In the upside-down world of the federal Liberals, the Bank of Canada’s cut in interest rates this week is cause for bragging.
Shortly after that decision, the Liberal Party posted on X that the cut was proof of a “strong economy,” while Finance Minister Chrystia Freeland posted that the bank’s move shows that the government’s “economic plan is working.”
Those rose-coloured posts are misleading: The reason that the bank feels able to cut rates is not because the economy is strong, but because it is weak. (And for the record, the government’s persistent deficits have made the bank’s job harder, not easier.)
Slack in the economy is increasing, as evidenced by the rising unemployment rate, which hit 6.4 per cent in June – its highest level since January, 2022. So it was not terribly surprising that the bank pared its outlook for economic growth this year and next, even as it cut its benchmark interest rate by a quarter-point on Wednesday.
That falling interest rate is a sign of a chilling economy, not a thriving one. To be fair to the Liberals, that’s true of any anti-inflation campaign by a central bank. What’s different this time, for Canada, is the degree to which lower economic growth is being propped up by a surging population.
Even as the bank reduced its outlook for the economy, it boosted its numbers for population growth. In April, the bank forecast in its Monetary Policy Report that the population of Canadians aged 15 and older would jump by 3.1 per cent this year, but then increase by just 1 per cent on average in 2025 and 2026. The bank said that its projection depended in part on a “sharp decrease” in the net inflows of non-permanent residents into the country.
In its July report issued this week, the bank predicts that the decrease in non-permanent residents will take longer to materialize. As a result, the bank is now forecasting that the population of Canadians 15 and older will rise by 3.3 per cent this year, and 1.7 per cent in 2025 and 2026.
The population surge underpins an increase in consumption that is boosting economic growth this year. The bank notes that average household consumption is actually declining. The only reason for the increase in overall consumption is that there are more households. Without that population-fuelled rise in consumption, Canada’s projected GDP growth for this year would have slipped below 1 per cent.
Population growth is disguising the underlying weakness of the Canadian economy, with economic expansion accompanied by the traditional benchmarks of a recession. Royal Bank of Canada addressed this apparent paradox in a recent report titled “Canada’s economy might not be in recession but it feels like one.” In it, the bank’s economists note that the rise in unemployment, and the decline in per-capita GDP, mirror the patterns of recessions past.
And who has been hit hardest? Younger workers. Unemployment among Canadians aged 20 to 24 soared to 11.1 per cent in June, the highest level since June, 2020, when the economy was still reeling from the onset of the pandemic.
That is what the Liberal Party calls a “strong economy.” That is the situation that the Finance Minister says is evidence of the success of the government’s economic plan.
Now, it’s no mystery why the Liberals would prefer to talk about the growth in the overall size of the economy, rather than such trifles as rising job losses, the erosion of Canadians’ standard of living or sagging productivity growth. There aren’t a lot of options on the bragging menu, after all.
But the Trudeau government boasts at its peril. Canadians are all too aware of the decline in their buying power from the surge in inflation, even if the rate of price increases is moderating.
Interest rates are falling, good news to be sure for those who were already hit by higher debt costs. But many households are only now starting to roll over mortgages issued when rates were at rock-bottom levels. They are unlikely to celebrate their rates rising.
And younger Canadians – whom the Liberals were supposedly aiming to win back from the Conservatives in their last budget – could be forgiven for declining to high-five the government as they hunt for a job.
The reality of Canada’s economic challenges, and the pain felt by many Canadian households, is plain enough. No amount of self-serving Liberal spin will change that.