FX168 Financial News (North America) News Deloitte Canada said in its summer economic outlook report released on Wednesday (6/26) that as the Canadian economy continues to recover in the second half of the year, the Bank of Canada will resume cutting interest rates in September. But they also warned that more urgent measures are needed to address the slump in productivity.

Deloitte said that Canada's economic growth in the first half of the year was stronger than previously expected, and economic recovery is expected to continue in the second half of 2024 as the central bank continues its easing cycle. Deloitte predicts that the Bank of Canada will postpone cutting interest rates again until September, then cut interest rates again, and reduce overnight interest rates to 4.25% by the end of 2024.

Deloitte Canada's chief economist Dawn Desjardins said in an interview with Yahoo Finance Canada: “We have long believed that the Bank of Canada will be very cautious in cutting interest rates. We really hope to avoid injecting large amounts of activity into interest-sensitive parts of the economy, leading to price increases and jeopardizing the inflation rate reaching the 2% target.” However, Deloitte expects the Bank of Canada to accelerate interest rate cuts in 2025, and the benchmark interest rate will reach 2.75% by the end of next year.

Desjardins said, “We do think this will be a slow process, but once we actually see the 2% target, the Bank of Canada will take more aggressive measures, which means we should expect more interest rate cuts in 2025.”

Canada's inflation rate unexpectedly rebounded to 2.9% in May, and core inflation indicators rose, reducing the possibility that the Bank of Canada would cut interest rates in July. At the beginning of this month, the Bank of Canada lowered the benchmark interest rate for the first time in more than four years, to 4.75%, and said that if inflation continues to ease, it is reasonable to expect further interest rate cuts.

Deloitte said consumer spending and residential investment will pick up in the second half of the year as the Bank of Canada cuts interest rates. Deloitte expects GDP growth of 1.6% in the second quarter, 2.1% in the third quarter, and 2.7% in the fourth quarter.

Deloitte said: “However, consumer confidence is low and they are reluctant to make large purchases. Housing affordability is still a challenge, and savings rates are far above normal.”

“While these factors will dampen the pace of recovery in the second half of 2024, we will see stronger growth in consumer and residential investment next year as confidence recovers.”

Although the economic recovery continues and the so-called “soft landing” appears to be on schedule, Deloitte warned that weak business investment and productivity performance pose a risk to Canada's long-term prospects.

“Unfortunately, while we expect business investment to grow every quarter of 2024, the sharp decline in the second half of last year will be difficult to overcome, leading to a negative annual growth rate this year,” Deloitte said. It also pointed out that the commencement of construction of several electric vehicle battery factories will help increase productivity next year.

“While these investments are good news, weak business investment and productivity performance needs to be addressed more urgently across the country.”

The need to increase productivity is a key message from the Bank of Canada in recent months. Earlier this year, Vice President Caroline Rogers called Canada's low productivity a state of emergency. Speaking in Winnipeg on Monday, Bank of Canada Governor Maclum called the problem of slow productivity growth “our fatal weakness.”

“We're very good at growing the economy by adding workers. But in terms of increasing output per capita, we have been less successful. And this is causing us trouble.” McClum said.

“Weak productivity growth in Canada is a long-standing problem and has reached urgent levels. Although we are boosting economic growth by adding workers, we need more than just an engine.”

Desjardins said there are many possible solutions to help increase Canada's productivity, including encouraging business investment. She also said that reducing regulatory barriers (including cutting inter-provincial trade barriers) will enable businesses to grow and achieve economies of scale.

“This is worrying. We've been watching our productivity performance and have found that this isn't a good indicator for Canada. “We are lagging behind ourselves and our peers, which is of course very worrying,” Desjardins said. “Currently, we think this is a top concern for businesses, workers, and the government... We hope to find some solutions to really move this problem in the right direction.”