Yahoo Finance Bank of Canada will hold off on rate cuts till September, Deloitte says, as recovery continues
The Canadian economy will continue recovering in the second half of the year as the Bank of Canada resumes cutting interest rates in September, Deloitte Canada said in its summer economic outlook released on Wednesday. But it also warned that more urgency is needed to address weak productivity.
Deloitte says Canada’s economy grew stronger than previously forecast in the first half of the year, and that economic recovery is expected to continue in the second half of 2024 as the central bank continues its easing cycle. Deloitte forecasts that the Bank of Canada will hold off on cutting rates again until September, before issuing another cut that would bring the overnight rate to 4.25 per cent by the end of 2024.
“We have long held the view that the Bank is going to be very cautious in terms of the pace of rate reductions, really wanting to lean against injecting a lot of activity in the interest rate sensitive parts of our economy and leading to price increases that jeopardize that move to two per cent (inflation),” Deloitte Canada chief economist Dawn Desjardins said in an interview with Yahoo Finance Canada. Still, Deloitte expects the central bank to pick up the pace of rate cutting in 2025, with the benchmark rate reaching 2.75 per cent by the end of next year.
“We do think that it’s going to be slow going, but once we are really seeing that two per cent target, the Bank will be a little more aggressive, and that means that in 2025 we should anticipate more interest rate reductions,” Desjardins said.
Canada’s inflation rate reaccelerated unexpectedly to 2.9 per cent in May and measures of core inflation increased, reducing the odds that the Bank of Canada will cut rates in July. The central bank cut its benchmark interest rate for the first time in more than four years earlier this month, bringing the rate to 4.75 per cent, and says it is reasonable to expect further cuts if inflation continues to ease.
As the Bank cuts interest rates, Deloitte says consumer spending and residential investment will pick up in the second half of the year. It expects gross domestic product growth to be 1.6 per cent in the second quarter, 2.1 per cent in the third quarter, and 2.7 per cent in the fourth.
“However, consumer confidence is low, there is reluctance to make major purchases, housing affordability remains a challenge, and savings rates are well above normal,” Deloitte said.
“While these factors will restrain the pace of recovery in the second half of 2024, we will see stronger gains in both consumption and residential investment next year as confidence returns.”
Still, while the economic recovery continues and the so-called “soft landing” appears to be on track, Deloitte warns that weak business investment and productivity performance pose a risk to Canada’s long-term outlook.
“Unfortunately, while we expect business investment to grow each quarter throughout 2024, substantial declines in the second half of last year will be tough to overcome, leaving annual growth negative for the year,” Deloitte said, noting that the start of construction of several electric vehicle battery plants will help productivity levels next year.
“While these investments are good news, more urgency is needed nationwide for addressing weak business investment and productivity performance.”
The need to improve productivity has been a key message from the Bank of Canada in recent months. Earlier this year, deputy governor Carolyn Rogers called Canada’s weak productivity an emergency. In a speech in Winnipeg on Monday, Bank of Canada Governor Tiff Macklem called the issue of low productivity growth “our Achilles heel.”
“We have been very good at growing our economy by adding workers. We have been much less successful at increasing output per worker. And this is catching up with us,” Macklem said.
“Weak productivity growth in Canada is a long-standing issue and it’s reaching emergency levels. As good as we have been at growing our economy by adding workers, we need more than one engine.”
Desjardins says there are many possible solutions that can help improve productivity in Canada, including encouraging business investment. She also says reducing regulatory hurdles – including by cutting interprovincial trade barriers – would allow companies to grow and reach economies of scale.
“It is a concern. We consistently look at our productivity performance and see that it is not a good indicator for Canada. We’re falling behind ourselves, but also our peers, and that of course is very worrying,” Desjardins said.
“Right now, it is something that we feel is top of mind for businesses, for workers, for governments… there is some hope that we’ll be able to come up with some solutions that actually will get that moving in the right direction.”
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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