Seven charts that show why Canada’s interest rates are set to rise

These animated charts show just how fast Canada’s economy has turned around in recent months. Even so, something is missing

If the majority of private sector economists are correct, the Bank of Canada will raise interest rates on July 12 for the first time in nearly seven years. Despite the Bank’s assertion as recently as January that another rate cut was “still on the table,” top officials have growing more bullish about the economy. Here’s a look at several key measures that show just how fast Canada’s economy has turned around over the past six or so months—and the one key measure that’s lagging.

Employment growth

Friday’s jobs report delivered the latest boost to those expecting a rate hike on July 12. In June the economy added roughly 45,000 net new jobs, which was the fastest pace of annual employment growth since early 2013. It wasn’t all good news—the tighter job market hasn’t translated into much bigger paycheques, with average weekly wages rising at just 1.1% from the year before, meaning that after inflation Canadians took a slight pay cut. Still, there’s no denying the strong rebound in job growth.

Chart showing Canada employment growth, 2004–2017

Hiring intentions

The boom in employment could keep on going, too, if the Bank of Canada’s business outlook survey is any indication. The latest quarterly survey, released on June 30, showed businesses were the more intent on hiring new employees than they’ve been in more than a decade. (The Bank’s gauge of hiring intentions shows the balance of businesses expecting to add new employees minus those that think their employment levels will be lower.)

Chart showing Canada hiring intentions, 2004–2017

Business expectations for future sales

Another key measure from the Bank of Canada’s outlook survey is the optimism businesses suddenly have about future sales of their goods and services. The Bank’s indicator of future sales gauge hasn’t been at this level since 2012.

Chart showing future sales expectations, 2004–2017

Canadian exports

One factor driving business optimism is the increase in demand abroad for Canadian-made goods. Canada’s weak export picture had been a constant source of concern for Stephen Poloz in recent years (reminder: before he was the Governor, Poloz was the head of Export Development Canada). As recently as January the Bank expressed concern about “choppy” exports and Donald Trump’s protectionist tendencies. With exports now growing at their fastest pace since 2011, that should check off an important box for Poloz in deciding whether to increase interest rates.

Chart showing Canada exports, 2004–2017

Retail sales

Retailers are also enjoying the best run they’ve had in years, despite the high-profile woes of big chains like Sears (which is in bankruptcy protection) and HBC, which is slashing jobs to cut costs. Flush with cash withdrawn from the equity in their homes and other borrowed money, Canadian consumers have gone on a spending spree with gains spread across a wide variety of retail sectors, including vehicles, building materials, home furnishings, clothing and food.

Chart showing Canada retail sales, 2004–2017

Gross Domestic Product

All of this is feeding into the strongest economic growth Canada has seen since the collapse of oil prices in 2014.

Chart showing year-over-year GDP growth, 2004–2017


So, we have booming job market, rising optimism in businesses, soaring exports and consumer frenzy—a rate hike on July 12 must be a slam dunk, right?

Not so fast. One key ingredient is missing, and it’s the most important piece of the puzzle as far as the Bank of Canada’s mandate is concerned: inflation. Inflation has tumbled below the Bank’s 2% target, and this doesn’t include the full effect of the latest decline in oil. The question is, will this be enough to dissuade Poloz from tightening?

Chart showing Canada inflation, 2004–2017