A reversal in strategy . . .
The U.S. Federal Reserve released a statement Tuesday signalling it is ready and willing to cut interest rates following escalations in the trade war with China. The move came as a surprise as it is a complete reversal from the Fed’s previous policy agenda of increasing rates in order to decrease its US$4.5-trillion balance sheet and prepare the U.S. for potential turmoil ahead. Other countries are making similar moves: Australia’s Reserve Bank committed on Tuesday to reducing interest rates for the first time in three years in an attempt to try and revive its domestic economy.
Consumers in the crossfire . . .
These rate cuts send a strong signal that potential global economic turmoil might very well be closer than previously anticipated. The World Bank revised and reduced its global growth forecast due to a decline in levels of investment as well as trade growth being the “weakest since the financial crisis 10 years ago.” While consequences of the trade war and lower levels of investment are mostly being felt in the manufacturing sector in the U.S., in Canada these strains are hitting Canada’s agricultural sector hard, with direct impacts on Canadian farmers. Ultimately, this will have a trickle-down effect on consumer prices at the grocery check-out.
Diversity on the Canadian front . . .
Canada’s dependence on the U.S. for its exports (73%) and imports (46%) means that the Bank of Canada may mimic the Federal Reserve’s move should it go ahead and lower interest rates. Canada’s lack of diversity in its trading portfolio has left Canada in the crossfire in the conflict between the U.S. and China on multiple fronts. Canada should continue to work on diversifying its markets beyond the U.S. and China, as well as its policies and programs promoting a more inclusive economy at home.