Scotiabank Comments on Bank of Canada, "Hot" Canadian Wages, Poor Productivity

10:27 AM EDT, 08/20/2025 (MT Newswires) -- One argument Derek Holt, vice-president of Scotiabank Economics, has a hard time with is that the Bank of Canada should be cutting more because of slack.

That's not just because the amount of estimated slack is small and because output gaps play a limited role in explaining inflation.

The BoC saw early signs of slack emerging and anticipated more ahead when it kept cutting into the March meeting and took the policy rate down from 5% in June 2024 to about neutral at 2.75%, wrote the bank in a note to clients. To then cut again when you do get some modest slack would be doubling up and insensible unless you think you are getting much more slack than envisaged.

On top of this point, the doves are being too impatient. The full effects of monetary easing take 12-24 months to unfold and so Canada hasn't even seen the 225bps of easing fully work through the economy yet. A real policy rate toward zero should offer meaningful support, stated Scotiabank.

The bank is beginning to see the effects in a way that illustrates how monetary policy may be exerting its influence. Interest-sensitive sectors are on the rise, signaling that they don't need further help and that further easing could overheat them. Housing starts and home sales have been very strong over recent months. Auto sales have been fairly resilient and picked up in July.

Lenders appear very willing to finance it all. Retail sales volumes have picked up with Q2 tracking around 2.3% quarter-over-quarter seasonally adjusted annual rate and June is likely setting up a running head start into Q3. The BoC has to be very careful about overstimulating rate sensitives in the futile quest to save sectors most directly affected by tariffs, pointed out the bank.

The latter should be left to fiscal policy, with most of the tariff effect outside of a select few sectors being pretty small and accommodated by renewed currency weakening over recent weeks.

In any event, slack is likely small, added Scotiabank. It was estimated in the July Monetary Policy Report (MPR) at -0.4% in Q1. Tracking of Q2 gross domestic product suggests it may have risen somewhat, but perhaps not as much as the BoC estimated, which runs counter to the risk that the BoC may be getting more slack than envisaged. The July MPR had Q2 GDP at a 1.5% quarter-over-quarter SAAR contraction and it may prove to be too low.

Further, Q3 GDP is getting a running head start based on recent data. If June lands as the bank expects next week, then it could mean a hand-off effect that bakes in 1% quarter-over-quarter SAAR GDP growth in Q3 before Scotiabank even considers Q3 data. The supply side part of the gap calculation is probably also getting dinged, for example, tighter immigration, weakened confidence to invest, etc.

The Canadian consumer isn't poor as wages are "hot, hot, hot," according to the bank. They were up 8.1% month-over-month SAAR in July, 3.2% in June, 7.1% in May. Contract settlements are off the charts.

Productivity isn't strong as labor productivity has fallen outright in 15 of the past 19 quarters. Because pay has generally exceeded productivity, unit labor costs (productivity-adjusted total employment costs) have been rising sharply for years and pending Q2 figures after Canada gets GDP, this country isn't helping its competitiveness issues one bit with or without President Donald Trump's hindrances, noted Scotiabank.

The country's workers and businesses are so busy pointing the finger to government, expecting solutions, while their behavior is worsening the nation's competitiveness.

The argument that remains intact is that Canadians, on balance, are getting massive pay gains that they don't deserve, concluded Scotiabank.

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