Morning Market Brief September 26, 2024

Forecast for Canada’s growth revised higher

A new report from S&P Global (S&P) has upwardly revised its forecast for economic growth in Canada. S&P believes looser monetary policy might help boost residential and non-residential investment, contributing to a faster pace of economic growth. The ratings agency expects consumer spending to be relatively muted as borrowing costs remain high compared to levels seen just a few years ago.

• S&P now expects Canada’s economy to grow by 1.2% this year. Its previous report forecasted growth of 1.1%. Economic growth could reach 2.0% in 2025, according to S&P.
• Residential and non-residential investment should fuel the upwardly revised growth expectations this year. The residential real estate market has pulled back in response to weak demand amid high borrowing costs and lofty home prices. Ongoing rate cuts from the Bank of Canada (BoC) will bring down mortgage costs, which could have more purchasers entering the market.
• On the other hand, S&P believes it might take some time for consumer spending to fully recover. Labour market weakness is likely to persist, which will weigh on households’ spending power. Additionally, borrowing costs are still relatively high, despite coming down, which will continue to weigh on Canadians.
• The ratings agency expects core inflation to drop to 2.0% by the middle of 2025. Headline inflation reached 2.0% in August. According to S&P, the BoC’s benchmark overnight interest rate will fall to 2.50% by the end of next year.

Canada’s economy is expected to expand this year and next, but at a relatively slow pace. While lower interest rates could help stimulate demand and a pickup in economic activity, interest-rate cuts do take some time to filter through the economy and have their desired impact. It is not immediate. The BoC will likely need to keep cutting rates over the remainder of this year and over 2025.

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