Navigating uncertainty, at home and abroad

SEI has been cautioning investors that Canada’s economy could be in for some tough sledding. Although growth hasn’t been gangbusters, recession fears have so far proven unfounded. While both business and consumer sentiment remain depressed, neither has fed into actual economic behaviour to a degree sufficient to cause recession. We’ve also pointed out that, for a smaller, open economy such as Canada’s, the domestic outlook often depends heavily on what’s happening outside its borders. This is an observation that recent Bank of Canada research has confirmed in some interesting ways, and we’ll take a brief look at some relevant data and research for investors.

Perhaps the most noteworthy news of the second quarter was the Bank of Canada’s (BoC) decision to cut its target interest rate by 0.25% to an annualized rate of 4.75%. It was the first BoC rate cut since 2020, and the first among G7 central banks in this cycle. However, as has proven to be the case for multiple central banks, monetary policy easing has fallen far short of what markets expected coming into this year. The COVID and post-COVID eras have been challenging for central bankers. As higher inflation began to take hold a few years ago, we developed a tongue-in-cheek “central banker’s misery index” to illustrate just how challenging those conditions were.¹ The misery index for the BoC is shown in Exhibit 1 (download the PDF for exhibits). While inflation has certainly improved over the last two years, the pressures faced by BoC Governor Tiff Macklem and his colleagues are still above historical norms.

¹ The traditional “misery index” was created by economist Arthur Okun. It added the unemployment and inflation rates to assess how consumers were faring economically. For the central banker’s misery index, we subtract the unemployment rate from the inflation rate, using the (sometimes controversial) rule of thumb that tight labour markets tend to foster higher inflation. 

² “Carolyn Rogers: Time to break the glass - fixing Canada's productivity problem,” remarks to Halifax Partnership, Nova Scotia, 26 March 2024, https://www.bis.org/review/r240326e.htm. 

³ https://www.seic.com/en-ca/settling-new-normal. 

⁴ https://www.bankofcanada.ca/multimedia/press-conference-policy-rate-announcement-june-2024. 

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