Today the Bank of Canada (BoC) cut its Key Rate by half a point (0.5%).  Another jumbo rate cut, the fifth consecutive rate cut since June of this year, dropping the Key Rate 1.75% to 3.25% from 5% in just six months.

What issues is the Canadian economy facing that have continued the hawkish behavior of the BoC?

1. Recent GDP (economic growth) has been 1% –  a very weak showing for the Canadian economy, even with the record immigration experienced by Canada over the past three years.  Some experts are stating that if it were not for the high immigration levels Canada would have had a bad recession by now.  The basic additional demand created by the new to country people has buoyed the economy.  This has just masked the real problem.

• Productivity remains the single biggest concern –Canada’s labor and production productivity continues to underperform compared to the rest of the western economies.  Taxes remain high, wage demands continue to stress the system.  Currently, the country is in the middle of a 4-week postal strike, the impact of this on the economy has been underestimated and not measured.

• The Canadian government is and has counted on the weak Canadian dollar – to do its bidding for them to create a false sense of productivity via cheaper prices in the international marketplace.  As they say, a weak dollar is good for our exporters, but this can only carry an economy a short distance as all goods imported are more expensive and travel outside of Canada becomes prohibitively expensive forcing people to seriously look at alternative places to live to lessen the burden.  Relying upon currency weakness to substitute real in-country productivity is a temporal soft policy for any nation’s economy.

• Record immigration – has pressured and pushed prices up in the housing market, while the collective inflation (stacked up from the past three years) that Canadians experience for their everyday purchases has put pressure on spending.  Albeit, current inflation statistics show that price increases in the most recent readings are down to 2-3%, coming within the range of the BoC’s target. 

• U.S. threats of tariffs under the next regime – whilst highly unlikely have thrown a temporary shock into the Canadian economy.  The U.S. has linked economic tariffs to border control.  You can hardly blame them after what has transpired on the (mainly) southern border, but Canadian border also over the past four years.

In summary, the Canadian government has a simple job to do, they just need to do it: get rid of unnecessary taxes, cut other taxes, slow government spending and stop wasted spending.  All of these measures will encourage and incentivize small business to invest and grow.  Small business being the creator of 80% of the jobs in the private sector – the real economic locomotive for any free economy.