Expect more interest rate cuts as Canada's economy grows at a slow, steady pace

Enjoy the cuts, even if the relief it brings is only minor

“Let’s just enjoy the moment,” exclaimed Bank of Canada Governor, Tiff Macklem’s, after being questioned about further rate cuts during last June's Monetary Policy press conference.

According to TD analysts, the BoC "clearly wants to focus on the good news for an economy coping with the highest policy rate in over 20 years." In this report, TD analysts commented how this appears to be a global sentiment. "With inflation broadly coming to heel and no widespread recession, the best-case scenario is unfolding for policymakers for economies that suffered through severe dislocations over the past four years.”

Of the G7 countries, only the European Central Bank and the Bank of Canada have begun rate-cut cycles.

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Canada's economic growth to pick up in 2024

Canada's economy is growing — slowly. After a second straight quarter of 3% annualized consumer spending, the nation's real gross domestic product (GDP) rose by 1.7%. GDP is used globally as a standard measure to quantify the value of goods and services created and completed during a specific period of time. As such, GDP measures the income earned from the production of these goods and services, along with the expenditures on these goods and services.

TD analysts expect the overall Canadian economy will pick up the pace in 2024, after its weak performance in 2023. However, even with this increase in GDP, TD analysts warn that consumer spending may not match economic output. Analysts cited four primary reasons for this slow uptick in consumer spending, along with the overall impact on economic output in 2024 and on interest rate cuts through to the end of 2025.

#1. Borrowing costs are still very high

Borrowing costs will remain much higher than what consumers had access to during the years impacted by restrictions due to the COVID-19 pandemic.

Impact on Canadian homeowners

One of the biggest reasons for slow consumer spending is that many homeowners still face very tight budgets — and this probably won't change that much over the next two years.

As the new TD report explains: mortgage rates will remain higher than rates promoted during the pandemic years; however, home buyers and homeowners need to put current and near-future rates in perspective.

“As we move into 2025, mortgage renewals will be occurring against some of the lowest rates in history," explains the report authors. Today's higher rates are still a significantly lower than the mortgage rates mortgage borrowers were presented in 2020 and 2021.

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#2. Softer labour market

TD analysts expect spending to slow, in part, to a softening labour market. Report authors point out that Canada’s job market is at greater risk of tipping into net losses in the second half of 2024. The unemployment rate has climbed a full percentage point in 12 months, and ongoing labour shortfalls could push the unemployment rate to 6.7% by the end of 2024.

According to TD analysts, a more balanced job market would help keep inflation around the 2% target on a sustainable basis.

#3. Tighter immigration policy

Another factor that will contribute to softer consumer spending — and lower economic growth — is the predicted tightening of Canada's immigration policy towards the end of 2024.

Over the last two quarters, the 3% growth in consumer spending was helped by strong immigration numbers, which helped increase population growth and provide labour to fuel production of goods and services (along with wallets to pay for these goods and services).

#4. US economic strength

According to bank analysts, US economic growth in 2024 is expected to match the economic pace of 2023 — at at 2.4%.

But towards the end of this year, the US economic pace will also start to slow, with a projected growth rate of 1.7% by Q4 2024. This drag on the US economy is due, in part, to the longevity of higher interest rates and the deepening unemployment numbers coupled with less ability to set aside savings.

While Canada's economy is not dependent on the US economic strength, we are deeply impacted by our neighbour's fiscal health.

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Impact on interest rate cuts in Canada

How does a slower than desired growth in the economy impact interest rates in Canada? According to TD analysts, its now anticipated that both the US and the Canadian national banking systems will moderate rate cuts.

TD analysts now forecast a total of eight BoC target rate cuts by the end of 2025 — compared to the the previously predicted 11 BoC target rates cuts during the same time period.

Report authors explain that this adjustment is due to “progress on inflation [being] slower, [and] the economy [being] more resilient." The authors add " we suspect the neutral interest rate is likely a touch higher due to a shift higher in potential economic growth.”

Bottom line

TD Bank analysts predict that inflation, on a year-on year basis, will remain a bit on the high side through 2024, with a mirrored outlook for the US Fed and its decision on whether to cut rates at the end of this year.

— with files from Romana King

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