Why interest rate cuts aren’t on tap for Canada

By Staff | April 18, 2019 | Last updated on April 18, 2019
2 min read
Businessman climbing towards growth in statistics

Canada has been close to recession twice in recent years—yet managed to escape. Today, as recession potentially looms again, Canada could likewise escape, but don’t count on the central bank to lower interest rates as a way to keep economic momentum going.

A CIBC report published on Friday discussed how Canada might avoid recession, with CIBC chief economist Avery Shenfeld recalling the circumstances surrounding two recent recession near-misses.

First, in 2015, Canada had two consecutive quarters of falling real GDP—but no recession—after oil-sector capital spending dropped. The situation didn’t count as a recession because there was no increase in the jobless rate, the report said.

The second near-recession was in the second half of last year, as global growth slowed, home sales slumped and a bottleneck depressed heavy oil prices. While that situation resulted in an almost zero growth rate in the fourth quarter of 2018, growth continues to be positive, thanks to such things as a pause on rate hikes and an improved outlook for Chinese growth, the report said.

Looking forward, CIBC forecasts that recession risk lies in wait in 2020, as positive effects from U.S. fiscal policy fade.

Historical economic analysis shows that countries that reach full employment rarely stay there for an extended period before recession hits, said the report. Considering that Canada has been close to, if not at, full employment for a sustained period, to escape recession’s clutches would require that the country have its longest run near full employment since the 1960s, it said.

Even if Canada managed to maintain full employment by continuing the current expansion through rate cuts and household debt, that course of action would build up financial risks, and recession would likely be worse once it eventually occurred.

Despite recession risk, the report cites reasons why Canada might still “muddle through 2020 with sluggish but still positive growth.” Those include a continued pause on central bank rate hikes and a weaker loonie, which will help boost exports.

If global growth were to take a turn for the worse, domestic stimulus would be required, not a reliance on ultra-low interest rates and ever-expanding household debt, the report said.

“Someone has to borrow and spend when tough times come,” Shenfeld said in the report. “But putting the debt on the nation’s books rather than on those of individual households could be the safer approach.” Canada’s debt service costs are well contained, he added.

Far from a potential rate cut, one of the big banks forecasts a hike this year.

After positive inflation readings were released earlier this week, Derek Holt, vice-president and head of capital markets economics at Scotiabank, said in a report that “core inflation is proving stickier than expected.”

With Scotiabank forecasting an economic rebound this year, Holt said, “We still think the [central bank] is not done with its hike cycle, and our current view is a hike by year-end.”

For full details, read the reports from CIBC and Scotiabank.

Advisor.ca staff


The staff of Advisor.ca have been covering news for financial advisors since 1998.