Some of Bay Street’s lions are uneasy about the state of Canada’s economy. 

“I think we’re in a bit of a recession here,” said Joe Canavan, the long-time asset-manager-turned-angel-investor, this week at the National Angel Capital Organization’s summit in Ottawa. 

Canavan’s assessment runs counter to the numbers. Statistics Canada reported Friday that Canada added 90,000 jobs in April, the most in more than a year. It was “one of the strongest data releases in recent months,” said Marwa Abdou, senior research director at the Canadian Chamber of Commerce. 

Gross domestic product grew at an annual rate of one per cent in the fourth quarter, reversing a slide over the summer months and all but cementing the narrative that the Bank of Canada managed to pull off a “soft landing.” The central bank’s latest quarterly forecast predicts growth of 1.5 per cent this year, a significant improvement from the 0.8 per cent it predicted in January. 

That’s why Canavan’s read on things is noteworthy. It seemed like the coast was clear. Maybe it isn’t. 

“We are headed for an interest-rate cut sooner rather than later,” Canavan said, citing the exchange rate as a good barometer for what the markets think of Canada’s prospects. The currency is trading at around 73 U.S. cents, even though oil prices have been stronger lately.  

“The dollar is telling us that our leadership is misguided, that we are spending way more than we have, that the balance sheet is burdened and bloated. And our ability to carry the debt is going to be challenged over the next two, three, five years.”  

Economist David Rosenberg, another Bay Street legend, is also unpersuaded by the data that suggest Canada is fine. 

“We find it rather incredible that the Bank of Canada is so nonchalant when it comes to the state of the Canadian economy,” Rosenberg wrote in the Financial Post this week. “The degree of excess capacity is expanding by the month, inflation has swung to disinflation and the economy (in real output per-capita terms) is contracting at two per cent annual rate. Yet the folks in Ottawa fiddle as the macro landscape burns.” 

Let’s unpack what Rosenberg is saying. 

Statistics Canada’s industrial capacity utilization rate measures how hard factories, mines, mills and utilities are running to keep up with demand. The number dropped to 78.7 in the fourth quarter; excluding the COVID-19 pandemic, it was the lowest since the second quarter of 2016. That could pick up, given the U.S. economy has been surprisingly strong and much of Canada’s industrial output relies on orders from south of the border. Still, that number was consistently above 80 per cent before the pandemic. If demand has increased since the end of last year, Canadian industry has the capacity to handle it. That should avoid inflationary backlogs. 

Headline inflation has been slowing consistently since August, and has been inside the Bank of Canada’s comfort zone for three consecutive months, according to the most recent data. Core measures that adjust for volatile items in the consumer price basket tell a similar story. The three-month average of the Bank of Canada’s preferred measures of core inflation plunged to annual rates of 1.1 per cent and 1.4 per cent in March; another measure of core that subtracts fruit, natural gas and six other consistently volatile items increased two per cent from March 2023, matching the central bank’s inflation target. 

Rosenberg’s point about per-capita GDP is that Canada might have had a hard landing if not for immigration. That’s not news to the Bank of Canada. Its April economic update includes a chart that shows GDP per capita has been declining since 2022, although the central bank’s forecast has that turning around later this year, now that the federal government plans to reduce work and student visas. That’s evidence governor Tiff Macklem isn’t as “nonchalant” about the state of the economy as Rosenberg thinks. 

The latest jobs numbers surprised many of the Bay Street economists who are paid to digest high-frequency data. Their consensus forecast was for a gain of about 20,000 jobs, so traders received the beat as evidence of economic strength that could delay rate cuts. The Canadian dollar jumped higher on the news. Forecasters tended to sample evidence from the report that supported their outlooks; CIBC stuck with its call for a rate cut in June; Citibank clung to its prediction for a cut in July; and Scotiabank continued to insist that the economy is too strong to allow for cuts before the fall. 

The big increase in employment in April should probably be seen as evidence that the economy has enough momentum to muddle along, and not a sign of renewed vigor. The unemployment rate leveled at 6.1 per cent because the labour pool continued to grow faster than employers were hiring. The youth unemployment rate jumped to 12.8 per cent, the highest since 2016, excluding the pandemic years of 2020 and 2021, Statistics Canada said.

For those seeking to time the rate cut, perhaps the most important indicator was the drop in year-over-year wage growth to 4.7 per cent from 5.1 per cent. That’s still inflationary, according to the Bank of Canada’s math, but the summary of deliberations of the last rate decision revealed that policymakers see wages as a lagging indicator. That means the trend is more important than the number itself, and the trend suggests wages are exerting less pressure on inflation. 

Statistics Canada will update the consumer price index on May 21. If inflation continues to break lower, Macklem will have enough evidence to cut interest rates. There will be a strong case to play it safe and make sure inflation is good and conquered, but Canada’s next economic challenge is growth. Best to get ahead of it. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.