The Current - Cracks in the Canadian economy

Episode Date: September 18, 2025

What does the Bank of Canada cut to its key interest rate mean for you - and for Canada's economy? CBC’s Senior Business Correspondent Peter Armstrong joins us to walk through the bad and the slightly less bad economic news. We’ll also talk to Avery Shenfeld, Managing Director and Chief Economist of CIBC, and Pedro Antunes, the Chief Economist at The Conference Board of Canada to look at what the coming months could bring.

Hugh is a rock climber, a white supremacist, a Jewish neo-Nazi, a spam king, a crypto-billionaire, and then someone killed him. It is truly a mystery. It is truly a case of who done it. Dirtbag Climber, the story of the murder and the many lives of Jesse James. Available now wherever you get your podcasts. This is a CBC podcast. Hello, I'm Matt Galloway, and this is the current podcast. The governor of the Bank of Canada, Tiff MacLam, has a message for Canadians, and you probably won't like it.

We are expecting growth, you know, somewhere around 1% in the second half of the year. So that is slow growth. It's not going to feel good. It is growth. But it's slow growth because, you know, growth is, Canadian economy is adjusting to a different relationship. with his biggest trading partner. It's not going to feel good. Yesterday, for the first time since March,

the Bank of Canada cut its key interest rate, lowering it to 2.5%, the lowest it's been in three years. With all of the uncertainty from south of the border and a trade war unfolding, there is a lot of anxieties you can imagine about the economy. You're probably feeling it yourself. For a look at what this rate cut means and what our economy could be in for,

we're joined by the CBC's senior business correspondent, Peter Armstrong. Peter, good morning. Good morning. Tiff Macklin says it's not going to feel good. That doesn't sound promising. No, but I mean, it doesn't feel good right now, right? Like, if you were to walk down the main street of your town or neighborhood, you're not going to be meeting people that are overbrimming with enthusiasm.

And I think what Macklin is saying is that this is kind of where we're at, right? Like, we saw the economy contract in the second quarter. So that was April, May, and June. I don't think if you walked around in July, August, or September, you were thinking to yourself, oh wow things have really turned around the the issues that are plaguing the canadian economy i think everybody knows them everybody's feeling them and that sense that that there's not a whole lot that can be done is really pervasive right like there there's not even this rate cut that we had yesterday i was talking to somebody about like the this isn't going to help their business and

my colleague nisha pettel was talking to somebody who has a variable rate mortgage and that person was like look i'm going to get a little bit extra money not of that is going to change the underlying conditions that plague the Canadian economy, which is a trade war with the United States, what the rate cut might do or should do is just give them a little bit of cushion so they can weather the storm a little bit long. Talk a little bit more about why the bank, as you understand it, decided to cut the rate now. This comes, what, after three consecutive rate decisions where the Bank of Canada held things steady. So there's a few things that sort of drove it.

One is that until now, they were kind of worried that inflation wasn't completely. under control. And if you cut rates, you're going to encourage people to borrow and spend, that's going to fuel inflation. And you can't be doing both of those things at the same time. So we got those inflation numbers on Tuesday that showed inflation, still sticky in some places, but it's right on target. 1.9%. It's a little bit below where most economists had expected it to be. It's a little bit below that midpoint of the 1 to 3% range that the Bank of Canada likes to target. So that gave them the green light. But more broadly speaking, what they, what they're trying to do here is, as I say, if you've got, if you, if your debt payments are just even a little

bit lower as a result of that, you've got a little bit extra cash. So for a business, you might not have to let go of somebody. You might even, God forbid, have a little bit extra money. You could hire somebody. And most of those decisions are going to be pretty small. But if you add up a bunch of little things on the margins, they can add up when you scale them out over the, you know, size of a Canadian population. You mentioned the inflation numbers. And when Tiff Maclum says that the balance of risk has shifted, and that's why they lowered the rate. That's what he's talking about, right? The danger in lowering the rate doesn't necessarily square with the fact that inflation could go up more than they're comfortable with. Right. And the balance of risk that

literally on Monday morning, he was still worried about inflation. By Wednesday morning, he was more worried about growth. And that balance had shifted to what you kind of need monetary policy to do is kind of build like a scaffolding around the economy to just help keep it on track and and that the risk of you know previously worrying about inflation his needs to now pivot to worrying about growth worrying about jobs worrying about the state of the economy and trying to give it some support and and you know interest rates had been in that neutral range where they're not really pushing or pulling your decisions one way or another but you know one economist yesterday told us this is like dipping your toe into the stimulative range where you're just

barely nudging it along trying to encourage semi-economic activity. I want to ask you about job numbers in a moment, but you mentioned housing. And there are many people who are trying to figure out, maybe to your point, they have a variable rate mortgage. They're wondering whether this is going to give them a bit of a breather. But also, if there are lower interest rates, whether this might help loosen up the housing market and deal with some of the issues that the housing crisis has presented, is it going to have any? material meaningful impact, do you think, on the housing market? I mean, Matt, I wish I knew. I'd be doing a very different job if I could see that far ahead.

But listen, I think it's important to note the Canadian, the sort of notoriously bonkers Canadian housing market that rose and rose and rose, regardless of the economic conditions around it, has turned a corner. And we've seen, I think it's like an 18, 18 and a half percent drop in the average housing price across Canada since the peak was in like February of 2022. And it's fallen since then. We've begun to see a little bit of turnaround in activity. So in sales and in listings, we haven't really seen a turning of the corner of prices yet.

But, you know, will this be the thing that turns, help nudges that back into an acceleration? We don't know because, you know, there are so many fundamentals about the Canadian housing market that are just completely broken. But, I mean, again, the underlying thing in the housing market, has been, you know, we've seen now a couple of years of decline. And what is it going to take for that to turn around? And even just one last point on this, Matt, even with an 18.5, 18% drop in the average housing price, there is still a massive affordability problem in Canada. That houses are still too expensive for most people to be able to get in first time housing

homeowners are having a really hard time. So even with this historic drop that we have seen, it hasn't addressed a housing affordability crisis, and so that's much more of a supply problem, and that's the federal program, which leads you to another question that the Bank of Canada's had to struggle with is they've got to factor in what federal spending is going to do to the economy and how that's going to try to juice economic growth. We're not going to get a budget until after the next decision by the Bank of Canada. So they're sort of operating a little blind in terms of what that might look like as well. Affordability is top of mind for people who are losing their jobs. What,

100,000 jobs lost in the last two months in this country. Unemployment up to 7.1%. You can talk to people across the spectrum. You hear these stories of people applying for 2,000, 3,000 jobs and not getting a call back that they're doing these interviews with what they think is AI on the other side of a computer. Entire generations of people, particularly in 20s, early 30s, who are struggling to get a foothold. What do those numbers signal to you about the broader health of the economy? Look, the employment numbers, you know, on the headline employment number, you can kind of look at it and be like, God, that's not great, but it's not horrible. It's when you dig in under the, under the hood and you look at specific youth unemployment, you look at regional

unemployment. My colleague, Jennifer Lagrasse, was reporting out of Windsor yesterday. They've got 11% unemployment in the city of Windsor because they're just getting clobbered by. the tariffs and the uncertainty that goes with it. And always when there's a crisis, it's the most vulnerable to get hit. So the young, so the precarious, so the gig workers, all of these people that weren't having a great time in the economy before this hit are getting hit very hard now. And it tells us how and where the hard part of this. You know, it's really easy for guys like me to come on the radio and talk about, you know, 95% of the products that we're any United States are Kuzma compliance, so they're not getting tariffed, and we've got the best

deal of any country, you know, the cleanest dirty shirt of anybody dealing with the United States and a safe port in a storm. Where this is hitting, Matt, is hitting incredibly hard, and it's an incredibly difficult time. And the things that are being done and that are going to be done in the weeks ahead to try to support are, should be focused on those areas and those demographics that are getting hit the hardest because they are really feeling the pain, where, huge sectors of the Canadian economy have so far been, been sheltered from that because of Kuzma compliance. But where it's hitting, man, it's hitting hard. I don't think we've just I have to let you go, but I don't think we've said the word or the name of Donald Trump,

the U.S. President yet in this conversation. And that seems to be the thing that's hanging over the announcement yesterday. Tiff Macklin talking about how we aren't expecting a recession in his words if the U.S. maintains its current tariff policy. But that's a big if. And you have no idea. Like, I was talking to somebody last week about you could well see a situation where, okay, we're getting back into the beginning of the QSMA renegotiations, the USMCA renegotiations. It's entirely feasible that they might say, okay, let's suspend the sectoral tariffs on steel, aluminum, cars and softwood. I don't think it's going to happen, but it's possible, sure.

It is equally possible that Donald Trump on a whim says, no, no, no, the QSMA exemptions, we're done with those. the Canadians are going to pay 25% tariff across the board. You simply don't know. And how on earth do you plan if you're a business, if you're a policymaker, if you're a central banker, if you're trying to figure out a federal budget,

it is almost impossible, Matt. And it is a really difficult policy needle to try to thread. It's a really difficult work environment to try to be a worker in, to try to be an employer in. It is impossible to overstate how hard this moment is for the people that are really in the thick of it. Peter, thank you. You bet.

Peter Armstrong, CBC's Senior Business Correspondent. What kind of person takes on the law? Can they ever really know what they're getting into? A really tough-looking guy came up to us and said, are you part of this gay case? My family started getting death threats. I wasn't able to go outside alone anymore. I'm Phelan Johnson, host of See You in Court,

a new podcast about the cases that changed Canada and the ordinary people who made history. This is David N. Goliath we have here. Find and follow. See you in court wherever you get your podcasts. As we've been discussing, Canadians have questions about the economy that go well beyond the future of interest rates. Everey Schenfeld is managing director and chief economist at C-IBC. Pedro Antunis is chief economist at the Conference Board of Canada. Good morning to you both. Good morning.

Avery, was this rate cut expected and was it given what we've just been talking about with Peter the right move given the state of our economy? Well, in my case, it was not only expected, but I thought it was overdue. The Bank of Canada had been worried about inflation, but I think when you have this much unemployment, this much slack in the economy, and therefore weak growth in consumer spending power, it's going to really be hard to sustain elevated inflation. And I think this was a bit of chicken soup for an economy that's caught a cold. It's going to help a bit.

And I would expect them to deliver another rate cut the next time they meet because, you know, we do need a little bit of help. We need to get some sectors of the economy that aren't exposed to the trade shock, moving a little better. Probably not in a recession, but clearly, you know, the economy is disappointing people. I'm going to come back to that R word in a moment. Pedro, do you want to pick up on that in terms of the rate cut and what, in the best case scenario, it's likely to do? Well, I think one thing that's really quite important here is that the bank has been in some respects pushing on a string a little bit because rate cuts have affected the short-term interest rates that are out there. But when you look at longer-term rates, bond yields, for example, have not moved nearly as much. And those are really what's driving or what will drive, you know, essentially the cost of borrowing for households and a lot of businesses. So, yes, it's welcome to see a little bit of a move downwards here.

I think the timing is absolutely right for this, and likely we're going to see more if the economy continues to sink. But, again, it's not having as much impact for a lot of households, especially those, and Avery would know this very well from a banking perspective, especially those that are renewing their mortgages in the coming two years. Avery, do you want to pick up on that? I mean, just in terms of the governor said yesterday in his announcement, considerable uncertainty remains.

People feel that uncertainty in their gut, right? What would help people if they worry about not just the state that they're in right now, but where this economy might be going? Well, as Peter was saying, one thing that would help is if we had more certainty that that Canada-U.S.-Mexico deal was going to be extended because businesses who are exporting now tariff-free aren't sure that they should spend money expanding their plant or making any plans for an expansion in Canada if their target market is the U.S.

So we'd like more certainty on trade, but we're going to be living with that cloud for quite a while, I believe. I think the lower interest rates will help some people with variable rate mortgages. They will help hold five-year mortgage rates down a little bit. So people renewing a five-year mortgage may be paying more than their old one, but less of an increase. That's helpful. And then we're, of course, waiting for budget measures.

Unfortunately, some of the budget measures are going to take time. So, you know, the prime minister is talking a lot about big capital spending projects. Those will help build capacity in the Canadian economy in important ways. But Rome wasn't built in a day and neither is a port facility or a high-speed rail line. So these may help, but they may be at 2026 or even 27-story. And I think that's where lower interest rates, they may not be the best tool, but they're a tool that can give a little bit of help. help to the economy sooner rather than waiting for these capital projects to help later.

I want to come back to the budget when it is delivered in November, but Pedro, how worried are you about unemployment? As I said earlier, Canada has lost something like 100,000 jobs in the last couple of months, unemployment up to about 7.1% now. How alarming is that to you? Well, I think I kind of reiterate the sense that we have that the overall unemployment rate at 7%. It's high, but it's not. out of whack completely. But again, I'd go to the youth unemployment. And what's interesting is we've been talking about a lot about youth unemployment,

the 15 to 24, sorry, the 15 to 24 group. But the biggest impact up until August had been in the 15 to 19, a very young where we'd actually seen job losses among that cohort. The problem now is in the last reading from Statistics Canada, 66,000 job losses in August. And most of those were in the core age group. at 25 to 54. So we're starting to see the implications of this, if I can reiterate as well, the lack of confidence in the economy, the lack of business investment. That is the widespread

impact that the uncertainty around these tariffs is having, and we're seeing the implications on labor markets. If you look at job levels today, you're essentially at the same level as we were at the end of last year. No job growth at all for most, in fact, for all of this year. What would give businesses confidence? I mean, and is that in, in our hands, or are we at the mercy of the decisions made south of the border? Well, I think from my... Go ahead, Pedro, and then I'll get you in, Avery. Yeah, just very quickly.

Essentially, the challenge is, and it's been an ongoing challenge, we have not been focused on facilitating business investment in this country. We've not been focused on tax competitiveness with the U.S., and now the challenges are even bigger with the one big, beautiful bill, of the border where you can essentially write off your investments, year one that you make them. Now, I don't know how to deal with that. I think we need to be very strategic in how to incent investment at home because we don't want to be running deficits like they are in the states. So it's going to be an ongoing challenge. I think the capital focus on capital

projects that we're hearing from the federal government is a positive. Maybe that'll incite some private sector investment as well. Avery, go ahead. Yeah, I agree. I think that we need to spur business capital spending. To some extent, you know, there's a saying no crisis should be left to go to waste. And so to some extent, the challenges we're facing in our export sector are forcing us to rethink a little bit on what can we do to drive the domestic economy better. You know, we've taken a focus on interventional trade barriers, but we're also looking at other regulatory barriers to growth.

to some extent, the politics in Ottawa have changed so that virtually all parties are now really growth focused above everything else. And we need that because if we're going to be challenged in some export sectors, if the tariffs on things like autos and steel, for example, aren't going to be negotiated away, then we're going to need to get growth in other industries and services in Canada in order to make sure that we've got an offset. that. Pedro, what would you want to hear in the federal budget? Mark Carney is an economist, and he presumably has some designs, not just in politics, but from the economic background that he has in terms of what he thinks would help in this moment. What would you want to see in that budget

in November? Well, I think the focus that we're hearing about essentially facilitating the approval of major projects, I think that's a really important step. And I think we're going the right direction there. How easy that's going to be to do in our Confederation is obviously always a challenge, but kudos for an effort on that front. I think we do need to see something around the challenges that we have with the U.S. Big Beautiful Bill. In the last economic update, we talked about extending the capital gains, accelerated capital gains reductions. I think we need to focus on that as well. It's a challenging environment. I think, think we need to, you know, bear through this difficult environment. I think the U.S.

situation is currently not sustainable, but it's also very hard to wait for the U.S. to fix its underlying deficit problems. In the meantime, we get hurt and don't see the investment happening here. I think the most important thing would be a trade deal. If we can settle some nerves around access to the U.S. economy, that would be terrific. Avery, just last few seconds to you. You said earlier that you don't believe we are in a recession. Governor of the Bank of Canada said that we're not expecting recession if the U.S. maintains its current tariff policy. If it doesn't, is it likely that we will slide into recession?

So if we had the combination of a broad 25 or even 35% tariff on all our exports to the U.S. And if Donald Trump wins his case before the Supreme Court that lets him apply that sort of tariff, I think it's undoubtedly true that we would fall into recession. That would just be too big a shock for the economy. We'd need deeply lower interest rates. We'd need more fiscal stimulus. So we might work our way out of it, but the initial shock would be quite large. So it really is only because we didn't end up with tariffs on everything that we're managing to still see some growth.

It does look like the economy is returning to some growth in the third quarter. So that's a positive. But yes, there's a big cloud of recession risk associated with Donald Trump. And no one knows what he's going to do next on that front. Nobody does. No. It's good to speak with you both about this. Thank you very much.

Thank you. You're welcome. Avery Shenfield, managing director, chief economist of CIBC. Pedro Antunis is the chief economist at the Conference Board of Canada. You've been listening to the current podcast. My name is Matt Galloway. Thanks for listening. I'll talk to you soon.

For more CBC podcasts, go to cbc.ca.