Strategies to counter the economic downturn in Canada

10 December 2024 - Canada’s economy grew at an annual rate of 1% during July-Sept 2024, with real GDP increasing by 0.1% in September, Statistics Canada reported. This was below the Bank of Canada’s revised forecast, which resulted in garnering support for a 50-basis-point rate cut in December. Monthly growth underperformed, as analysts had forecast a 0.3% rise for September. Preliminary estimates suggest a 0.1% GDP increase in October, supported by growth in real estate, transportation, and retail trade, which will balance out losses in construction and mining.

GDP per person fell 0.4% in the aforementioned period, the sixth consecutive quarterly decline, reflecting falling living standards. Despite upward revisions to growth estimates for the past three years, the economy has shown signs of weakness through mid-summer and early fall. Household and government spending drove Q3 growth, countering declines in business investment, inventory accumulation, and exports. Household savings reached a three-year high of 7.1%, fueled by faster income growth than spending.

Conflicting opinions on the upcoming strategy of the central bank
Economists and market analysts are divided on the central bank’s next move. CIBC’s Andrew Grantham noted that weaker-than-expected Q3 results and subdued Q4 momentum point towards a 50-basis-point cut in December, though upcoming employment data may influence the decision. Royce Mendes of Desjardins acknowledged the possibility of a larger cut but expects a more measured 25-basis-point reduction due to revised output gaps and a weak currency. BMO’s Douglas Porter also anticipates a 25-basis-point cut, citing upward GDP revisions as a stabilizing factor.

Kyle Chapman, an FX market analyst, argues that restrictive policies and stagnant living standards justify a 50-basis-point cut, especially with inflation at the Bank of Canada’s target. Conversely, Rhys Mendes, deputy governor of the Bank of Canada, emphasized that future rate cuts depend on a range of indicators, including GDP and employment data. The Bank’s Q4 growth forecast of 2% appears optimistic given current trends.

In financial markets, traders have increased their bets on a half-point cut, raising the odds to over a third from a previous one-in-four chance. While opinions vary, the decision will hinge on whether recent data confirms broader economic weaknesses or suggests resilience. Does you salary match what is happening in the economy? Use our Salary Check.