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Economics

Canada's slow economy will start to rebound later this year: economists

By Daniel Johnson
Right now higher rates are having a bigger psychological impact than inflation itself: TD’s Caranci Beata Caranci, chief economist at TD Bank, joins BNN Bloomberg and says that the start of rate cuts by the Bank of Canada would do more to lift Canadians' perceptions of the economy than the inflation metrics themselves.

A new report from RBC Economics says that the slowdown in Canada’s economy is not yet over, but will likely start to rebound later this year.

In a note Tuesday, economists at RBC highlighted that Canada’s economy is underperforming relative to its peers with gross domestic product (GDP) not growing at a pace to keep up with population gains. However, the report said Canada’s economic slowdown has not been as “pronounced as featured” following the Bank of Canada’s aggressive tightening campaign that began in 2022.

“Still, the ratio of household debt payments to disposable incomes is at record levels and will continue to rise as mortgages get renewed at higher interest rates. Household delinquency rates have been edging higher and business bankruptcies have been rising sharply for the first time in decades,” the report said.

The economists also noted that housing affordability is weighing on consumer purchasing power.

“Home prices are still high and rent prices are rising sharply even though broader inflation pressures have eased,” the economists said.

Interest rate cuts 

The Bank of Canada will likely begin lowering interest rates “gradually” in June, the report highlighted, which should improve the backdrop for the Canadian economy throughout the second half of the year.

According to the report, easing inflationary pressures should allow the central bank to begin easing monetary policy. The economist noted that consumers will still face higher prices when compared to 2019 levels, but that the rate of future increases will be relatively small.

“Consumers will drive the bulk of the pick-up in the back half of the year. Services sector spending will provide most of the lift as consumers start to reprioritize discretionary spending as inflationary pressures around essentials abate. Population growth also continues to add to consumer demand,” the report said.

However, despite potentially improving economic conditions in the back half of the year, the economists said “the rise will be slow” as many households “remain cash-strapped.”