In the troubled world of the federal Liberal Party, the interest rate cuts made by the Bank of Canada this week are something to brag about.
Shortly after the decision, the Liberal Party posted on X that the rate cut was evidence of a “strong economy,” while Finance Minister Chrystia Freeland posted that the bank’s action showed the government’s “economic plan is working.”
These optimistic posts are misleading: banks feel they can cut interest rates not because the economy is strong, but because it is weak. (Incidentally, chronic government deficits make banks’ jobs harder, not easier.)
The economy’s headroom is expanding, as evidenced by rising unemployment, which hit 6.4% in June, the highest level since January 2022. So it’s not all that surprising that the central bank cut its economic growth forecasts for this year and next, despite cutting its benchmark interest rate by a quarter of a percentage point on Wednesday.
Falling interest rates are a sign of economic slowdown, not boom. To be fair to the Liberals, this is true of all of the central bank’s campaigns to keep inflation in check. What’s different this time for Canada is the extent to which the decline in economic growth is being fueled by population growth.
While the Bank of Canada lowered its economic outlook, it raised its population growth figure. In April, it projected in its Monetary Policy Report that the population of Canadians aged 15 and over will grow 3.1% this year, but grow by just 1% on average in 2025 and 2026. The bank said its projection was based in part on a “sharp decline” in the net inflow of non-permanent residents to Canada.
In its July report released this week, the bank predicted that the decline in non-permanent residents will take longer to materialize. As a result, the bank projects the population of Canadians aged 15 and over to grow by 3.3 per cent this year and 1.7 per cent in 2025 and 2026.
Population growth is supporting the increased consumption that is fueling economic growth this year. The bank notes that the average household is actually spending less. The only reason overall consumption is increasing is because the number of households has increased. Without the increased consumption from population growth, Canada’s GDP growth this year would have been below 1%.
Population growth is masking underlying weaknesses in the Canadian economy, and the economic expansion is accompanied by traditional indicators of recession. The Royal Bank of Canada addressed this apparent contradiction in a recent report titled “Canada’s Economy May Not Be in Recession, But It Feels Like One,” in which bank economists noted that rising unemployment and declining GDP per capita mirror patterns of past recessions.
So who are being hit hardest? Young workers. The unemployment rate for Canadians aged 20 to 24 soared to 11.1 per cent in June, the highest level since June 2020, when the economy was still recovering from the onset of the pandemic.
This is what the Liberals call a “strong economy,” a situation the finance minister says is evidence of the success of the government’s economic plans.
Now, is it any wonder that the Liberals prefer to talk about growing overall economic size rather than minor details like rising unemployment, falling living standards for Canadians, and slowing productivity growth? After all, there aren’t many options to brag about.
But the Trudeau government can boast at its peril: Even if price increases are slowing, Canadians are painfully aware that a spike in inflation will erode their purchasing power.
Interest rates are falling, which is no doubt good news for people already struggling with rising debt costs, but many households are just starting to refinance mortgages they took out when rates were at their lowest, so rising interest rates will be less of a cheer for them.
And young Canadians, the demographic the Liberals were reportedly aiming to win back from the Conservatives in the last budget, might be forgiven for refusing to high-five the government while searching for a job.
The reality of Canada’s economic problems, and the pain felt by many Canadian families, is abundantly clear. No amount of self-serving reporting from the Liberal Party is going to change that.
