Introduction to Economic Forecasting
The Bank of Canada is set to release its economic forecast on October 29, marking a return to formal economic forecasting after a hiatus due to trade uncertainty. According to Governor Tiff Macklem, the bank will have to be "humble" in its forecasting due to ongoing trade uncertainty.
Current Economic Outlook
Macklem notes that while uncertainty around the U.S. tariff campaign has decreased since the spring, threats to global trade persist. A potential escalation between China and the United States could have significant global implications. Additionally, the review of the Canada-U.S.-Mexico Agreement on trade next year poses a risk to Canadian goods entering the United States tariff-free.
Impact of Uncertainty on Businesses
The Bank of Canada has found that businesses are holding back on investments and hiring due to ongoing uncertainty. However, the artificial intelligence boom has been a "countervailing force" to boost investment in the face of uncertainty, particularly in the United States. Macklem believes that AI has the potential to increase productivity and sustain non-inflationary growth, but also poses risks that need to be better understood.
Labor Market Trends
The Canadian jobs market has shown signs of softening, with over 100,000 positions shed in July and August. Although September saw a gain of 60,000 positions, Macklem cautions that any one monthly number is not definitive. The Bank of Canada will be looking at labor market trends, as well as inflation and consumption levels, to guide its upcoming interest rate decision.
Upcoming Interest Rate Decision
Macklem remains tight-lipped on the direction of the interest rate decision, citing the need to review all data and forecasts before making a decision. The bank will be paying close attention to consumption levels, which have shown resilience lately, as well as the overall inflation outlook.
Conclusion
In conclusion, the Bank of Canada’s return to formal economic forecasting is a significant development in the midst of ongoing trade uncertainty. With the potential for escalation between China and the United States, and the review of the Canada-U.S.-Mexico Agreement on trade next year, the bank must be cautious in its forecasting. As the bank navigates these challenges, it will be closely watching labor market trends, inflation, and consumption levels to guide its interest rate decisions and promote economic growth.
