Canada’s economy is often treated as an appendage of the much larger US economy.

The Canadian economy is not nearly as diversified as the American, both because of its much smaller size (i.e. GDP) and its heavier emphasis on resource production and exports. Nonetheless, business cycles in Canada are heavily influenced by the cyclical direction of the larger US economy.

If the Goldilocks scenario prevails, the US economy is expected to slow into a more sustainable growth phase this year and next. Bear in mind that this month the US and Canada both entered the eleventh year of an economic recovery out of the Great Recession.

In terms of recent economic growth patterns, Canada barely avoided a recession over the six months ending the first quarter, while the US economy expanded strongly in the first quarter.

The US economy rose at a 3.1% annual rate in Q1, a burst of growth which is clearly not sustainable in a nearly fully employed economy. The Canadian economy, in contrast, barely expanded at a 0.4% annual rate in the first quarter.

The US Fed’s benchmark interest rate of 2.25%-2.50% is considerably higher than the Canadian counterpart rate, as there were four consecutive US federal funds rate increases last year.

Canada’s benchmark rate, the overnight rate, is 1.75%. The Canadian central bank is currently holding steady on its policy rate outlook, even though the financial market expects the Fed to soon start cutting interest rates.

Federal Reserve Chairman Jerome Powell in a recent presentation indicated that Fed officials believe that the weakening of the global economy and rising trade tensions have strengthened the case for interest rate cuts. This interest rate reduction direction seems to continue to prevail at the Fed despite the fact the American job market still appears to be soaring. The financial markets have priced in at least one and possibly two 25 basis rate cuts this year.

At its recent policy meeting, the Bank of Canada held its key policy rate unchanged, citing the same slower world growth and trade concerns expressed by the Federal Reserve. The Bank of Canada kept its key policy rate unchanged even as Canada experienced a very weak growth phase late in 2018 and early in 2019.

If the US central bank cuts rates, as is widely expected, and Canada’s rate holds steady, then the benchmark rates of these two countries may soon coincide.

So, the short-run signs suggest more US-Canada convergence both in terms of economic growth and interest rates is on the way.

Canada Real GDP Growth, Annual Rates

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US Real GDP Growth, Annual Rates 

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