OTTAWA—The Bank of Canada gave a sombre outlook for the Canadian economy, quite in contrast to its view of the U.S. economy, as part of its latest interest rate decision on Oct. 25. But while the BoC says this phenomenon is temporary and that the two economies will have similar growth rates in 2024, some advantages the U.S. economy has are being revisited.
Bank of Canada governor Tiff Macklem called the U.S. economy “surprisingly strong” in his opening statement at the central bank’s press conference.
Estimates of U.S. third-quarter gross domestic product (GDP) are in the 4 percent to 5 percent range. Meanwhile, Canada’s second-quarter GDP shrank by 0.2 percent and RBC indicated on Oct. 20 that it is tracking another small decline for the third quarter of 0.5 percent.
The Bank of Canada is projecting the U.S. economy to grow 2.2 percent for 2023, compared to 1.2 percent for Canada.
But the BoC expects the weight of higher interest rates to slow the U.S. economy considerably in 2024 with growth slowing to 0.8 percent and Canada’s economy growing by 0.9 percent.
Key Differences
A notable difference between the two economies is how productivity is languishing in Canada while it is robust in the United States.
“We’re seeing that in the current [economic] cycle, productivity growth in Canada has been pretty flat,” Mr. Macklem said in response to a question from The Epoch Times.
“It is growing in the U.S. and, to be frank, productivity growth makes everything easier. It pays for higher wages without stoking inflation. It supports non-inflationary growth. So you know that that is another difference between Canada and the United States.”
The U.S. economic outperformance currently being seen goes back to larger and more effective government support during the pandemic, according to Jean-Paul Lam, University of Waterloo economics professor and former Bank of Canada assistant chief economist.
“The U.S. fiscal stimulus was around 27 percent of GDP compared to around 20 percent in Canada, and 12 percent in EU countries,” he told The Epoch Times.
“Unlike Canada, which adopted a mix of policies (wage subsidies to employers to retain workers, more generous employment benefits), the U.S. policy on focusing mostly on making unemployment benefits more generous allowed workers the freedom and flexibility to adapt to changing job conditions, including remote work opportunities,” Mr. Lam added.
Another big difference between the Canadian and U.S. economies is the state of the consumer. Canadian retail sales declined marginally in August, by 0.1 percent from July, and the BoC’s survey of consumer expectations indicated that nearly 60 percent of consumers reduced spending in the third quarter to guard against high inflation and rising interest costs.
But in the United States, retail sales leaped by 0.7 percent in September, along with upward revisions to July and August’s initial readings.
The BoC said the U.S. consumer has drawn down savings a lot more while the Canadian consumer is more concerned about debt and mortgage renewals, which typically happen every five years whereas in the United States, borrowers often lock in a mortgage rate for 30 years.
“You'd expect monetary policy to have more traction in Canada,” Mr. Macklem said, given this heightened sensitivity the Canadian borrower has.
Thus, Canadians have shifted pandemic savings into higher interest savings (term deposits) and are spending less, the central bank noted.
CIBC chief economist Avery Shenfeld said in an Oct. 20 note that as the U.S. consumer keeps spending, the falling U.S. savings rate is a sign that higher interest rates have not taken effect.
“Perhaps it’s that Americans aren’t fretting as much about their current debt burdens, which are lower than those in Canada, and locked in for up to 30 years at ultra-low interest rates,” he said.
Lower Growth, More Persistent Inflation
While Mr. Macklem said Canada is not experiencing “stagflation,” where both inflation and unemployment are high and growth is low, the BoC downgraded its economic outlook and said core inflation remains problematic.
“The path to a soft landing is narrow—in this projection that path has gotten narrower,” Mr. Macklem said.
The Bank of Canada held its overnight rate target at 5 percent, as was widely expected, but warned that three-month core inflation measures have been in the 3.5 percent to 4.5 percent range over the past year. The BoC thus said there is more persistence to inflation than what was expected in July when it last provided detailed economic forecasts.
Canadian governments at all levels in aggregate are ramping up their spending. Mr. Macklem said government spending is expected to grow by 2.5 percent in 2024, which is faster than the economy’s potential growth rate, and is projected to make up two-thirds of economic growth.
“It would be helpful if governments considered the inflationary impact of their spending decisions when they’re making their spending plans. It’s going to be easier to get inflation down if monetary and fiscal policy are rowing in the same direction,” Mr. Macklem said.
The Canadian dollar has weakened noticeably since mid-July. The loonie was trading at close to US$0.76 then, but it has since weakened to a seven-month low of around US$0.725—down about 4.5 percent in three months.
Richard Dias, a global macro strategist with PGM Global in Montreal, told The Epoch Times that the BoC is saying it is prepared to raise interest rates if needed but that the Canadian dollar’s weakness reflects a potentially larger interest rate differential between the United States and Canada.
“The dollar is pricing in that the U.S. is either able to or should raise interest rates and Canada is basically done,” he said.
“Because of major deficit spending, and because they [United States] don’t have any of the debt hang-ups or real estate issues that we have, then they’re more able to absorb higher interest rates and that’ll get priced in.”
