Canadians Still Feeling the Economic Pain, Despite Three Early Rate Cuts  

• Despite three interest rate cuts since June, Canadian consumers still appear to be feeling more stressed than their neighbours in the U.S., where the Federal Reserve has yet to start any reductions in borrowing costs.
• The persistent financial pressure reflects the vagaries of the Canadian mortgage structure, a surge in rents and a heavy debt load carried by many households. All three have crimped disposable incomes. With more mortgage renewals imminent and high population growth, putting more upward pressure on rents, analysts and economists say Canadians will feel stressed well into next year and after, keeping economic growth muted.
• The outlook remains muted even though Canada got a head start in lowering borrowing costs. In June 2024, Canada was the first economic power to cut rates in the current cycle. It has followed up with two more cuts, bringing the key policy rate to 4.25%.
• Canada's inflation-adjusted per-person expenditure has fallen by 2% since the peak of 2022 and 1.1% annually in the second quarter, showing that consumers are reeling under the burden. By comparison, inflation-adjusted spending in the U.S. grew 2.7% annually in July and is generally considered to be in line with the pre-pandemic trend. This divergence mainly reflects the differing structure of Canadian and U.S. mortgages.
• "What you're seeing in the U.S. is a preponderance of 30-year fixed-rate mortgages," said Randall Bartlett, senior director of Canadian economics at Desjardins. "It's very predictable for households," he said. By contrast, most Canadian mortgages are either variable rate or adjustable after four or five years. For homeowners with low-interest loans now coming up for renewal, they can expect their payments to jump, even with the Bank of Canada's current series of cuts.
• About C$400 billion ($294.55 billion) worth of mortgages are set to renew in 2025, out of which more than two-thirds are four- or five-year contracts. The 2025 figure is more than 30% of the value of mortgages being renewed this year. "It's a wall of mortgage renewals coming up," Bartlett said, and added that this would keep many Canadians under stress way into 2025 and 2026.

(Source: Reuters)