Canadian Economy Stagnant, Pointing to Another 50-Basis-Point Interest Rate Cut

How Is the Canadian Economy Doing?

The Canadian economy continues to underwhelm as years of high inflation and high interest rates hurt Canadian consumers and businesses. According to preliminary data from Statistics Canada, the country’s gross domestic product (GDP) grew at an annualized rate of just 1% in August; unchanged from July. Preliminary data also shows the Canadian economy stalled in September with GDP flatlining, up just 0.3%.

We’ll know how the Canadian economy is truly doing in a month when the official numbers are released. If these early projections hold, the Canadian economy will have expanded just 1% on an annualized basis in the third quarter. That’s down significantly from the 2.1% GDP gains in the second quarter and 2.2% GDP growth in the first quarter of 2024.

The 1% third-quarter growth is also much lower than the Bank of Canada’s estimate of 1.5%, which itself, was revised lower from earlier projections for 2.8% growth.

Canada’s economic growth has stalled due to high interest rates, which makes borrowing more expensive and curbs consumer demand. Higher interest rates are how central banks like the Bank of Canada tackle inflation. Inflation is down from 8.1% in June 2022 to 1.6% in September. So, it succeeded on that level, but recent interest rate cuts haven’t fully worked their way into the Canadian economy.

What Kind of Rate Cut Will the Bank of Canada Do Next?

The weak projections can’t be a total surprise to the Bank of Canada since it’s acknowledged that the economy is weak and needs to pick up.

How will it do this? In mid-October, the central bank announced a 50-basis point (0.5%) interest rate cut. This comes on the heels of three consecutive 0.25-basis-point interest rate cuts. That puts the Bank of Canada’s key lending interest rate at 3.75%.

Preliminary projections for weak third-quarter growth could force the Bank of Canada to announce another 50-basis-point interest rate cut when it meets next in December. This would lower interest rates to 3.25%; the lowest interest rate since September 2022.

The Bank of Canada expects the Canadian economy to rebound after its rate cuts successfully work their way through the economy. The central bank is projecting the Canadian economy will still grow by 1.2% in 2024 before GDP rebounds to 2.1% in 2025, and 2.3% in 2026.

To reach those targets, the Bank of Canada will need to further reduce its interest rate to encourage growth and reduce slack in the economy.

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