Interest rate cuts could be on their way as economy slows: economists
Kristine Owram, The Canadian Press
Published Saturday, September 27, 2008 8:09AM EDT
Last Updated Friday, May 18, 2012 9:09PM EDT
TORONTO -- The Canadian economy is slowing to a crawl and the stock market lost about $100 billion of value this week, prompting economists to predict that further interest rate cuts could be on the way to boost consumer and business confidence.
The rate cuts, they said, are needed to stimulate growth as the U.S. economy moves deeper into recession and the Canadian economy is at a standstill, with minimal growth in recent months.
"Canada's position as a place of relative calm amid the storm surging in global financial markets is being tested," BMO Capital Markets economist Michael Gregory wrote in a note to clients Friday.
"On balance, the odds of a Bank of Canada rate cut are building based on economic considerations."
The sagging U.S. economy and the Wall Street financial crisis have also weighed heavily on the stock market for months -- with a 420 point plunge Friday and a 6.1 per cent drop this week.
That wiped out about $75 billion of the value of stocks listed on Canada's dominant exchange.
There were other signs Friday of worsening troubles in the economy, especially the battered manufacturing sector:
-@ AbitibiBowater Inc. (TSX:ABH) announced that nearly 900 of workers will be laid off next month as the Montreal newsprint giant idles four sawmills and woodland operations in the face of dwindling U.S. housing starts.
Another 150 employees at a sawmill in Thunder Bay, Ont., will also see their hours of work cut, but no layoffs at the Ontario plant are planned.
-@ The Finance Department reported new figures which show the surplus for the first four months of the current fiscal year narrowed sharply to $2.9 billion from $6.7 billion a year ago, when the economy was perking along and corporate and personal tax revenues were strong.
-@ A Statistics Canada report showed the average weekly earnings of Canadian employees increased by 0.3 per cent during July to $791.89, up by 2.6 per cent from a year earlier, but below the current rate of inflation.
Statistics Canada also released longer-term data showing manufacturing employment fell by 241,000 workers between 2002 and 2007. At the same time, manufacturing's share of total employment in the economy dropped to 12 per cent from 15 per cent.
Prime Minister Stephen Harper reiterated Friday that while the global economy is in "deep trouble," the Canadian economy remains fundamentally sound.
"We have seen commentators around the world and respected figures here emphasize the strong foundation of the Canadian economy . . ." Harper said in Calgary while campaigning for the Oct. 14 election.
The Bank of Canada meets in October and could cut rates a quarter point to stimulate growth.
Weakening consumer confidence and cooling housing and labour markets are combining with a volatile worldwide financial sector and strains in credit conditions to create an increasingly welcoming environment for interest rate cuts, said BMO economist Douglas Porter.
Interest rate cuts are often used to stimulate the economy in times of market turmoil. Lower interest rates encourage borrowing, which in turn increases consumer spending and corporate investment, boosting the economy.
"Because of the nervousness we're seeing in all markets, basically even if it's a bank lending to another bank, they're demanding higher rates because of concerns about the credit-worthiness of their counterparts," Porter said in an interview.
Porter predicted that Canadians could see rates cut by a quarter to a half percentage point -- affecting some mortgages, consumer loans and lines of credit -- to offset higher short-term rates in the money markets. He also raised the possibility of the Bank of Canada and the U.S. Federal Reserve cutting rates in a co-ordinated fashion.
"The benefit there is that besides giving a little bit of a boost to investor confidence and potentially starting to fix some of these problems we're seeing in the credit markets is that if everyone cut rates at the same time it wouldn't really have any currency implications," said Porter.
"One of the reasons why the Fed might be a little bit leery about cutting rates by themselves is it could lead to renewed downward pressure on the U.S. dollar, but if every central bank cut rates then there really wouldn't be a currency implication."
He said co-ordinated rate cuts are rare, and the last time this happened was after the Sept. 11, 2001 terror attacks.
"For financial markets, what's going on is arguably as important as after 9-11," he said.
Avery Shenfeld, a senior economist with CIBC World Markets, said there's no "pressing need" to cut interest rates in Canada, but this could change based on the e the financial situation in the U.S.
"If at the end of the year there's no light at the end of America's tunnel, then the bank at that point might consider cutting interest rates," Shenfeld said in an interview, adding that the fate of Canada's economy is closely connected to that of the U.S.
"The slowdown in Canada is largely a story about what's happening outside our borders," he said.
On the markets, the Toronto Stock Exchange lost more than 420 points in Friday trading. A major factor was confusion surrounding a proposed US$700-billion rescue plan for Wall Street financial institutions and the collapse of the largest U.S. savings and loans bank, Washington Mutual.
The Canadian market was also squeezed by a big drop in shares of BlackBerry-maker Research In Motion Ltd. (TSX:RIM), which lost more than a quarter of its market worth following a disappointing earnings report and sales outlook.
Energy stocks, a major influence on the Toronto stock market, were also a major drag after a drop in global oil prices.