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Economy and entrepreneurship

Economic perspectives: 10 questions to Jimmy Jean

February 8, 2023

Rising interest rates, high inflation, and the likelihood of a recession... there are increasing concerns for households and businesses

Many of you attended the web conference of Jimmy Jean, Vice President, Chief Economist and Strategist, who presented the latest economic and financial forecasts. Some of the attendees online took the opportunity to ask him questions, not all of which could be answered during the conference.

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Economy: Jimmy Jean's predictions


Jimmy Jean, Chief Economist of Desjardins Group, presented the latest economic and financial forecasts on February 7.Moins

Economy: Jimmy Jean's predictions

Jimmy Jean, Chief Economist of Desjardins Group, presented the latest economic and financial forecasts on February 7.Moins

Here are the answers to 10 questions that were most often asked to Jimmy Jean during this presentation.

1. Where do you see the Canadian dollar heading over the next few months?

If economic conditions deteriorate as expected, the Canadian dollar could fall to US$0.72 in the coming months. When the economy is struggling and financial markets are more volatile, investors often seek out "safe" assets, which generally benefits the US dollar. At the same time, many commodity prices tend to fall, which also puts the loonie at a disadvantage. What's more, the Bank of Canada has already signalled it plans to keep interest rates where they are for the next few months. So if the Federal Reserve continues to raise rates, the Canadian dollar could fall due to wider interest rate spreads with the United States.

2. If the Fed raises rates again, will the Bank of Canada follow suit to prop up the loonie?

The exchange rate is typically a secondary consideration for the Bank of Canada. And interest rates—specifically US–Canadian interest rate spreads—are just one of many variables affecting currency values. Commodity prices and risk aversion are other factors that can have a much bigger impact. But the Bank of Canada has no control over those, leaving it little influence over the exchange rate. If the Bank of Canada followed the Fed's lead and raised rates again, it would more likely be because of persistent inflation in Canada.

3. What could prompt the Bank of Canada to continue raising interest rates?

The Bank of Canada (BoC) has decided to pause rate hikes. To continue holding, it would have to see encouraging signs that inflation is slowing. Not only would it want to see pressure abate on fuel and imports, it would probably also want to see labour shortages ease and wage growth moderate. Persistent labour market overheating, new global supply shocks or surging food and fuel prices could raise fears of a permanent de-anchoring of inflation expectations. The BoC would likely respond by raising rates further. Financial markets aren't pricing in this kind of outcome, so we could see a lot of volatility if something like that happened.

4. Quebec's GDP contracted in Q3 2022. Is the province already in a recession?

We'll need to see the fourth quarter data to get a better sense. If GDP declined for a second straight quarter, Quebec would meet the definition of a technical recession. Even so, if the labour market remains strong, it wouldn't necessarily be a true recession. In the past decade, there have been technical recessions in Germany, Japan and elsewhere. But since unemployment didn't spike, they were periods of economic stagnation rather than recessions. We'll have to keep an eye on the unemployment rate and household incomes to determine whether Quebec is truly in a recession. Both of those indicators held up well in 2022, but they're expected to deteriorate somewhat this year.

5. What can we expect from the US and Canadian bond markets in 2023?

Central banks have warned markets not to price in immediate rate cuts, but looser monetary policy could be in the cards if we see disinflation and a recession. Bond yields would move lower as these signs pop up. If that happens, bonds should perform better than last year. But rate cuts will likely be slow in coming, which could mean relatively modest returns. There could also be a lot of volatility, especially as central banks trim their balance sheets.

6. Should we be concerned about extremely high levels of government debt around the world?

Government debt increased in most countries in response to the pandemic. The sharp rise in nominal GDP in 2021 and 2022 helped, but this trend will reverse itself if we dip into a recession. That's because we'd see downward pressure on revenues and upward pressure on social safety net spending on things like employment insurance. Canada continues to have a solid credit rating and relatively low debt levels. Compared to other advanced economies, it also has good long-term economic growth prospects thanks in part to strong population growth. Some economies with precarious public finances will be especially vulnerable if returns rise on risk-free assets. Countries with a struggling economy and a poor fiscal starting point could see their debt service costs skyrocket.

7. If inflation doesn't come down as expected this year, could the Bank of Canada raise interest rates?

We can't rule it out. The Bank of Canada's mandate is to bring inflation back to its 2% target, though it doesn't expect to get there until late 2024. It's being patient, but that patience has its limits. If new shocks were to significantly lengthen the time horizon to reach the inflation targe, the Bank would likely tighten further. See my answer to Question #2 for more details.

8. How is the labour shortage affecting wages and inflation?

The worker shortage has created a mismatch between labour supply and demand, putting upward pressure on wages. This is driving up costs for businesses and fuelling inflation. In the longer term, labour scarcity will force businesses to adapt and look for ways to boost productivity through things like investment and infrastructure upgrades. Such productivity gains could eventually offset some of the upward pressure on inflation. In the shorter term, the recession we expect in 2023 should ease demand for workers somewhat, resulting in fewer job vacancies and a more balanced labour market.

9. Will every sector of the economy be affected by the downturn? Which will be hardest hit? Could any come out ahead?

The most interest rate-sensitive sectors are the most vulnerable. The housing market obviously tops the list. Spending on durable goods like furniture, appliances and motor vehicles would also be affected. Sectors struggling to recover from the pandemic (accommodation, food services, entertainment), sectors hobbled by debt (accommodation, food services, construction) and sectors grappling with labour shortages (manufacturing, transportation, warehousing) stand to bear the brunt. In contrast, health care, education and the primary sector should hold up better.

10. In a perfect world, governments could mitigate the economic slowdown without adding fuel to the inflationary fire. Is that possible in practice?

In the short term, it would be virtually impossible. The Bank of Canada and other central banks are responding to high inflation by raising interest rates. Their goal is to ease price pressures by bringing supply and demand into better balance. That means reducing demand and slowing the economy. However, governments could take highly targeted measures to lessen the effects of the economic slowdown on the most vulnerable households. If the recession is relatively severe, inflation will probably come down. That would make it a more appropriate time to make structural investments and implement reforms to revitalize the economy, boost productivity and enhance long-term economic resilience.