Slow growth could lead to rate cut, experts warn
OTTAWA When Canada’s top economists sit down next month with Finance Minister Bill Morneau to carve out a consensus on the country’s growth outlook, weak consumer prices and disappointing spending levels will likely loom large in those forecasts.
At the moment, those two key indicators are not putting a positive spin on the economy.
Rather, with inflation running at a 10-month low and retail sales taking a surprising tumble, there is speculation interest rates could be the next to fall — maybe not at the Bank of Canada’s policy meeting next month, but perhaps not too far down the road if key indicators don’t improve.
Avery Shenfeld, chief economist at CIBC World Markets, said the Bank of Canada “is still worried about the underlying (growth) trends, particularly for exports.”
“A rate cut would help boost growth, but most of the impact would come by weakening the Canadian dollar further and thereby helping exporters,” said Shenfeld, one of the economists who will provide economic forecasts to Morneau on Oct. 13 in Toronto.
“There really isn’t that much to be positive about for the Canadian economy,” said Paul Ashworth, chief North America economist at Capital Economics.
“Our view for some time has been that the bank would be forced to cut interest rates.”
Canada’s annual inflation rate fell to 1.1 per cent in August, Statistics Canada said Friday, which was the biggest drop since October last year, and followed a 1.3-per-cent yearover-year gain in July. Stripping out the most volatile consumer items, the core pace of inflation eased last month to 1.8 per cent from 2.1 per cent in August. That was the lowest core rate since July 2014.
Both readings were below the central bank’s two-per-cent inflation target.
Retail sales, also released Friday by the federal data agency, declined by 0.1 per cent in July from the previous month — led by a drop in gasoline prices — while forecasters had anticipated a 0.1-per-cent increase.
“That’s a slow motion economy,” said Douglas Porter, chief economist at BMO Capital Markets, who will also provide input to the finance minister’s Fall Economic Update, expected in November.
“We’ve got overall inflation now of one per cent. And we know that in the past year growth has averaged about one per cent. And, lo and behold, long-term interest rates are at one per cent,” Porter said.
“Most people would say that is not a particularly an encouraging story. It’s not a bad story. (But) I think everybody would like to probably see a ‘two’ on every one of those items. I think that would be a more normal world.”
“The Canadian economy slumped in late 2014 and in the first half of 2015, and obviously that drove up import prices — higher food prices was a big part of that. But more recently, of course, we’ve seen the dollar stabilize over the last 12 months. So, that earlier imported inflationary pressure is fading very, very rapidly,” Ashworth said.