**Deutsche Bank Predicts Weak Canadian Economic Outlook, Expects Bank of Canada Rate Cuts**
*Original reporting by Ben Livesey. Supplemented with independent research.*
Deutsche Bank has issued a stark warning regarding Canada’s economic trajectory, predicting tepid growth and calling for further interest rate cuts by the Bank of Canada (BoC) amid mounting economic pressures. According to the bank’s economists, Canada’s economy is grappling with a combination of sluggish productivity, weak domestic demand, and a structural slowdown that sets it apart from its global peers. In its latest macroeconomic report, Deutsche Bank anticipates that continued headwinds could necessitate a series of interest rate cuts over the course of 2024.
This article breaks down Deutsche Bank’s projections, the rationale behind their forecast, and how it fits within the broader monetary policy environment and macroeconomic trends influencing Canada.
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### Key Highlights from Deutsche Bank’s Canadian Outlook
Deutsche Bank’s economists outlined several critical issues currently weighing on Canada’s economy:
– **Slowing economic growth**: Canada’s GDP growth is expected to be among the weakest within the G7 nations, hampered by a reliance on debt-fueled consumption and dwindling productivity gains.
– **High household debt**: Canadian households remain among the most indebted in the world, making the economy particularly susceptible to interest rate increases.
– **Cooling labor market**: Employment growth in Canada is showing signs of deceleration, pointing toward softer labor demand and a widening output gap.
– **Weak productivity**: Canadian labor productivity has been declining, which threatens long-term potential growth and competitiveness.
Collectively, these indicators have led Deutsche Bank to conclude that the Bank of Canada may need to move faster and deeper in cutting interest rates than previously expected.
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### An Overview of Canada’s Macroeconomic Challenges
Canada’s economic slowdown is not entirely unexpected, but the scope and persistence of the weakness have caught policymakers and analysts by surprise. Despite a strong rebound from the COVID-19 pandemic, Canada is showing signs of stagnation, especially in real GDP per capita terms. Analysts increasingly point to structural issues rather than cyclical fluctuations.
Key structural challenges include:
– **Declining productivity**: According to Statistics Canada, labor productivity fell by 1.3 percent annually in 2023, marking the third consecutive year of declines. Productivity has now fallen in eight of the last ten quarters, raising concerns about the country’s economic efficiency.
– **Stalling real incomes**: Inflation-adjusted wages have remained largely stagnant, despite record-low unemployment rates earlier in the decade.
– **Demographic pressures**: An aging population and declining birth rate are dampening labor force growth. Even with higher immigration, productivity shortfalls mean real economic gains remain subdued.
Deutsche Bank expects these factors to restrain economic growth to below 1 percent for 2024 and possibly into 2025.
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### Anticipated Bank of Canada Policy Response
Deutsche Bank sees an urgent need for monetary easing in Canada. While the Bank of Canada took the lead among G7 central banks by delivering an initial 25 basis point cut in June 2024, Deutsche’s analysts expect significantly more accommodation ahead.
Their rate forecast includes the following projections:
– **Total cuts forecasted for 2024–2025**: 100 to 125 basis points
– **Target policy rate by end of 2025**: Approximately 3 percent
– **Number of additional rate cuts**: Four to five cuts of 25 basis points each, spread over the next 12 to 18 months
These expectations align with movements in Canadian swap markets. Traders are currently pricing in a high probability of two to three additional rate cuts by the end of 2024, with the first likely coming as soon as September.
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### Comparison to Other Central Banks
The Bank of Canada was the first G7 central bank to pivot into a rate-cutting cycle in 2024, reflecting the country’s
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