15 Jul

Bank of Canada lowers overnight rate target to 1/2 per cent


Posted by: Tony Passalacqua

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Total CPI inflation in Canada has been around 1 per cent in recent months, reflecting year-over-year price declines for consumer energy products. Core inflation has been close to 2 per cent, with disinflationary pressures from economic slack being offset by transitory effects of the past depreciation of the Canadian dollar and some sector-specific factors. Setting aside these transitory effects, the Bank judges that the underlying trend in inflation is about 1.5 to 1.7 per cent.

Global growth faltered in early 2015, principally in the United States and China.  Recent indicators suggest a rebound in the U.S. economy in the second half of this year, and growth is expected to be solid through the projection. In contrast, China is slowing amid an ongoing process of rebalancing to a more sustainable growth path. This has pulled down prices of certain commodities that are important to Canada’s exports. Financial conditions in major economies remain very accommodative and continue to provide much-needed support to economic activity. Global growth is expected to strengthen over the second half of 2015, averaging about 3 per cent for the year, and accelerate to around 3 1/2 per cent in 2016 and 2017.

The Bank’s estimate of growth in Canada in 2015 has been marked down considerably from its April projection. The downward revision reflects further downgrades of business investment plans in the energy sector, as well as weaker-than-expected exports of non-energy commodities and non-commodities.  Real GDP is now projected to have contracted modestly in the first half of the year, resulting in higher excess capacity and additional downward pressure on inflation.

The Bank expects growth to resume in the third quarter and begin to exceed potential again in the fourth quarter, led by the non-resource sectors of Canada’s economy. Outside the energy-producing regions, consumer confidence remains high and labour markets continue to improve. This will support consumption, which will also receive a fiscal boost. Recent evidence suggests a pickup in activity and rising capacity pressures among manufacturers, particularly those exporters that are most sensitive to movements in the Canadian dollar. Financial conditions for households and businesses remain very stimulative.

The Bank now projects Canada’s real GDP will grow by just over 1 per cent in 2015 and about 2 1/2 per cent in 2016 and 2017. With this revised growth profile, the output gap is significantly larger than was expected in April, and closes somewhat later. The Bank anticipates that the economy will return to full capacity and inflation to 2 per cent on a sustained basis in the first half of 2017.

The lower outlook for Canadian growth has increased the downside risks to inflation. While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment. Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.

10 Jul

Canadian Job Data Weak As Expected


Posted by: Tony Passalacqua

Economists had expected a weak employment report for June on the heels of the larger-than-expected gain in May. Canadian employment fell by 6,400 last month as the biggest decline in part-time work in more than four years dwarfed gains in full-time positions.

The unemployment rate remained at 6.8 percent for the fifth month in a row. If you convert the Canadian jobless number to its U.S. equivalent, the rate would be 5.8 percent compared to 5.3 percent Stateside–the lowest level in the U.S.since April 2008. 

This report follows on the heels of a consistent stream of weak Canadian data leading some to suggest a recession is in train. I’m not willing to make that call yet, but clearly the economy did not pick up in the second quarter contrary to what the Bank of Canada had expected. 

Canada is underperforming the U.S. by a wide margin, battered by the rout in oil prices. Over the past year, the jobless rate has fallen by 0.8 percentage points in the U.S. compared to only a 0.2 percent drop in Canada. The labour force participation rate in Canada, however, exceeds the rate in the U.S. The American employment rate has fallen to it lowest level since October 1977 owing to a disturbing rise in discouraged workers who have given up looking for a job. 

The Bank of Canada meets next week and is faced with a troubling reality–output has fallen for four consecutive months, business confidence and capital spending plans are down and the trade deficit is at its second-largest level on record. Contrary to the Bank’s expectation, non-oil exports have not offset the decline in oil exports despite the sharp decline in the Canadian dollar. That may well lead Stephen Poloz to cut Canadian overnight rates on July 15 for the second time this year.

He, however, is between the proverbial rock and a hard place. If he does cut rates, he will be harshly criticized for contributing to a further rise in household debt and to feeding a housing bubble in Vancouver and Toronto. If he doesn’t cut rates, he will take heat for his Pollyanna-like assertion that the economy is going to bounce back any time now.

Either way, monetary stimulus at this stage will not boost the sectors or regions in need of help. Unfortunately, monetary policy is the only game in town, however, as fiscal stimulus is off the table both for economic and political reasons. The Harper government is committed to balancing the budget, even in the face of a weakening economy, and the summer recess and October election preclude any fiscal changes probably until next year at the earliest. Nevertheless, public sector employment has risen by just over 2 percent in the past year compared to a 1 percent gain in the private sector. 

We can take some solace in June’s decline in part-time and self-employment–an indication that some of these workers may be shifting to full-time jobs.

Regionally, Quebec was the biggest loser with a job loss of 33,300. Employment rose 15,000 in British Columbia and was little changed in Ontario. Alberta also saw little change in employment last month, having suffered a nearly full percentage point rise in its unemployment rate in the past year. 


Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres