With the Canadian economy performing a bit better than expected, S&P Global Ratings is upgrading its forecasts for this year and next.
In a report released Tuesday, the rating agency noted that while economic growth in the country remains relatively weak, the economy has held up slightly better than it predicted, with real GDP growth in the second quarter coming in at 2.1% on a quarter-over-quarter basis, ahead of the 1.6% that it predicted.
As a result, S&P has nudged its forecast higher. It now expects Canada’s GDP growth to be 1.2% this year, up slightly from its previous call of 1.1%. In 2025, it now sees growth accelerating to 2.0%, up from its previous forecast of 1.7%, and ahead of the economy’s long-run potential of 1.8%.
“We think the rebound in economic growth will mainly come from fixed investment — both residential and nonresidential — rather than consumer spending,” S&P said. “The monetary easing cycle that began in June will help flip investment outlays from contraction last year to expansion in our forecast horizon. This shift may not be dramatic, but is it is much needed after the malaise of recent quarters.”
As for consumers, it will take some time before they feel the effects of lower rates, the report said.
“Even though the [Bank of Canada] has started an easing cycle, borrowing costs will remain much higher in the next two years than COVID-19 pandemic lows, partly due to the mortgage renewal system in Canada,” the report said. “Many homeowners will see interest payments as a share of income rise in upcoming five-year mortgage renewals over 2025 and 2026.”
The latest data on labour markets points to continued softening there too, S&P said, noting that “the underlying trend since May has been one of weaker hiring and rising unemployment.”
The weaker job market is also consistent with inflation continuing to ease, the report said.
Headline inflation was already down to the 2% mark last month, and S&P said that it expects core inflation to fall to 2% by mid-2025.
“Higher unemployment coupled with persistent declines in per-capita GDP will help push inflation lower,” the agency said.
Against this backdrop, S&P expects the Bank of Canada to keep cutting rates, with the overnight rate reaching 3.75% by the end of the year, and hitting 2.5% by the end of 2025.
While the expectation is for the central bank to continue cutting rates by 25 basis point increments, S&P said it also sees a “risk of front-loaded cuts by 50 bps at upcoming meetings until [rates] return to a neutral range.”