More tough sledding ahead?

At the start of the fourth quarter of 2023, we were concerned about a weakening outlook for Canada in spite of some pleasant economic surprises earlier in the year. Subsequent data has largely reaffirmed those worries, and it seems likely we will encounter further weakness ahead.

With inflation and inflation expectations easing, the Bank of Canada should have room to lower its interest rate target in 2024. While that would help soften the impact of a business cycle downturn, Canada’s economy could still face tough sledding ahead, and it’s not yet clear that the war on inflation is truly over.

The last quarter of 2023 treated investors to yet another series of global interest rate shocks. This time, downside inflation surprises and a shift in monetary policy rhetoric—particularly by the U.S. Federal Reserve (Fed)—convinced market participants that central banks would soon start cutting their targets for short-term interest rates. The Bank of Canada (BOC) was not immune to this dynamic. As shown in Exhibit 1 (view graphs in the full commentary), the BOC is now expected to cut its policy rate five times (in 0.25% increments) in the year ahead, which would bring its policy rate to 3.8% by December 2024.

As discussed in our most recent Quarterly Economic Outlook and SEI Forward, SEI is highly skeptical of the optimism that’s been priced into rates markets for the Fed. Should that skepticism apply to the BOC as well? Let’s examine the evidence. The struggles in Canada’s housing market are well known. After some surprising improvement earlier in 2023, both sales volumes and prices have resumed their downward trends since the middle of the year. According to a range of surveys, the outlook in Canada’s manufacturing sector actually worsened recently after a string of already-negative reports (Exhibit 2). This is consistent with global manufacturing in general, as consumers have meaningfully shifted their activities from stay-at-home purchases early in the COVID era to services and experiences such as dining out and travel.

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SEI Investments Canada Company, a wholly owned subsidiary of SEI Investments Company, is the Manager of the SEI Funds in Canada. 

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