Oh no, Canadians will not deny their pleasure with the drop in interest rates which finally gives some fresh air to their budget. But the Bank of Canada’s announcement hides a truth that hurts their wallets even more, even if everyone ignores it.
All the better if inflation returned to a level that was easier to swallow, which made it possible to reduce the key rate from 5% to 4.75%. And that’s just the beginning. Economists expect it to fall to around 4% by the end of 2024.
Many homeowners will gasp. So does the Office of the Superintendent of Financial Institutions (OSFI). He, who has the mandate to monitor the risks facing the Canadian financial industry, warned in May that a mortgage renewal shock awaits the country.
You should know that three-quarters (76%) of mortgage loans in Canada will be renewed by the end of 2026. Homeowners will then find themselves with higher payments, particularly those who took out their loan when interest rates were significantly lower, between 2020 and 20221.
This is why OSFI expects an increase in the number of delinquent or defaulted loans.
In this context, any rate cut is therefore very welcome. To give you an idea, a reduction of 100 basis points (1 percentage point) would lower payments by almost $3,000 per year on a $400,000 mortgage.
Rejoicing! Yes, but there is another side to the coin.
If our central bank is the first of the G7 countries to reduce its key rate, it is because our economy lacks energy, especially when we compare it to that of the United States which is running at full speed.
If it were not for the unsustainable increase in population due to immigration, Canada would have been in recession for almost two years.
In fact, when we look at real gross domestic product (GDP) per capita, we realize that Canada has been at a standstill since 2014. In other words, the last 10 years have been a lost decade in terms of economic growth.
This sad observation has a direct effect on our standard of living. If Canada were at the same level as its American neighbor, each of us would have the equivalent of $20,000 more per year, according to calculations by the RBC economic team2.
Why this big gap? Whose fault is it ? Canada’s chronic lack of productivity which has worsened since the pandemic.
Productivity may seem like a vague economic concept. But it is simply the value that we manage to produce for each hour worked. It is the basis of a healthy economy that allows us to finance public services and offer wage increases to workers.
However, the drop in interest rates in Canada could harm our productivity even more, to the extent that the United States could wait until the end of the year before also lowering their rates, since their economy is feeling overheating again.
This divergence in monetary policy risks causing our loonie to lose altitude, which several economists see falling from 73 US cents to 70 US cents… or even below this psychological threshold.
The weakness of our currency will drive up the price of all imported products, including the machinery that businesses need to optimize their processes and which often comes from abroad.
It is therefore urgent to find ways to increase our productivity. “There is danger ahead,” warned the number two of the Bank of Canada this spring3.
In this regard, we must welcome two recent initiatives from the Coalition Avenir Québec (CAQ) which will make it possible to break harmful corporatism.
First, the reform of the construction industry led by Minister Jean Boulet will bring efficiency gains by breaking down unnecessary silos between trades.
And then, the reform of the Professional Code unveiled this week by Minister Sonia LeBel will improve health services, by giving more latitude to certain professionals such as pharmacists or mental health experts. It will also allow professionals from outside Quebec (engineers, doctors, etc.) to more easily obtain a restricted permit to practice with us.
But there are many other solutions to improve productivity, a crucial issue for Canada, as we have already argued4.5.
Examples ?
• Break down trade barriers between provinces that cost us dearly.
• Reduce bureaucracy (you have to wait three times longer than in the United States to obtain a building permit!).
• Do a major clean-up of corporate taxation, which is overly complex.
• Better integrate technology into businesses, particularly artificial intelligence.
• Improve continuing training for workers.
A drop in interest rates is all well and good. But if we really want Canadians to have more money in their pockets, we must focus on productivity.
1. Consult the report “Annual overview of risk – Fiscal year 2024-2025”
2. Read the RBC text “Canada’s Growth Challenge: Why the Economy is Stalling”
3. Read the speech “The Time Has Come: Let’s Fix Canada’s Productivity Problem”
4. Read the editorial “Productivity emergency: why is our standard of living taking a nosedive? »
5. Read the editorial “Productivity emergency: take Canada out of its slippers”