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Consumer debt hampers growth: EDC

Canada’s economic growth will remain constrained in 2024, according to Export Development Canada.

Gross Domestic Product is expected to expand by a paltry 0.9 per cent. Sizeable debt-servicing requirements have forced the Canadian consumer to focus on saving over spending.

“We see an extremely weak consumer, a heavily indebted consumer here in Canada, which is holding back our ability to grow,” said EDC chief economist Stuart Bergman.

The debt-to-income ratio in Canada is 187 per cent, which is far higher than in the United States. Consumers are spending 15 cents of every dollar of disposable income to service debt.

“That is going to hold the Canadian consumer back as long as interest rates remain at currently elevated levels,” said Bergman.

EDC is forecasting three interest rate cuts in 2024, with the first coming in June.

“It’s still very much our base case, but my confidence level around that June pivot has come down quite a bit,” he said. “There’s a good chance we’ll see that pushed out into the fall.”

Other analysts think interest rates will remain flat or even rise in 2024.

EDC expects the Canadian dollar to average US$0.74 in 2024 and then climb to $0.78 in 2025, which isn’t great news for farmers.

“Obviously it hurts our competitiveness,” said Bergman.

Many agricultural commodities are priced in U.S. dollars and that means fewer Canadian dollars per U.S. dollar. But

$0.78 is still a “relatively comfortable” level for exporters. The mid-80 cent range would be far more troubling.

Canada’s top export markets for agricultural commodities are the U.S. and China.

American consumers have done a better job than Canadian consumers of repairing their balance sheets over the last 15 years and a resilient labour market in that country has supported steady growth in wages and employment.

That has generated a “spending splurge” that should result in an economic growth rate of 2.3 per cent in 2024.

Inflation is cooling in the U.S., which may result in interest rate relief in the second half of this year.

China’s economy continues to weaken with a 4.7 per cent increase in GDP forecast for 2024 and a 4.4 per cent hike in 2025. That is down from the double-digit growth rates of the early 2000s.

“Despite fiscal stimulus and modest monetary policy easing, the effects of the country’s property sector slowdown and weak consumer and business confidence will persist,” said Bergman.

Consumers are paying down debt rather than buying more stuff, which could result in softer prices for many commodities.

“We’re not seeing great things out of China,” he said.

Bergman worries that the property sector “meltdown” in China could spill over and harm the country’s banking industry.

“That’s something that agricultural exporters need to be concerned about.”

EDC expects the world economy to grow by 2.9 per cent in 2024, which is considered “fairly soft.” Growth should return to pre-pandemic levels of 3.3 per cent in 2025 due in a large part to lower interest rates.

But those global forecasts come with a high degree of uncertainty due to the considerable geopolitical volatility that exists today.

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