In a connected world, a global slowdown will hit Canada, too

Could this really be the end of interest rate hikes?

As Canadians wait for Tuesday's latest domestic inflation reading and real estate sales data,a flurry of economic signals at home and around the world maybe telling us that the long path of painful increases in interest rates has done its workandcome to an end.

A slowdown in demandis just what the Bank of Canada has been hoping for,allowing production in the economy to catch up with consumption, thus putting the brakes on rising prices.

Ending the interest rate sting?

For borrowers who have been watching the rising cost of mortgage renewals and other loans, an end to the sting of higher lending costs could not come too soon.

But an examination of world events from the impact of a climatecrisis to declining trade to fears of a meltdown in the world's second-largest economy may imply Canadians couldget more of a slowdown than they have been bargaining for.

Perhaps the biggest portent forCanadian inflation were the figures released last week fromour southern neighbour. While the U.S.inflation number out on Thursdayjogged up a touchfrom the previous month, marking the first rise in the headline consumer price index (CPI) in a year, analysts looking at the numbers more deeply said the inflationary trend was heading down.

As of Friday, an average of estimates by bank economists polled by Bloombergpredicted that Canadian inflation would likely follow a similar path, rising from 2.8 per cent in June to threeper cent in July.

WATCH | Canada lost about 6,000 jobs in July, a sign of a slowing economy:

Canada lost about 6,000 jobs in July, a sign of a slowing economy

1 year ago

Duration 2:24

The latest StatsCan jobs numbers show Canada had about fewer jobs last month, a sign the economy is slowing down, according to at least one economist.

The inflation number that gets most ofthe attention compares prices this year to those one year ago, but after a surge last autumn, prices of many goods have been coming down.

And a measure of U.S.core inflation the number with volatile food and fuel removed, which is closely watched by central bankers fell to 3.1 per cent from what had been fiveper cent as recently as May.

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"The core CPI, in particular, adds to recent data that calls into question whether the central bank will need to raise rates again this year, as most officials had projected in June,"the Wall Street Journalreported.

But while stock markets rose on Thursday onthe prospect of an end to interest rate hikes, by Friday there were signs that fears for the global economy notably trouble in the world's second-largest economic powerhouse, China contributed toconcerns among some traders.

September is the cruellest month

U.S. producer prices released on Friday showed companycosts rising, which traders also seemed to read as evidencethat even an end to interest rate hikes will not lead to rate cutsas central banks try to ward off a new outbreak of rising prices.

As markets head for the volatile month of September, traditionally the cruellest month for stocks, traders seem to look for things to worry about.But a number of economic indicators point to a slowdown in the medium term.

"The number shows that we've fallen below 50 on a seasonally adjusted basisit's at 48.6, which means that we're actually seeing indications of a slowdown," Fraser Johnson, a professor in operations management at Western University's IveyBusiness School in London, Ont., and author of the textbook Purchasing and Supply Management, said in a phone conversation last week.

The number Johnson was talking about was the Ivey Purchasing Managers Index, a Canadian economic measure that gets less attention than things like unemployment and inflation. As the director of the group that compiles the index, Johnson said the sudden decline of the data point below 50 is significant.

Like other PMIs around the world, the data is based on a rolling poll of a group of key people across a spectrum of industries and regions who simply say whether their companies are buying more or buying less in any month. In other words, he said, as of the July data, a majority of purchasing managers have given a thumbs down.

Johnson said despite research that shows his 23-year-old PMIhas proven itself reliable, only the August reading, expected in early September, will show whetherthe decline is a blip or a trend. He also points to the strength of theemployment componentof the indexcoming in at54.2, which shows companies are still hiring.

Shrinking global trade is bad for Canada

Johnson said that purchasing by businesses tends to be a leading indicator for the economy. And as David Parkinson reported in the Globe and Mail last week, Canada is far from alone inseeing that indicator decline demonstrating that manufacturing, and thus trade, may be slowing worldwide.

That matters for Canada, a relatively small economy that depends on trade with its bigger partners. The latest data out last week showed that both imports and exports fell, but exports fell more, leading to the biggest trade deficit in three years.

Canadian exports to the United States declinedmore that two per cent, but trade with other countries fell even more sharply, down 5.5 per cent.

"Weaker global demand and the fading boost from easing supply shortages took a toll on exports in June, confirming that net trade weighed on second-quarter GDP growth,"Olivia Cross, an economist at Capital Economics,told Reuters last week.

Economists at the Bank of Montreal insisted that last week'ssurprise move from rising prices todeflation in China was unlikely to have a strong impact outside that country. But in an articletitled "Sputtering Trade Fuels Fears of a Fractured Global Economy," the Wall Street Journal warned that growing trade divisions would have a slowing effect.

There were also several warnings last week of the medium-term economic impact of climate change, as places like Hawaii are too dry and places like Ottawa are too wet. The insurance costs of disasters are rising, and a new study from the journal Management Scienceshows that failing to address climate change will increase the cost of public borrowing, with Canada one of the most affected.