Interest rates, inflation weighing down on consumer spending: RBC

Current signs point to softening economic activity and slowing price growth, new RBC report suggests

Interest rates, inflation weighing down on consumer spending: RBC

Elevated policy rates and tight financial conditions continue to hamper consumer spending in developed economies like Canada, according to a new analysis by RBC Economics.

“Evidence is mounting that economic activity is softening and that inflation will continue to slow,” RBC said. “Central banks are willing to step in again to bring inflation under control.”

At this point, however, additional hikes are looking much less likely, “particularly in Canada where key indicators like per-capita GDP, and the unemployment rate are already tracking closely to early stages of historical recessions,” RBC stressed.

A major element that will determine the Bank of Canada’s trajectory over the next few months will be the inflation reading, which remains markedly higher than the central bank’s 2% target but is set to moderate further.

“There are growing signs that the Canadian economy is buckling under the weight of higher interest rates and prices,” RBC said. “The US dollar held on to broadly based appreciation over the last month, while CAD underperformed as the economic backdrop softens ahead of the other economies.”

Excess demand in Canadian economy is dissipating, RBC says

Statistics Canada is anticipating a small decline in the third quarter, mainly due to lethargy in sectors like retail and restaurant sales, coupled with lower manufacturing output.

“Taking into account surging population growth, GDP per-capita looks on track to decline a similar amount in Q3 as the 3.5% annualized drop in Q2, marking a fifth straight quarterly drop,” RBC said.

And while employment numbers remain on the rise, the growth rate has not proven fast enough to counteract a 0.7% increase in the unemployment rate, which reached 5.7% in October.

“Growth in wages has yet to moderate persistently but businesses expect pay increases to slow in the year ahead,” RBC said.

“Absent a larger pick-up in inflation readings and with GDP growth still expected to trend below the ‘potential’ rate for some time, we see little prospects for the Bank of Canada to move the overnight rate higher again and expect them to start cutting in the second half of next year.”