Persistently high interest rates are taking a big bite out of the Canadian economy. In February, Canada’s gross domestic product (GDP) grew just 0.2% on a month-over-month basis. That’s lower than the 0.3% economists were expecting and well below Statistics Canada’s own advanced estimate of 0.4%. On an annual basis, Canadian GDP grew 0.8%, well below the 1.1% expansion forecast.
While the Canadian economy kicked off 2024 on a strong note, with January GDP growing 0.5%, the underwhelming February reading and early estimates for March suggest little has changed.
How Is the Canadian Economy Doing?
Despite the slowdown, Statistics Canada still believes the Canadian economy expanded by 2.5% at an annualized rate in the first quarter. But the slowing economy could extend into the second quarter putting pressure on the Bank of Canada to begin cutting interest rates. The central bank expects GDP growth to slow to 1.5% in the second quarter.
The Bank of Canada last raised its key lending rate in July 2023 and has held interest rates at a more than 20-year high of 5% at each of its last six meetings. The odds of a June interest rate cut have risen close to 60% from 56% before Statistics Canada released its February GDP data. An interest rate cut in July is all but expected.
It’s not just Canada’s GDP that is decelerating. Other measures also point to a weakening economy. Over the last three months, the Bank of Canada’s two favourite measures of core inflation have been running at an annualized rate at the lower end of the central bank’s target of 1%.
Taken together, there is really no compelling reason for the Bank of Canada to not start cutting interest rates when it meets next in June and July. In fact, failing to act could actually harm the Canadian economy.
Canadian household debt is near $3 trillion, over 130% of GDP, and outpacing other G7 countries. Moreover, even when interest rates do start to come down, Canadians with mortgages are going to see their interest payments soar.
Roughly 70% of borrowers have fixed rates that have remained near record lows that were priced in during the pandemic. The lowest five-year fixed mortgage rate during the health crisis was 1.39% compared with 4.79% today.
Even when rates fall, for those with fixed mortgages, the rates are still significantly higher than what they’re paying today. Of the $2 trillion in outstanding mortgage debt, only 5% was renewed in 2023. In 2024 that number increases to 13%, then jumps to 23% in 2025, 31% in 2026, and 21% in 2027.
More money going to service debt means less disposable income which could weigh even further on Canada’s already fragile economy.
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