While difficult months are still ahead, there is improvement in sight in the second half of 2024, predict Matthieu Arseneau, deputy chief economist at the National Bank, Jimmy Jean, chief economist at Desjardins, and Robert Hogue , senior economist at the Royal Bank of Canada, who participated in the 48e edition of economic forecasts The Press.
Inflation: victory on the horizon
The best news of 2024 will undoubtedly be the decline in inflation and the return of the consumer price index to the Bank of Canada’s 2% target. “The battle is coming to an end,” says Jimmy Jean. Highly criticized for waiting too long before raising interest rates and for having done so very aggressively, the Bank of Canada acted appropriately to cool the economy, believes Robert Hogue. For Matthieu Arseneau, the latest increase in the key rate was probably too much and it worsened the economic slowdown. But monetary policy is working, he says, and it has cooled inflation significantly. The CPI, which was 5.9% at the start of 2023, had fallen below 3% by the end of the year.
The Bank of Canada should be able to say mission accomplished at the end of 2024, our participants predict.
Which does not mean that consumers will no longer suffer, emphasizes Jimmy Jean. Food prices, like housing prices, will remain high for reasons that monetary policy cannot control. The increase in housing prices will continue, unless there is a moratorium on immigration to try to rebalance supply and demand, says Matthieu Arseneau.
One, two, three rate cuts
The fall in interest rates is the other improvement that the next year should bring. The three economists predict a reduction in the Bank of Canada’s key rate by the end of 2024. This reduction could vary between 100 and 150 basis points, in two or three announcements. Unlike the American Federal Reserve, which has telegraphed three reductions in the key rate for 2024, the Bank of Canada hides its game well. Its official speech always speaks of another increase “if necessary” and it will not change it before have the conviction that inflation has fallen to a lasting decline, our economists believe.
The conditions expected by the Bank of Canada to begin lowering rates should arrive at the same time as spring, in April.
Be careful, says Matthieu Arseneau, even after a drop of 150 basis points, we still have a key rate of 3.5%, which remains very high. “We must not forget that monetary policy can take up to eight quarters to have its full impact on the economy,” insists the National Bank economist. This means that 40% of the impact of past rate increases remains to be passed on to a consumer who is already on one knee. »
The word that starts with R
There has been much talk of recession in the year that has just ended, but it has not yet materialized, except perhaps in Quebec where the latest statistics should confirm two consecutive quarters of decline in gross domestic product, which is the technical definition of a recession.
Despite record debt, households have borne the brunt of rapid increases in interest rates.
This is not the catastrophe that some had predicted either in Canada or in Quebec, says Jimmy Jean. “The balance sheets of Quebec households are in relatively good health. We do not see an explosion of insolvencies or failures. » The next few months will be difficult, according to him, but “when the pressure on interest rates begins to fall and extreme inflation becomes a thing of the past, the Quebec economy will be able to bounce back because that there is no significant deterioration in either the job market or household balance sheets.”
For the same reasons, Matthieu Arseneau believes that the weakness of the Quebec economy is not alarming. “It was the most overheated economy in the federation. Yes, the unemployment rate has increased more than elsewhere, but it remains below the national average, he recalls. I find it hard to believe that Quebec will continue to underperform compared to the rest of Canada. »
House prices hold up
The expected drop in interest rates should breathe some fresh air into the real estate market, predicts Robert Hogue. “We expect the market to remain fairly calm between now and spring, if not until summer. It will take a rate cut to make activity take off a little. »
Rising interest rates have not led to a wave of home sales, he says, but rather have led households to tighten their belts and curtail their other spending. “Culturally, in Canada and Quebec, people are ready to make sacrifices before giving up the keys to their homes,” believes Robert Hogue.
The Royal Bank economist points out that 40% of mortgage holders have already renewed their loans at higher rates. Those who still have to do so should get through it, he said, especially if rates fall. The most at-risk cohort of mortgage holders will arrive in 2025, when rates are expected to be lower.
House prices are also holding up because people have kept their jobs. But we are seeing an increase in registrations and the market has already turned in favor of buyers in certain regions, according to Jimmy Jean. “It could lead to a drop in house prices,” he said.
If house prices were to fall significantly, a recession would be inevitable. “A soft landing would become as likely as the return of the Quebec Nordiques,” says the economist, who nevertheless believes that the risks of a major correction in real estate prices are “fairly low.”
Unemployment: inevitable increase
The good performance of the labor market was the surprise of 2023. We should expect the unemployment rate to continue to increase in 2024, estimate our economists, to get closer to 7%.
The economy will not be able to create enough jobs to absorb record population growth. “The increase in the unemployment rate is not due solely to job losses,” recalls Robert Hogue, “it is because the active population is increasing so quickly, it is a fairly unusual situation. »
The labor market will be less buoyant because the impact of interest rates continues to hurt businesses.
“There is quite a contrast between wages which are increasing by 7% and corporate profits which are falling by 20% in Canada,” explains Matthieu Arseneau. Companies are a little traumatized by labor shortages, they keep their employees, but at some point, there are sectors that will have difficulties and there will be difficult decisions to make. »
Businesses could also feel the impact of the expected slowdown in the American economy at the start of the year. The risks of a recession or a major slowdown in the United States cannot be ruled out, believe our three participants. If that happens, “we will be exposed through exports,” says Jimmy Jean.
Governments too generous
Governments have been generous recently in helping households cope with inflation. This generosity fueled the economic growth and inflation that the Bank of Canada worked to calm. “I think governments will have to be careful because investors are very careful about their financial situation,” says Matthieu Arseneau.
The level of government deficits and debt, both in Canada and the United States, should require some restraint in public spending. If the economic context were to deteriorate, requests for intervention will flood in from all sides, and governments have demonstrated that they have difficulty resisting the temptation, especially as the electoral deadline draws near, fears Robert Hogue. “Perhaps something has changed during the pandemic, spending programs to deal with absolutely historic situations are becoming a bit of the norm. »
Canada has an interest in being more disciplined in its spending if it wants to maintain its triple A credit rating. After analyzing the government’s financial situation, economists at the Royal Bank came to the conclusion that Canada should not take for granted that he will maintain this better rating. “We are not saying that a discount is coming,” specifies Robert Hogue, “but that we must not lose sight of that. »