- Economic Shifts: U.S. Slowdown and Canadian Housing Revival
The U.S. economy is beginning to show signs of a slowdown, aligning with expectations that the Federal Reserve may soon implement interest rate cuts. This deceleration is part of a broader global trend, where economic growth is synchronizing across countries, leading to increased market volatility and fluctuating currency values. After a strong start in 2024, the U.S. dollar has slightly declined but may regain strength by the end of the year due to geopolitical factors (Caranci, 2024). Meanwhile, markets are heavily betting on significant rate cuts by the Federal Reserve, with some expecting reductions of up to 100 basis points by year-end (Caranci, 2024).
In Canada, the economy faces a complex mix of challenges and opportunities, particularly in its housing market. Lower mortgage rates and increased demand, especially among first-time homebuyers who are benefiting from parental downpayment gifts, are driving a housing revival expected to boost economic growth through 2025. However, this recovery comes with caution, as the Bank of Canada (BoC) balances the need to stimulate the economy with the risks associated with elevated household debt and a hot housing market (McMahon, 2024). The BoC's careful approach aims to support growth while maintaining financial stability.
- Canada’s Rail Shutdown: A Looming Economic Threat
The shutdown of 80% of Canada’s rail network, caused by a lockout of unionized workers at Canadian National Railway Co. and Canadian Pacific Kansas City Ltd., poses a significant threat to the country's economy. This disruption has halted the daily flow of goods worth C$1 billion ($740 million), and economists warn that a two-week lockout could shave up to C$4.8 billion from Canada’s nominal GDP. The broader economic consequences could be severe, with potential impacts including deferred sales, growing inventories, goods shortages, and declining business and consumer confidence. Even a one-week shutdown could reduce monthly GDP growth by 0.1 percentage points, underscoring the critical nature of the situation (Hertzberg & Zhao-Murray, 2024).
Given these substantial risks, many analysts anticipate swift government intervention to resolve the issue. Possible actions include invoking binding arbitration or passing back-to-work legislation to prevent prolonged disruptions. While the rail strike might cause temporary price increases for certain goods, such as fresh and frozen foods, its overall impact on inflation is expected to be minimal. Elevated inventory levels relative to demand are likely to cushion any significant inflationary pressures, further emphasizing the need for a quick resolution to avoid broader economic fallout (Hertzberg & Zhao-Murray, 2024).
- Canadian Economic Landscape Resilience Amid Stagnant Productivity
Despite stagnant total factor productivity (TFP) since around the year 2000, Canada has experienced notable growth in net disposable income, leading to improved living standards. This paradox illustrates that while productivity has not increased, Canadians have become wealthier, partly due to significant improvements in the country’s terms of trade. Since the early 2000s, these terms have appreciated by over 20%, allowing Canadians to purchase more with the same level of production, as import prices have decreased relative to export prices (Pujolas, 2024).
Traditional GDP metrics often struggle to capture this dynamic, underestimating the true economic well-being of Canadians. The Real Purchasing Index, which accounts for the benefits of improved terms of trade, reveals that Canadians can buy eight percent more than what real GDP growth figures alone would suggest. This highlights a stronger economic resilience and a higher standard of living than traditional productivity measures imply (Pujolas, 2024).
Looking ahead, Canada’s economic outlook remains positive, driven by demographic growth, policy adaptability, and ongoing efforts to diversify beyond its reliance on natural resources and the financial sector. The Bank of Canada’s (BoC) careful approach to monetary policy, including recent rate cuts, reflects a commitment to supporting growth while managing risks such as high household debt. Addressing challenges like stagnant productivity and the need for continued diversification into technology and renewable energy will be crucial for sustaining long-term growth (McMahon, 2024).
Financial Tip of the Month: Maximize Tax-Advantaged Accounts
August is a great time to assess your contributions to tax-advantaged accounts like TFSA, FHSA, and RRSP. If you haven’t maxed out or are close to maxing out your contributions yet, consider increasing your monthly contributions to take full advantage of the tax benefits these accounts offer.
At Alpen Investment Advisors, your trusted North Vancouver iA Investia team, we are committed to keeping our valued clients informed. We trust that you have found this market recap informative and insightful. Please do not hesitate to reach out to your dedicated financial advisor, jonathan@alpenia.ca for any questions about your portfolio or to help navigate the process of growing and preserving your wealth.
References:
Caranci, B. (2024, August 22). The only constant is change. TD Canada Trust. https://economics.td.com/ca-bc-client-presentation
Hertzberg, E., & Zhao-Murray, J. (2024, August 22). Rail shutdown’s hit to Canada seen rising if outage lasts a week. Financial Post. https://financialpost.com/pmn/business-pmn/rail-shutdowns-hit-to-canada-seen-rising-if-outage-lasts-a-week
McMahon, S. (2024, August 22). Unpacking the canadian economy: Growth, policy shifts, and future prospects. Macrobond. https://www.macrobond.com/insights/blogs/unpacking-the-canadian-economy-growth-policy-shifts-and-future-prospects
Pujolas, P. S. (2024, August 23). The Canadian economy is not as doomed as some people think. Canada’s National Observer. https://www.nationalobserver.com/2024/08/23/analysis/canadian-economy-not-doomed-analysis
