The Canadian yield curve has flattened to its lowest level since the run-up to the late 2008 recession but, unlike in the US, it is not an infallible indicator for predicting economic downturns. Moreover, it is an inversion of the curve rather than just a flattening that really matters. An inversion of the spread between 10-year and two-year yields did provide an early warning of the recession that began in early 1990. But the curve also inverted in the early 2000s, even though the Canadian economy narrowly avoided a contraction. The curve did invert ahead of the late 2008 recession, but by the time that downturn started, it had already un-inverted again. The upshot is that, like the Fed is doing in the US, the Bank of Canada should keep one eye on developments in the yield curve, but it is far from a faultless warning indicator. In particular, between 1998 and 2000 the spread was narrower than it is now and yet GDP growth averaged 4.5%.
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