US and Canada Further Diverge – Implications for Canadian Mortgage Rates and Economic Outlook

In Q3, the US GDP maintained resilient growth (advanced estimate) at 2.8% annually, driven mainly by consumer spending and increased government expenditure, even amid high interest rates in Canada. This stability in the US economy impacts the Canadian market, primarily as the Bank of Canada assesses recent domestic GDP data showing signs of stagnation.

Canadian GDP has struggled, with output essentially flat in recent months. RBC is tracking a modest 1% growth for Q3, with the Statistics Canada data set to be released on November 29th. Here’s what Canadian homebuyers and mortgage holders need to know about these trends and how they might affect mortgage rates.

Soft Economic Growth in Canada

While the US economy continued its steady climb, Canada’s growth slowed, with flat GDP growth in August and downward revisions to previous months. Canada’s Q3 GDP growth is anticipated to land around 1% annually, with per-person GDP shrinking. This softness could signal more rate cuts from the Bank of Canada to support economic activity.

Canada’s real GDP held steady in August, staying flat after a modest 0.1% rise in July. Service industries saw a slight uptick of 0.1%, mainly from finance, insurance, and public service sector growth. However, goods-producing industries declined by 0.4%, marking their lowest point since December 2021, mainly due to dips in manufacturing and utilities. Despite this, 12 out of 20 sectors experienced growth in August, reflecting mixed economic performance.

Potential Rate Cuts in Canada

Despite declines in Canadian goods-producing sectors, including manufacturing (-1.2%), there were gains in services, retail, and finance. However, the impact of Canada’s elevated interest rates, compounded by high population growth, has not yet fully materialized. This lag suggests Canada’s economic activity may stay soft before picking up in the second half of 2025, impacting mortgage rate trends.

Given Canada’s tepid economic performance, RBC expects the Bank of Canada to cut the overnight rate by another 50 basis points (0.50%) on December 11th, with further cuts likely in 2025. This presents potential opportunities for homeowners with mortgages and prospective homebuyers to lock in more affordable rates as they decline.

US Stability as a Supporting Factor

With inflation trends moderating, the Fed’s preferred measure, the personal consumption expenditures (PCE) price index, dropped to? 2.1% in September on an annual basis, close to the central bank's goal of a 2% yearly rate, While it rose by only 1.5% in Q3, as core inflation, excluding food and energy, was 2.2%—above target but well below previous highs. The Fed is expected to respond with rate cuts, which could influence the Bank of Canada to consider similar actions. Lower rates could provide relief for Canadian homebuyers currently facing high borrowing costs, potentially creating a more favourable landscape for prospective buyers in Canada as inflation slows and mortgage rates may begin to ease.

With the Fed’s possible rate cuts and markets seeing another 25 bps (0.25%) off the federal funds rate on November 7th, Canadian mortgage rates may also decrease. High levels of US government spending have helped sustain economic activity, and this stability could positively affect Canadian markets, primarily as Canada benefits from US-driven financial market activity if oil prices avoid a nose dive. These strong consumption patterns reflect resilient consumer confidence, which could have a positive ripple effect in Canada, where spending behaviours often mirror those in the US.

Canada’s Economic Lag to Provide Relief for Borrowers

Given these dynamics, Canadians should consider securing competitive rates or discounts (from prime on variable rates) before further rate changes, which could affect mortgage lenders' spreads and funding costs. Connect with nesto mortgage experts to learn how these economic factors might impact your mortgage decisions and discuss strategies to benefit from potential rate cuts.

Whether you’re renewing, refinancing, or buying for the first time, nesto ’s advisors can guide you through the shifting economic landscape, helping you make informed choices to secure the best terms for your needs.

Contact your nesto mortgage experts today to explore how these changes can impact your mortgage strategy and secure the best rates for your next purchase or renewal.

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