The Bank of Canada announced another 50bps reduction in the Overnight Rate. Now at 3.25%, rates have fallen 1.75% since the summer, marking a rapid shift in monetary policy.
This comes as recent months have highlighted the volatile nature of the Canadian economy:
🔘 The Consumer Price Index rose 2% year over year in October, up 0.4% from September (1.6%). Shelter costs continue to outpace many other categories, and in October gasoline prices fell to a lesser extent (-4%) compared to September (-10.7%).
🔘 Real GDP grew slightly (0.3%) in Q3 after gains of 0.5% in the first two quarters. However, GDP per capita continues contracting, down 0.4% and the sixth consecutive quarterly decline. A major contributor to GDP growth has been consumer spending and government expenditure, both of which are facing headwinds in the short and medium term as personal expenditure and mounting deficits drag on spending.
🔘 Unemployment figures rose to 6.8% in November according to Statistic Canada, a 0.3% rise and the highest rate seen since January 2017 excluding the pandemic years. Youth unemployment in particular has risen dramatically, now at 13.9%.
The possibility of tariffs is a perceived risk to many businesses as the dynamics of the US administration will change early next year. Higher personal consumption is offset with slower business investment, and GDP is projected to decline slightly as planned immigration target reductions come into effect.
In the construction sector, employment grew by 18,000 (+1.2%) in November after relatively little movement since the summer. Construction sector GDP also grew in September, with repair construction (+1%) leading the way. Gains in residential building (+0.4%) and non-residential building (+0.7%) were also observed.
Housing starts have been relatively flat across many cities, and projects in both Vancouver and Toronto continue to decelerate, down 18% and 21% respectively (year to date vs. 2023). Conversely, Montreal showed strength with YTD figures up 12% compared to 2023.
With 2025 just around the corner, this announcement continues a sizeable shift in monetary policy to address the economic slowdown and volatility in the short-term. Growth overall has been slower than anticipated, and excess supply in the economy has yet to be absorbed.
Despite this, many major capital infrastructure projects will continue well into 2025, and demand for housing remains strong. With interest rates trending downward and new mortgage rules improving borrowing capacity, the residential sector could see a strong start after the winter months.
Balancing stimulus with potential inflation is a significant challenge; next week the US Federal Reserve will make their final announcement for interest rates in 2024. With stronger economic indicators, the US may take a more reserved approach with their monetary policy compared to the Bank of Canada.