Winter economic outlook

Ashleay: Hello everyone, and welcome to the “In Your Interest!” podcast. This week we're taking a look at the latest economic news, and I'm delighted to have with me Sébastien Mc Mahon, our chief strategist, who will be sharing his insights on recent economic developments. So hi, Sébastien.

Sébastien: Hello, Ashleay. It's good to be here again and talk about the economy with you.

Ashleay: Yes, it's been a while since we've discussed the latest economic news together. And so, as we approach the end of 2023 and head into 2024, what has caught your eye recently?

Sébastien: Well, it's the period of the fall economic updates from governments. So, provinces and also the federal government, this one is, the latest one is coming. It's not published yet as we're recording this at the end of November. But we can, you know, guess the trend that this will take also for the federal government. So, if we look at the situation in which provinces and, you know, federal governments find themselves in, we're talking about the need for better infrastructure, for social housing, for anti-inflation measures. And we know the provinces are all facing similar problems. The population is aging. So is the infrastructure. The energy transition is creating massive needs for green investments. All this in a context where we're looking to return to equilibrium in the post pandemic era.

Ashleay: I see. And so maybe if we talk a little bit more about Ontario?

Sébastien: Yeah, if we start with Ontario. So, the fall economic update was published recently and Ontario decided to, well, it's delaying its return to balance by one fiscal year. It used to be 2024-2025. Now they're moving it down one year to 2025-2026 with less revenue and more expenses than anticipated. Pretty much the same thing for Quebec. So, remember that the economy is slowing down. We’re talking about this quite often here. Revenues were higher in the pandemic period because lots of money was injected in the economy. So, people were spending more and inflation of course inflated the prices. This is what inflation does. And that means that if you pay a tax rate on your goods and services that you purchase, that means that the governments had more revenues because of inflation and because of the boom in spending that happened during the pandemic. So, some of this was used to pay for tax cuts for targeted programs during the pandemic era. And now we're seeing the economy slow down. Some of the rise in income is already spent, as I mentioned, because of some tax cuts that happened during the last few budgets. So, the Quebec government was targeting to have a balanced budget by 2028, but it did have a large contingency reserve that it put in place when it did the exercise in March. So now, fast forward to November and we see that all or almost all of the contingency reserve has been used up because revenues are less than expected. So, the target now is more at risk of not being reached.

Ashleay: And in Canada maybe—what are the expectations?

Sébastien: Yeah, because the results are not published yet. They should be published on November 21st. But we kind of know that since the federal budget was announced early in 2023, the government, you know, then it planned to continue deficit spending, targeting Canadians’ pocketbooks, public healthcare and a clean economy. But in the months that followed, during the summer, all the way to today, Liberals returned their focus to the housing crisis and the cost of groceries. So, we knew the projection for the fiscal deficit in 2023-2024 was about 40 billion for Canada, which was 10 billion higher than the forecast from the previous fall. So, there’s a trend here. Maybe the projected deficit will be higher. And also, the measures should be more targeted towards the housing crisis, the cost of groceries. So, we should not expect that they expedite the target date for getting back to a balanced budget.

Ashleay: Okay. And I think the Bank of Canada is still trying to curb inflation?

Sébastien: Yeah, sure. Interest rates remain high. So, I recently suggested that fiscal and monetary policies should be rowing in the same direction rather than opposite directions. So, of course, restraint is the word that Mrs. Freeland has been repeating lately and likely will repeat when she publishes the Fall Update.

Ashleay: And as you've often said over the past year and a half, these are interesting economic times. It's the strongest inflationary push in 40 years, it’s the end of a pandemic and there’s the risk of a recession. So, what portrait would you paint for the current Canadian economy?

Sébastien: Canada seems to be already in a recession, but per capita. So, if you divide the real data, so the quantity of goods and services that are purchased and sold in the country. And you look at the per capita figures you see that, year over year, we’re already in a contraction for GDP for final expenditure on consumption. Pretty much everywhere you look you see per capita, you see a contraction. So, if you're looking around and you're looking at the news and you see, well, the news on TV, the numbers that are published seem to be still good, but, you know, I kind of feel more, you know, tied up than before financially. Well you're right, because every single Canadian spends maybe more in dollars but gets less in return. So, this is the situation that we're in right now. We see that the unemployment rate is starting to rise. This is the last criterion that is needed for more serious talk of an official recession. Usually when unemployment rates start rising, it doesn't stop after 0.2 or 0.3%. Usually, you know, it rises by quite a bit. So maybe we're at the beginning of this. Let's cross our fingers that it's not. But you know, we do see the labour market that is starting to hurt. It's been tight for a good while. And you know, when interest rates rise by as much as they have recently, then of course it has an economic impact. And we're starting to see it right now. So, Quebec is a bit in a different situation than in Ontario. In Quebec, the labour market is a bit tighter. That creates more inflation in Ontario. You know, lots of immigrants are going to Ontario. So that's creating an economic tailwind, but maybe creating some worse issues with housing.

Ashleay: I see. And what will we have to watch out for on the economic front this winter?

Sébastien: Yeah, it's an answer that's not too sexy, I would say. But I would say the continued transmission of monetary policy. So just, you know, when interest rates rise as quickly as they have, as I just said, the impact tends to, there are lags that last between 18 and 24 months before you've seen the full impact of every single monetary policy decision. So already we've seen consumer credit lag. Loan applications are down. Willingness to lend by banks is down. We're seeing bankruptcies on the rise. We're seeing credit card delinquencies go up. It's still, you know, early in the process. But we're seeing that for sure. And after that, you know, business credit is going to be more impacted. We're already seeing some signs of that. And in end, you know, the employment market, the labour market suffers and inflation gets back to 2%. So, in 2024 we should see this process at play. So, there's more of this impact to come ahead of us.

Ashleay: And what will it take to see a Bank of Canada rate cut?

Sébastien: We should see more clear signs of economic weakness, which will lead into inflation getting back to targets in a sustainable way. So there's no free lunch in the world, if you want to tame inflation, you need to slow the economy down enough. And this is what we're starting to see with a recession per capita. This is what we're starting to see with the unemployment rate rise from all time lows. So, we need likely to see more of that before it becomes clear that the economy is reacting as expected. Inflation will be back to 2% in a sustainable way, and then we can start cutting. Likely this is a story for mid-2024, a little bit later. But let's put it another way, if we do see a rate cut early in 2024, likely it's not going to be for good reasons.

Ashleay: Okay, so, to be continued. Thank you, Sébastien for your presence and the insightful analysis of the current economy of Canada. We hope you found it informative and helpful in understanding the current economic issues. Thanks for listening today and we will see you next week.