OTTAWA, Aug 16: Canada’s economy has shifted into lower gear, likely forcing the central bank to cut interest rates later this year or in early 2007, depending on the severity of an expected slowdown in the US economy.
Since the Bank of Canada ended a nine-month rate-hiking campaign in May, a string of economic indicators has pointed to sharply lower growth in the second quarter compared with the first, prompting economists to herald the start of a downturn in the business cycle.
“We have peaked, we are definitely turning the corner.
This is the end of the cycle,” said Benjamin Tal, senior economist at CIBC World Markets in Toronto. “In Canada, we believe the next move will be to cut interest rates, not raise them.” Economists agree that weaker trade, housing and retail data signal a slowing of second-quarter economic growth to about two per cent or less, down from 3.8 per cent in the first three months of this year. That is considerably lower than the Bank of Canada’s 3.1 per cent growth forecast for the quarter.
Still, Canada is pegged to outperform the United States, where recent economic indicators have suggested a downshift in the economy, led by a cooling housing market.
The US Federal Reserve has also moved to the sidelines on interest rates, but inflation appears to be a bigger threat in the United States than in Canada.
The fortunes of the US economy over the next few months will help determine whether Canada has a soft landing, as is expected. Economists say that if the US housing market, for example, suffers a messy collapse and drags down the economy, then Canada could sink with it.
“We could see maybe a percentage point or more taken off Canada’s growth rate, more than enough to drop it below the potential rate of growth, more than enough to get the unemployment rate rising again,” said Carl Weinberg, chief economist at High Frequency Economics.
