Overview of the current economy - summer vacation series

Ashleay: Hello and welcome to the “In Your Interest!” podcast. My name is Ashleay and, as usual, I’m joined by my colleague, Chief Strategist, Sébastien Mc Mahon. Today we’re discussing the current economic scene in preparation for summer. So, Sébastien, what will you be watching on the economic stage this summer?

Sébastien: Well, we’ll be talking about interest rates again, of course—

Ashleay: Of course!

Sébastien: —but for good reasons. We’ve been discussing interest rates for, what, two years now?

Ashleay: About.

Sébastien: Well, two years on the podcast, at least; we’ve been discussing them off-air even longer. But before now, the themes of those discussions were along the lines of, “Rate hikes are coming,” “Oh my God, rate hikes are happening fast.”

Ashleay: Yeah.

Sébastien: “Oh my god, what’s going to be the consequence of all these rate hikes?” And now we’ll be talking about rate cuts.

Ashleay: Yes.

Sébastien: So yeah, we’ve come full circle. For a good while not, we were in the camp that predicted a first cut on July 24, 2024. We were a bit behind the consensus that many of my colleagues—economists—held, which predicted a first cut earlier in 2024. We were waiting for more progress on inflation, and now we’re rallying behind the idea that it could happen a bit before then, that June 5 could be the date. And in fact, in his last press conference, Governor Macklem kind of asked himself the question, “what would it take for a rate cut in June?” and answered, “Well, it would take a continuation of the trends that we’re already seeing.” This was, in a way, setting the table for a cut. We think it’s very likely, I would say the odds are about 80%, that we have a rate cut in June. But if we skip over June, I think it’s pretty much a done deal that we’ll have a first rate cut in July. We think there will be a total of three to four cuts in 2024. This will depend on a lot of things. If inflation were to flare up again—which is quite unlikely, it would take major surprises to change current trends, since we think inflation is down enough. Last summer, in August 2023, we were still at 4%; now we’re at 2.7%. Food inflation, we were discussing that for a while, was about 10% or something like that.

Ashleay: Yes

Sébastien: And, of course, this is creating many socioeconomic issues. Now, the prices are not going down, but at least food inflation has dropped to 2.3%. Housing, however, is still an issue. And, of course, we can talk about housing in more detail. The thing is, immigration and demographic growth is putting a lot of pressure on housing. So the pressure is for good reasons, but the bank can’t do anything about it: the interest rate is too blunt a tool to address it. So, we’re still near the peak for housing inflation. Rents, specifically, are still rising at the rate of 8% per year. But if you strip all that down and look at everything (excluding housing), you see that inflation is close to 1%.

Ashleay: Oh, ok.

Sébastien: So much lower. Meaning it’s time to get moving.

Ashleay: I see, I see. And I think we were discussing the value of housing; the period between 2013 and 2020, if I’m not mistaken.

Sébastien: Yeah.

Ashleay: What was that percentage?

Sébastien: When it comes to discussing the price of a house in Canada, markets are very regional. So, there’s Toronto, Vancouver at the top end, and Montreal has been catching up. The market was hot for a while in Calgary. Other than that, it depends on how the economy is doing. But now we’re seeing the impact of demographic growth broadening. Here in Quebec City, for example, demographic growth wasn’t really an issue for a while: in the eight years between 2013 and 2020, housing inflation was at 0% total. Prices were going sideways. Since late 2019, of course, interest rates fell, which sparked a move. Now we’re seeing demographic growth and interest rates going up again. Over the last four years, the price of an average house has increased by 35%.

Ashleay: 35%!

Sébastien: So again, interest rates are not the solution to this, since it’s not about speculation, it’s about demographic growth. The Bank of Canada needs to ignore everything that’s going on in housing, they need to look at everything excluding housing. And when you do that, what’s left is 1% inflation. So, again, it’s time to move.

Ashleay: Wow, all right. So the potential interest rate cut is good news for borrowers, but will we still be talking about a housing shortage?

Sébastien: We’ll likely be talking about a housing shortage for the next decade. So that’s the bad news.

Ashleay: Right.

Sébastien: Since it’s moving season, we’ll be hearing more on this topic. Real estate prices will likely continue to rise for several years. Even if demographic growth were to stop, just to accommodate everyone that’s joined the Canadian economy over the last few years. Demographic growth is about 3% per year now, which is even higher than the baby boom of the 1950s/60s, so it’s very strong. To rebalance the whole market, we would need to build a lot of housing. We’re also seeing that construction labour shortages is a big issue in Canada, and not just for housing but for all major infrastructure projects. We need to build more and better roads, more bridges, we need to invest in electricity capacity, which is a big issue in the province of Quebec. But, you know, it’s often the same kind of workers that build housing and infrastructure. These are the issues we’re facing now, and until the economy catches up, housing will remain at the centre of these tensions. The good news is, if you have a house it’s going to keep appreciating over the next years and decades. But if you’re among the younger generations, like my children, for example, accessing property will be much harder than it was for our and our parents’ generations.

Ashleay: Right. And how is the global economy fairing?

Sébastien: Yeah, the global economy is doing well; in fact, it’s getting better. The US economy has been held up by fiscal spending and strong consumer spending—which we’ve discussed at length. And now we’re seeing that Europe is coming out of a recession.

Ashleay: Right.

Sébastien: We’re seeing China’s economy reaccelerating. We’re hearing anecdotal evidence of some favourable developments, such as more demand for exports in Germany, China, etc. This is good news for investors and good news for Canadians, because we trade extensively with these countries. Resource prices should continue to rise. The prices of copper and industrial metals are already higher. In fact, in our portfolio, in our strategy, we implemented these positions to benefit from just that. In terms of gasoline prices, we’re at the bottom of the $75–90 range. We could see some upward pressure during the rest of the year, which could bring inflation back into the picture, but likely not enough to bring the rate back to three, four or five percent. It would be marginal but could still keep inflation a bit stickier, let’s say. But overall, the global economy is doing well. This is good news for investors, good news for businesses.

Ashleay: Fantastic. And the US election is fast approaching; what should we be watching for?

Sébastien: Well, we need to watch for who has the lead right now. Trump seems to have a slight lead, but that could change between now and the election. Two debates have been announced: one in June and one in October. These will likely bring some momentum into the race. The markets aren’t really trading on it yet, though. The question is: what kind of Trump will we get if he does win? Will it be a vengeful Trump, thinking about the lost election, the “stolen” election? What will he do? What reforms will he try to make? Of course, the checks and balances are very important features of the US political system. We saw that, between 2016 and 2020, Mr. Trump said a lot, but not much of it got done: it was just rhetoric. We’ll see if that’s still the case. Of course, he is thinking about implementing tariffs again. We’ll see about that. It would have a significant impact on the world. But if you’re a Canadian looking at the US and seeing Mr. Trump potentially overheating the economy again with debt and so on, you might look at positively, since whatever is good for the US economy, even in the short-term, directly or indirectly helps Canada’s economy. I won’t pick a side. I think both candidates will inherit an economy under immense fiscal pressure. Having said that, both are likely to keep the fiscal deficits going. The highlights of this election are likely ahead of us rather than behind.

Ashleay: Fantastic. Well, that’s all for today. Thank you very much, Sébastien.

Sébastien: Pleasure.

Ashleay: You always paint a very clear picture of current events. We can safely say that we know what to look for on the economic stage this summer. A big thank you to our listeners for being here with us. Don’t hesitate to drop us a line if you have any questions. Until then, see you all next week. Loved this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast, available on all platforms, visit the economic news page on ia.ca or follow us on social media.