Financial market turmoil could mean lower rates but higher unemployment
UNSPLASH: Tim Schmidbauer
Accelerated rate cuts may help consumers, but they would probably also mean rising unemployment.
Turmoil in financial markets dominated headlines earlier this week and rattled investor confidence in the ability of global economies to emerge from the recent central bank hiking cycle without too many scars. That belief — that inflation can be conquered without too much damage to economic activity — has underpinned the rally in global markets all year.
However, the weakening U.S. economic outlook is raising worries that interest rates have been too high for too long. Many observers now say the U.S. is heading into recession.
What does this all mean for Canada?
For starters, it’s raising expectations the Bank of Canada will accelerate and deepen its own rate-cutting cycle. The Canadian central bank has already lowered its policy interest rate by half a percentage point and is now seen moving more aggressively in the coming months.
Economists and financial markets are betting on another 1.5 percentage points of cuts by this time next year. This would take the policy rate down to about what the central bank considers its neutral rate — which neither stimulates nor acts as a drag on the economy.
The bad news is that accelerated rate cuts would probably reflect a weakening outlook for the U.S. and global economies — which is unambiguously bad for Canada. Such an outlook would not only curb demand for our exports — which have been the biggest driver of growth in Canada in the post-pandemic recovery — but also undermine investment in the resource sector as corporate revenue shrinks. We’ve already seen oil prices come off sharply in recent weeks.
The bottom line: we’ll be trading lower interest rates for higher unemployment and weaker growth, at least for a bit.
