Economic Insight: Treading Cautiously

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John Fanjoy serves as an Economic Analyst at Scotiabank. Photo John Fanjoy

Canada’s economy continues to grow, but interest rate cuts are yet to come.

The Canadian economy has continued to grow faster than was initially expected back at the beginning of 2024, and the Bank of Canada (BoC) has said it has started to see data that could indicate support for cutting interest rates, both of which are welcome developments though they face uncertainty in the near term.

The Bank has said there could be rate cuts as early as its next policy rate meeting in June, but our opinion at Scotiabank is that given upside risks to inflation, we believe it won’t start rate cuts until the third quarter of 2024.

We continue to see wage gains combined with low productivity growth in Canada, and a rise in oil and gas prices since the end of last year, which are some contributing factors to inflation that remains sticky and slow returning to the Bank’s target of 2% inflation.

Expect interest rates to drop in the third quarter

As of April 2024, the BoC’s policy rate stands at 5.0%. Our forecast is, that when rates start to drop in the third quarter, the overnight rate will be 4.25% by the end of 2024. The BoC began hiking its policy rate more than two years ago in early 2022, and even when it does start to ease monetary policy, we expect the cuts will not be of the same size, or come at the same frequency, as the way up.

Caution continues south of the border

In the U.S., the Federal Reserve is also being cautious. Its policy rate is 5.5%, and while that country’s economy continues to expand, its growth in the first quarter of 2024 has eased from the strong pace in the second half of 2023. Productivity growth—output per hour worked—is stronger in the U.S. than it is in Canada which helps drive economic activity with less upward pressure on prices, but inflation is also sticky south of the border, and that is pushing back expectations for the Federal Reserve to ease its policy rate. The difference in policy rates and expectations are also contributing factors to the strength of the U.S. dollar relative to our Canadian dollar.

Auto sales may slow but should still outpace 2023

In Canada, auto sales have continued to increase in seasonally adjusted terms through the beginning of the first quarter, with an average of 1.86 million vehicles at an annualized rate. That’s an increase over the 1.68 million vehicles sold in Canada last year, but as interest rates and the general cost of living continue to weigh on consumer spending, vehicle sales growth is likely to slow over the next couple of quarters. Even so, our forecast is that annual sales will increase to 1.75 million vehicles in 2024.

ZEV demand

Last year’s growth in automotive sales included zero-emission vehicles (ZEV), battery-electric and plug-in hybrid vehicles (PHEV), accounting for 10.8% of vehicle registrations, but will have to increase further to meet the first interim sales target of 20% by 2026 on the path to 100% ZEV sales by 2035. Among provinces where data is available, British Columbia has already met the first interim target throughout the calendar year 2023.

Quebec has also reached 20% in recent quarters but not yet for an annual figure. Ontario’s sales volume of ZEVs was higher than B.C.’s, but that is due to the sheer market size; as a percentage of sales, ZEVs were less than 10%. There is still quite a bit of road left for Canada to meet the interim sales targets for these vehicles, and we’ll be watching that as well as overall vehicle sales for 2024.



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