Canada Debt Market Report

Key highlights

The Canadian debt market continued to experience sluggish overall growth in Q2 2024. Year-to-date loan issuance was $2.0 trillion, driven primarily by the demand for new money. Loan issuance increased by 5% when compared to Q2 2023.

The real estate and financial services sectors made up the bulk of the total lending in Canada, followed by retail and wholesale, and other professional services sectors. These four areas comprised almost 60% of the total business lending in Canada.

The economy in the U.S.: A Goldilocks trend that leaves the Canadian Central Bank in a holding pattern

The economy in the U.S. continued to defy logic and scaled new heights in the second quarter of 2024. This was driven by a strong labour market, continued investments by the business and government sectors and technology sector growth fueled by AI. This was indeed a Goldilocks outcome where, despite inflation, a recession continues to be out of sight. With the future seeing rate cuts in the U.S., along with the ongoing generative AI mania, the economic euphoria in the U.S. is unlikely to subside in the near future.

So, what is driving the economic climate in the U.S.? Our neighbour continues to be a net exporter of key goods like energy . In addition, there has been a focus on housing and business investment by the government which has offset the challenges brought on by inflationary conditions.

This in stark contrast to the Canadian economy, which continues to move forward at an anemic pace. The Canadian economy is facing a sharp risk of recession if interest rates remain elevated throughout 2024. Even though the U.S. Fed and the Canadian Central Bank are independent in setting monetary policies, the Bank of Canada moves in lockstep with the U.S. Fed’s path.

But a lot of what binds the Bank of Canada to its American counterpart is the exchange rate of the Canadian dollar to the U.S. greenback. When interest rates are higher in one jurisdiction than another, investors are more likely to park their money there and earn a higher return, driving up the relative value. If the Bank of Canada were to cut faster than expected in a bid to boost the economy, it will drive down the value of the Canadian dollar. This would raise the value of Canadian exports to the U.S., boosting the economy. But it would also make imports more expensive, resulting in an inflation shock with goods brought in from the U.S.

What the future holds: Will the landing be as soft as predicted?

The Bank of Canada continues to be in a rock and a hard place with the overnight rates. In June 2024, inflation at 2.7% was still higher than the Bank’s target of 2%, though Canadian housing or shelter costs showed signs of cooling that month. Real estate activity across Canada in June showed a drop in both sales and housing prices year-over-year, whereas sales perked up a bit compared to May 2024. Monthly sales activity was 9.4% lower compared to June 2023. Overall, June 2024 did not end up being a blow-the-doors-off month for home sales.

Given the current Canadian labour market, headwinds facing business owners and the cooling housing sector, the Bank of Canada dropped its benchmark overnight rate by 25 basis points in July 2024.

Going forward, we anticipate further reductions in the overnight rate in Q3 and Q4 2024. Yet, with the booming economic climate in the United States and the impacts of dropping rates too fast on the Canadian dollar, the pace of rate drops might be slower than anticipated by the Canadian capital markets at the start of the year.