Action Points for Forex Traders:
Monitor incoming economic data, particularly retail sales, housing starts, inflation, and employment reports.
Pay close attention to the Bank of Canada's monetary policy statements and speeches.
Be aware of the potential impact of global economic trends on the Canadian dollar.
Key Upcoming Economic Events:
Week 36: Bank of Canada Interest Rate Decision (Wednesday, September 4, 2024)
Week 43: Bank of Canada Monetary Policy Report (Wednesday, October 23, 2024)
Economic Indicators
Economic Growth:
Real GDP Growth Rate (QoQ): 0.4% in Q1 2024. The outlook for future growth is uncertain, but the Bank of Canada expects a pickup in the second half of 2024.
Monthly GDP (MoM): 0.2% in May 2024. Advance estimate for June suggests a decline of 0.3%.
Inflation:
CPI Inflation Rate (YoY): 2.7% in June 2024. Expected to continue easing in the coming months.
Core Inflation Rate (YoY): 1.9% in June 2024.
Labour Market:
Unemployment Rate: 6.4% in July 2024.
Employment Change: -2.8K in July 2024.
Labor Force Participation Rate: 65% in July 2024.
Housing Market:
Housing Starts: 241.7K in June 2024.
New Housing Price Index (MoM): -0.2% in June 2024.
Business Confidence:
S&P Global Manufacturing PMI: 47.8 in July 2024.
Ivey PMI: 57.6 in July 2024.
Consumer Sentiment:
Retail Sales (MoM): -0.8% in May 2024. Advance estimate for June suggests a further decline of 0.3%.
Trade:
Balance of Trade: CAD 0.64 billion surplus in June 2024.
Current Account: CAD 5.4 billion deficit in Q1 2024.
Sources
Bank of Canada
Statistics Canada