PANEL: Two top economists weigh in on what the BoC will do following Canada's Q3 GDP data
Canada’s economy shrank in the third quarter, according to Statistics Canada, adding fuel to the narrative that the Bank of Canada will need to lower interest rates soon to avoid a deep recession – but economists have varying views on when to expect cuts.
“We're not thinking the bank is going to move until the second half of next year, maybe around mid-year, simply because we're not convinced that the inflation numbers are going to come in low enough,” David Watt, chief economist at HSBC Canada, told BNN Bloomberg in a Thursday television interview.
Watt said he believes the Bank of Canada will be “cooler” on rate cuts, despite signs of a slowing economy, because it may take some time for inflation to reach the bank’s target rate of two per cent.
Douglas Porter, chief economist with BMO Capital Markets, agrees that rate cuts likely won’t begin until the second half of 2024, despite the fact that markets have been “pulling forward” on when rates in both the U.S. and Canada will start coming down.
“I personally think the market is maybe getting a little bit ahead of itself,” Porter said during a Thursday morning panel discussion on BNN Bloomberg.
“I do think we can look forward to rate cuts next year, I just still believe that the Bank of Canada and the U.S. Federal Reserve, if they're going to make a mistake, it’s that they're going to stay too high, too long.”
National Bank of Canada’s chief economist Stefane Marion said during the panel discussion that he expects the Bank of Canada to cut rates by around 100 basis points by the end of next year.
He added that he’d like to be able to predict that rates will come down even further, but stubborn inflation numbers around housing costs are likely to keep rates higher for longer.
“That housing component of the Consumer Price Index (CPI) is very resilient, growing at six per cent right now - that's 30 per cent of the CPI, so that limits the ability for the bank to cut rates.”
Meanwhile, economist Tu Nguyen of RSM Canada said it’s “time to switch the discussion from potential rate hikes to potential rate cuts” due to the sharp “unexpected” contraction of the economy.
She predicted a rate cut could come as early as the second quarter of next year.
“The Bank of Canada might announce the first rate cut in April 2024 to avoid a deeper recession than needed,” she said in an emailed note on Thursday.
IS CANADA IN A RECESSION?
Statistics Canada’s gross domestic product report, released Thursday, said the economy contracted 1.1 per cent on an annualized basis in the third quarter due to a decrease in international exports and slower inventory accumulation by businesses.
However, the agency also revised their previously reported economic contraction in the second quarter, saying the economy actually saw net growth of 1.4 per cent, and its preliminary estimate for October suggested there was an uptick in economic activity.
Porter said that despite these contradicting readings, the “main message is still the same,” which is that the Canadian economy “really hasn’t grown in the last six months.”
“And it's probably going to struggle to grow over the next six months or so as well, so, whatever label we put on it, the reality is the economy is really struggling to make any forward progress,” he said.
Marion said the Bank of Canada’s aggressive rate hikes have contributed to the stalling of the economy, adding that Canadians have only felt 60 per cent of effects of the bank’s monetary policy so far.
“There's still 40 per cent of previous rate hikes that will impact the economy in the coming months,” he said.
“If you hike by 500 basis points, you're going to get collateral damage, and we're starting to see it…. clearly, the Canadian consumer is struggling.”
Watt argued that despite the more positive economic readings, GDP contraction in the third quarter will further embolden those who believe Canada is already in a recession.
“It reinforces the narrative that the Canadian economy is slowing … a lot of people are talking about Canada already being in a real recession, that will get somewhat more life given what we’ve got here,” he said.
However, Watt said he believes it’s too soon to tell, and that he’ll be waiting to see data on the fourth quarter of 2023, citing higher-than-expected retail sales in September and October as a sign of underlying economic resilience.
“Yes, the Canadian economy is slowing. Q3 was very weak relative to Q2, but Q4 might have a little bit more life in it, so we're not necessarily going to wave the white flag just yet.”
With files from the Canadian Press