The Canadian economy may be entering 2020 in a “favourable position,” but waning momentum could force the Bank of Canada to consider a rate cut by midyear, according to a report from CIBC.
The report, authored by CIBC chief economist Avery Shenfeld, noted that the Canadian economy started the new year with “historically low unemployment” and inflation tracking the Bank of Canada’s target rate.
“But that doesn’t mean investors should become complacent,” Shenfeld wrote.
Shenfeld observed that Canada’s strong population growth, driven by high immigration targets, will likely help fuel the economy over the long term. But the demand for labour will determine economic growth in the short term.
“Over the past few months, hiring has looked tepid at best,” Shenfeld wrote, adding that a soft demand for labour could lead to rising unemployment.
Shenfeld noted immigration in 2019 “was heavily skewed towards new Canadians 29 years of age and younger.” While this will help counteract Canada’s aging population, it also means new immigrants likely won’t be fuelling demand for new houses — either because they’ll still be living with their parents or because they’ll be priced out of the market.
“As a result, we see housing starts leveling off rather than rebounding to the faster pace seen earlier in 2019,” Shenfeld wrote.
Another sour note is retail spending, which has declined in recent months. Shenfeld predicted overall consumption growth in 2020 might not look any better than it did in 2019, “which is set to post its weakest advance since the crisis.”
Also concerning is a lack of demand for Canadian non-energy exports, which have made “virtually no gains over their pre-crisis peak” and hampered business investment in Canada, Shenfeld observed. He predicted that if job growth continues to be sluggish, the central bank “could be pushed into action to support the non-energy parts of the economy.”
“A rate cut would also get the ball rolling on currency depreciation, something we see as a necessary ingredient in 2020 and 2021 to rotate demand towards business investment and exports, and chew up economic slack,” Shenfeld wrote. “Non-energy exports and business investment have long been sore spots in terms of growth, but will now be more of a focal point as housing and consumption lose vigour.”
Read the full report from CIBC.