The Canadian and US economy are diverging from their typically similar performance. A new research note from BMO warns Canada’s economy is seriously underperforming in contrast to the US, especially when it comes to labor and inflation. This widening divergence likely means Canada will enter a recession and cut rates before the US, where its central bank has even floated the possibility of no rate cuts this year.
Canadian Labor Market Eroding Much Faster Than The US
Canada and the US typically have labor markets that move closely but not these days. The US economy gained 303,000 jobs and saw its unemployment rate fall to just 3.8% last month. Meanwhile in Canada, it lost 2,200 jobs and saw the unemployment rate climb 0.3 points to 6.1% over the same period. According to BMO, the 2.3 point gap for unemployment in both countries is on the high side for anything seen over the past 20 years.
“Just as there were some indications the gap may be narrowing in early 2024, the March employment reports put an exclamation point on the wedge,” writes Douglas Porter, chief economist at BMO.
Canadian Inflation Weakened Faster Than The US… It’s Not Good News
The divergence for employment is also a big factor when it comes to inflation. Canadian CPI’s annual growth came in at just 2.8% last month, in contrast to the 3.4% seen in the US. More importantly, the headline rate in Canada is on the way down while it’s heading the opposite direction in the US.
Moderating inflation is generally good news, but emphasizes Canada’s weakness here. Greater unemployment is likely curbing consumption and thus allowing higher inventories. Porter also notes the unemployment rate means employment is no longer “tight,” and will ease wage pressures. Great for monetary measures, not so much for the average household.
In fact, Porter points to the influence of unemployment on economic recession in both countries. “Over the past 40 years, in both Canada and the U.S., any time it [unemployment] has risen by 25% or more, the economy has been in recession,” he notes. Highlighting the US has climbed less than 10% from recent lows, whereas Canada has climbed 23%—nearly hitting that number.
Though he adds the caveat of population growth. The breakneck growth observed in Canada allows it to print mild growth based on aggregate measures. However, that only conceals the weakness readily observed in the per capita growth rates.
Canada To Cut Rates Before US, But The US May Not Cut This Year
Canada’s economy traditionally moves very closely with the US, but it may no longer be able to do so. “Markets have been steadily reeling back expectations of Fed rate cuts almost since the year began, and this week’s events pulled the string a bit further,” writes Porter.
He even emphasized the split within the US Federal Reserve on rate cuts, where branch President Kashkari warned it’s possible none occur this year.
BMO’s current forecast still sees mid-year rate cuts for both Canada and the US, at this point. However, they emphasize there are some factors, including housing, that may cause Canada to delay slightly.
In any event, the bank sees Canada leading the US when it comes to rate cuts due to the widening divergences when it comes to performance.
