Playing into this policy divergence, Phipps explains, is a Canadian per-capita GDP rate that has declined for the past six quarters. Real GDP, he says, would need to grow at an average of 1.7 per cent per year for the next ten years to get Canada to its average 40-year trend. Headline GDP, too, is likely to face headwinds as curbs to immigration come into effect.
Productivity, too, has been a problem since 2019 with rates effectively flat. The BoC, Phipps says, is aware of the structural reasons for Canada’s poor productivity growth and may be pushing faster towards a neutral rate in the hopes of restimulating productivity growth. They also see CPI and core CPI numbers that are at or even occasionally below their target, offering them more cover to cut.
The statement following the cut made explicit mention of the threat of US tariffs, the proposed GST holiday, and the deteriorating value of the Canadian dollar as well. On the mention of tariffs, Phipps believes it was prudent to acknowledge the threat but notes that BoC Governor Tiff Macklem has explicitly stated that threats of tariffs will not dictate policy. As of now bond markets have not priced in the reality of a 25 per cent tariff, acknowledging the likelihood that Trump’s social media statement is a bargaining chip at worst and pure bluster at best.
While there was mention of weakness in the Canadian dollar, Phipps called attention to earlier statements made by Macklem saying there is still room for further policy divergence from the US. Phipps again thinks it was prudent to make mention of the currency without going into too much detail in the statement. More noise might have implied a level of hawkishness that the BoC does not currently feel. Moreover, given how bearish futures markets for CAD currently are, there is not much risk of any knee-jerk shifts further to the downside.
Key to his view of policy divergence will also be what the US federal reserve does next week. Phipps expects that the final FOMC meeting of 2024 will result in a 0.25 per cent cut, greeted as something of a non-event. The US remains in a ‘goldilocks’ position of modest GDP growth, and relatively controlled CPI — albeit slightly elevated.
