In a connected world, a global slowdown will hit Canada, too

New inflation and house price data out this week could be a crucial sign of whether the Bank of Canada will give borrowers a break from constantly rising interest rates. But they could also signal troubling economic weakness as the world puts on the brakes.

Borrowers watch for clues that a weakening economy means rate hikes are done

A float plane flies past containers and cranes at the Port of Vancouver, British Columbia, Canada, July 30, 2023. REUTERS/Chris Helgren/File Photo
The Port of Vancouver last month. Trade is crucial to the Canadian economy, and there are signs of a global slowdown — a possible signal central banks can call off interest rate hikes. (Chris Helgren/Reuters)

Could this really be the end of interest rate hikes?

As Canadians wait for Tuesday's latest domestic inflation reading and real estate sales data, a flurry of economic signals at home and around the world may be telling us that the long path of painful increases in interest rates has done its work and come to an end.

A slowdown in demand is just what the Bank of Canada has been hoping for, allowing production in the economy to catch up with consumption, thus putting the brakes on rising prices.

Ending the interest rate sting?

For borrowers who have been watching the rising cost of mortgage renewals and other loans, an end to the sting of higher lending costs could not come too soon.

But an examination of world events — from the impact of a climate crisis to declining trade to fears of a meltdown in the world's second-largest economy — may imply Canadians could get more of a slowdown than they have been bargaining for.

Perhaps the biggest portent for Canadian inflation were the figures released last week from our southern neighbour. While the U.S. inflation number out on Thursday jogged up a touch from the previous month, marking the first rise in the headline consumer price index (CPI) in a year, analysts looking at the numbers more deeply said the inflationary trend was heading down.

As of Friday, an average of estimates by bank economists polled by Bloomberg predicted that Canadian inflation would likely follow a similar path, rising from 2.8 per cent in June to three per cent in July.

WATCH | Canada lost about 6,000 jobs in July, a sign of a slowing economy: 

Canada lost about 6,000 jobs in July, a sign of a slowing economy

7 months ago
Duration 2:24
The latest StatsCan jobs numbers show Canada had about fewer jobs last month, a sign the economy is slowing down, according to at least one economist.

The inflation number that gets most of the attention compares prices this year to those one year ago, but after a surge last autumn, prices of many goods have been coming down.

And a measure of U.S. core inflation — the number with volatile food and fuel removed, which is closely watched by central bankers — fell to 3.1 per cent from what had been five per cent as recently as May.

"The core CPI, in particular, adds to recent data that calls into question whether the central bank will need to raise rates again this year, as most officials had projected in June," the Wall Street Journal reported.

But while stock markets rose on Thursday on the prospect of an end to interest rate hikes, by Friday there were signs that fears for the global economy — notably trouble in the world's second-largest economic powerhouse, China — contributed to concerns among some traders.

September is the cruellest month

U.S. producer prices released on Friday showed company costs rising, which traders also seemed to read as evidence that even an end to interest rate hikes will not lead to rate cuts as central banks try to ward off a new outbreak of rising prices.

As markets head for the volatile month of September, traditionally the cruellest month for stocks, traders seem to look for things to worry about. But a number of economic indicators point to a slowdown in the medium term.

Plastic letters arranged to read "Inflation" are placed on U.S. Dollar banknote in this illustration taken, June 12, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
While last week's U.S. figures showed a rise in inflation, analysts say a sharp fall in core inflation may mean the U.S. central bank won't raise rates this year as many had predicted, taking pressure off Canadian borrowers, too. (Dado Ruvic/Reuters)

"The number shows that we've fallen below 50 on a seasonally adjusted basis — it's at 48.6, which means that we're actually seeing indications of a slowdown," Fraser Johnson, a professor in operations management at Western University's Ivey Business School in London, Ont., and author of the textbook Purchasing and Supply Management, said in a phone conversation last week.

The number Johnson was talking about was the Ivey Purchasing Managers Index, a Canadian economic measure that gets less attention than things like unemployment and inflation. As the director of the group that compiles the index, Johnson said the sudden decline of the data point below 50 is significant.

Like other PMIs around the world, the data is based on a rolling poll of a group of key people across a spectrum of industries and regions who simply say whether their companies are buying more or buying less in any month. In other words, he said, as of the July data, a majority of purchasing managers have given a thumbs down.

Johnson said despite research that shows his 23-year-old PMI has proven itself reliable, only the August reading, expected in early September, will show whether the decline is a blip or a trend. He also points to the strength of the employment component of the index coming in at 54.2, which shows companies are still hiring.

Shrinking global trade is bad for Canada

Johnson said that purchasing by businesses tends to be a leading indicator for the economy. And as David Parkinson reported in the Globe and Mail last week, Canada is far from alone in seeing that indicator decline — demonstrating that manufacturing, and thus trade, may be slowing worldwide.

That matters for Canada, a relatively small economy that depends on trade with its bigger partners. The latest data out last week showed that both imports and exports fell, but exports fell more, leading to the biggest trade deficit in three years.

Canadian exports to the United States declined more that two per cent, but trade with other countries fell even more sharply, down 5.5 per cent.

"Weaker global demand and the fading boost from easing supply shortages took a toll on exports in June, confirming that net trade weighed on second-quarter GDP growth," Olivia Cross, an economist at Capital Economics, told Reuters last week.

Men work at the construction site of an apartment building in Beijing, China, July 29, 2023. REUTERS/Thomas Peter
Workers are shown at the construction site of an apartment building in Beijing on July 29. Inflation in China, the world's second-largest economy, has disappeared, leading to falling prices or deflation. It is one more sign of a struggling economy as construction and manufacturing slow. (Thomas Peter/Reuters)

Economists at the Bank of Montreal insisted that last week's surprise move from rising prices to deflation in China was unlikely to have a strong impact outside that country. But in an article titled "Sputtering Trade Fuels Fears of a Fractured Global Economy," the Wall Street Journal warned that growing trade divisions would have a slowing effect.

There were also several warnings last week of the medium-term economic impact of climate change, as places like Hawaii are too dry and places like Ottawa are too wet. The insurance costs of disasters are rising, and a new study from the journal Management Science shows that failing to address climate change will increase the cost of public borrowing, with Canada one of the most affected.


Don Pittis

Business columnist

Based in Toronto, Don Pittis is a business columnist and senior producer for CBC News. Previously, he was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London.