Economists believe Canada can manage a smooth economic slowdown without needing major interest rate reductions, according to a Getty Images photo.
Economists predict that Canada can achieve a soft landing for its economy without the need for drastic interest rate cuts. According to a survey by Bloomberg, the Bank of Canada will gradually reduce interest rates in smaller steps over the next few decisions. These cuts are expected to bring the overnight rate from the current 4.25% down to 3% by April 2025.
This approach contrasts with earlier expectations for sharper cuts, signalling that the central bank may not need to resort to half-point reductions to ease the economy. The survey, which included 28 economists, was conducted between September 20 and September 25. They believe this gradual easing will allow the Bank of Canada to control inflation while preventing a sharp economic downturn after one of the most aggressive interest rate hikes in its history.
Economic growth, on average, is forecast to hover around 2% annually during the final three quarters of 2025. This would provide some relief to the central bank as it looks to avoid recession, helping to stabilize the economy. The economists also predict that inflation will finally reach the Bank of Canada’s 2% target by the second quarter of 2025, much earlier than previously expected.
However, challenges remain for Canada's economy. Signs of economic weakening are already visible, with slower consumer spending growth despite the country’s fast-growing population. Canada’s jobless rate climbed to 6.6% in August 2024, marking an increase of 1.6 percentage points since the start of the year. Youth and newcomer unemployment rates are also considerably higher, further adding pressure to the labour market.
The economists surveyed have revised their forecasts for unemployment, now expecting it to peak at 6.8% towards the end of 2024 and early 2025. This reflects concerns over the country’s job market and the struggles faced by younger workers and recent immigrants in securing employment.
Adding to the economic concerns, recent data from Statistics Canada show that growth in the third quarter of 2024 is tracking at around 1%, below economists’ and the central bank’s earlier expectations. The Bank of Canada had hoped for stronger economic performance to help combat inflation, but current growth trends suggest a more subdued outlook.
Despite these challenges, Bank of Canada Governor Tiff Macklem remains optimistic about the future, recently stating his desire for economic growth to exceed 2% to support the country’s inflation targets. Markets, however, remain divided on the future path of interest rates. Traders are betting on the possibility of a 50 basis-point cut at the central bank’s next meeting, though the survey’s economists lean towards smaller cuts.
Overall, economists are confident that the Bank of Canada’s plan for gradual rate reductions will help guide the economy through a soft landing, without triggering a recession. But with unemployment on the rise and economic growth underperforming, the path ahead remains uncertain.
