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While the Bank of CanadaIt is drop in interest rates The past week may be seen by some as good news, but it reveals some worrying underlying issues.

The central bank cut rates by 50 basis points, bringing its overnight rate to 3.75 percent. Interestingly, bond markets priced this in, with the five-year Government of Canada bond yield remaining unchanged following the announcement.

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While politicians encourage rate cuts as a sign of controlled inflation, the fact is that it is the weakening of the economy which is responsible, as Geneviève Roch-Decter of Grit Capital points out. recently posted on X (formerly Twitter). She noted that Canada was the first G7 country to cut rates as its economy lags, with a number of subsequent reductions.

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https://x.com/GRDecter/status/1849085230130332019

According to a report by University of Calgary economist Trevor Tombe, as of June this year, real GDP per capita had declined for five consecutive quarters. Over the previous year, GDP per capita decreased by 2.2 percent and compared to 2022 it is down by 3.6 percent.

“This has real consequences for the economic well-being and standard of living of Canadians. If Canada had simply matched the growth of the United States, for example, our economy would be 8.5 percent larger today. This is roughly equivalent to $6,200 in additional annual income per Canadian. This growing gap is now the widest it has been in almost a century, which should raise serious concerns,” he writes in a study for the Fraser Institute: Boosting Canada’s Competitiveness by Reforming Business Taxation.

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This reminds us of a great mantra: “You can make excuses or progress, but you can’t do both.” » Unfortunately, all we get from Ottawa are numerous excuses with a Prime Minister unwilling to acknowledge the seriousness of the situation. This is a problem because the first step to solving a problem is recognizing that there is a problem.

Despite the Liberal Party caucus meeting last Wednesday, marked by dissatisfaction among some MPs with their leader, it appears we are going to see more of the same unless there is a vote of no confidence before the predetermined elections of October 2025. .

Frankly, I’m tired of writing about this and I’m sure many Canadians are just as frustrated as I am. However, I worry about desperate people doing desperate things, because much more damage could be done before next year’s election.

This means a lower Canadian dollar and an economy plunged into recession, coupled with an affordability crisis that is worsening with measures like the carbon tax continuing to wreak havoc on ordinary Canadians. This says nothing of the incredible strain on housing, policing, education and health care, made worse by record immigration policy.

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The depreciation of our currency should be a major concern. Late summer short covering favoring the Canadian dollar over the US dollar has now been restored as it now tests the year’s lows. Fortunately, we took advantage of this short-term rally to buy more US dollars for our clients as a hedge, but many Canadian investors find themselves exposed due to the domestic bias of their portfolios.

A Vanguard report released in June revealed that Canadians allocate 50 per cent of their stock exposure to domestic investments. This is 18 times higher than the percentage of Canadian assets in the global stock market (which is approximately 2.7 percent). Canada also imports US$280 billion worth of goods from the United States, a 33 percent increase from 2016 lows. A weaker Canadian dollar will only worsen the affordability issues facing many Canadians face.

Looking ahead, unless serious changes are made, we are not optimistic about our currency, especially given the growing disparity between our two economies. We need less encouragement for rate cuts and a real desire to fix the problem. Unfortunately, we may have to wait until this time next year for that to happen.

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Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private and institutional investment firm specializing in risk-managed discretionary portfolios, audit/ investment monitoring and advanced tax, inheritance and risk management services. heritage planning. The views expressed are not necessarily those of Wellington-Altus.

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