Gloomy surveys suggest Bank of Canada left rate cuts too late

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A rather gloomy outlook from the Bank of Canada‘s business and consumer surveys yesterday had some economists questioning whether the central bank might have waited too long to pull the trigger on interest rate cuts.

The surveys taken in April and May signalled weak economic growth, a slowing job market and a diminishing threat of inflation. 

“All that raises the prospect that the bank left it a little late to begin cutting interest rates and increases the chance of the bank cutting again next week,” said Stephen Brown, deputy chief North American economist at Capital Economics.

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The Bank of Canada made its first cut in four years last month, reducing its benchmark interest rate from 5 to 4.75 per cent. After Monday’s surveys, markets are betting on a 78 per cent chance of another cut at its next meeting on July 24.

The surveys sketch a picture of a weakening economy and strained consumers.

Businesses reported that sales growth over the past 12 months has been below average and is not expected to increase, with discretionary spending particularly weak.

“One thing we’ve repeated often as rates began to rise and mortgages began to reset higher was that Canadians will pay their mortgage first, but likely cut back on those discretionary items — there’s even more evidence of that here,” said Robert Kavcic, senior economist at BMO Capital Markets.

More households expect their financial situation to deteriorate in the next year, with the possibility of losing their job or failing to make a debt payment also rising.

“Overall, the survey shows that consumers remain under stress, with further interest rate cuts required in order to prop up demand,” said Katherine Judge, an economist with CIBC Capital Markets.

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Slack in the labour market has increased. Hiring intentions sank to the low end of the historical scale and reported labour shortages fell to an almost 15-year low, said Kavcic.

And businesses are pulling back on their investment spending. “Weak demand, elevated interest rates, uncertainty about the business environment and the high cost of machinery and equipment were cited as discouraging investment,” said the Bank of Canada survey.

All in all, a pessimistic picture.

“We’ll just remind viewers that this survey was screaming for rate hikes in advance of the tightening campaign that ultimately started too late. Is the same thing happening now, but in the opposite direction? It seems so…,” said Kavcic.

Stayed tuned for the next piece in the interest rate puzzle — inflation data out today.

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Getting a job in the current economic climate is getting tougher, but it’s especially tough for new immigrants, recent data suggests.

For newcomers, the unemployment rate has risen 5.8 percentage points to 12.7 per cent since 2022, an increase on par with the global financial crisis in 2008, said National Bank of Canada economists.

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And they don’t see the situation improving soon.

Today’s chart by National Bank shows job vacancy rates in the sectors where new immigrants tend to work have fallen from 6.6 per cent in 2022 to just 3.2 per cent in April, the lowest since 2017. Vacancies in other sectors remain above pre-pandemic levels.

“According to Statistics Canada’s population clock, demographic growth remained outsized in Q2,” said National economists Matthieu Arseneau and Alexandra Ducharme. “Such strength, if it were to continue, makes us concerned about the economic conditions that await newcomers in the coming months.”

• Today’s Data: Canada consumer price index for June, housing starts, United States retail sales
• Earnings: Bank of America Corp, Morgan Stanley, Charles Schwab Corp, UnitedHealth Group Inc.

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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