As the Bank of Canada shifts its focus away from inflation control, there are significant developments in both inflation trends and population growth that could shape the Canadian economy in the coming months.

Core Inflation on a Downward Trend

The Bank of Canada has been closely monitoring core inflation, which excludes volatile items like gasoline. The good news is that core inflation is now on a clear downward trajectory. This has allowed the central bank to pivot its focus towards supporting the economy by cutting interest rates without fearing a resurgence in inflation.

Moreover, consumer inflation expectations have dropped significantly, marking the largest decline since 2022. When consumers expect lower inflation, they are less likely to make rushed purchases, which in turn helps keep inflation in check. This combination of falling core inflation and reduced inflation expectations has paved the way for the Bank of Canada to continue cutting rates.

Economic Slack and Rising Business Insolvencies

While inflation may no longer be the primary concern, the economy is not without its challenges. Business insolvencies and loan delinquencies are rising, signaling that many companies are struggling. This could lead to higher unemployment rates as businesses cut costs by reducing staff. The labor market, while not in a crisis, is beginning to show signs of strain, particularly in sectors like construction, where employment has started to decline.

Population Growth and Immigration: A Tipping Point?

Canada’s population growth has reached a peak, largely driven by an influx of non-permanent residents. However, this growth is expected to slow down significantly in the coming years due to government policies aimed at curbing the number of temporary residents. This slowdown in population growth could have far-reaching implications for various sectors of the economy, including housing and labor markets.

The government’s efforts to reduce the number of temporary residents come in response to growing public concern about immigration levels. Recent surveys show that Canadians are increasingly viewing immigration as a top issue, even surpassing concerns about climate change in some regions.

These developments indicate that while inflation may be under control, other economic challenges, such as business solvency and population dynamics, will play a critical role in shaping Canada’s economic outlook in the near future.