The Bank of Canada is easing its policy stance as the economy shows signs of recovery, and after lowering the interest rate to 4.75% in June, another cut is expected this fall.
According to Deloitte’s latest summer forecast, the Bank of Canada is likely to announce another rate cut in 2024.
“While interest rates were hiked at a rapid clip from March 2022 to July 2023, our forecast assumes the pace of cuts will be much more gradual,” reads the report. “After a rate cut in June, we see the Bank holding off until September for a second cut and then moving again in December.”
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However, ongoing weak investment and productive performances continue to “pose risks” to the country’s long-term economic outlook.
Last year saw labour shortages, while this year saw a shortage of jobs as the population grew.
Deloitte predicts that the unemployment rate will remain high before dropping in 2025. And as inflation continues to ease, Canadians can expect to see slower wage growth in 2024 and 2025.
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As for business investments, 2025 looks much better than 2024, and Deloitte attributes this to the construction of several electric vehicle plants. Despite an increase in insolvencies, “business confidence improved” in 2024 after a steady two-year decline.
When it comes to economic recovery by province, all eyes are on Alberta, which is currently benefiting from a population surge as Canadians search for a lower cost of living. In addition, the TransMountain pipeline expansion means that Alberta’s economy will continue to grow above the national average. Deloitte predicts that its GDP will gain 1.5% this year and grow by 3.3% in 2024.
However, assuming that inflation in Canada continues to drop (and return to the target rate of 2% by the second quarter of next year), rate cuts are expected to continue until 2025. But there’s a possibility that the inflation rate will remain above the target rate because of Canada’s “chronically weak productivity and significant increases in unit labour.”
“Turning around productivity performance is not only key to ensuring a return to 2% inflation on a sustainable basis but also integral to Canada’s long-term growth prospects,” reads the report.