Rising interest rates, high inflation and upcoming 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.
Here are the answers to 10 questions that were most often asked to Jimmy Jean during this presentation.
1. What can we expect from the markets by the end of 2022 and 2023?
There are many indications that several industrialized countries will experience a recession in early 2023, including the United States and Canada. Historically, stock markets have fallen sharply during recessions. The outlook for equity markets over the next few quarters is therefore bleak, with the expectation that they will only bottom in 2023. In fact, the asset class that could do best in the coming quarters is the bond market.
2. With inflation at a very high level and interest rates rising rapidly, could we end up with very high interest rates in late 2022 and 2023?
Our base case scenario is that Canadian policy rate hikes should stabilize after a final 50 basis point increase in October. This would leave the target for the overnight rate at 3.75%. Signs of a gradual slowdown in inflation should then become increasingly apparent, which should reassure policymakers. However, against this baseline view, there is a risk that inflation proves to be more persistent than expected, and the Bank of Canada may have to raise interest rates further to curb inflation. The risks of interest rates being raised to the very high levels of the early 1980s are low, however, as inflation already appears to have peaked.
3. How long can a recession last?
The duration and magnitude of recessions differ from cycle to cycle. The pandemic recession lasted only two months. The longest recession in Canada was the 1981-1982 recession, which lasted 6 quarters. Each crisis is unique in nature, making it difficult to establish a typical scenario. However, the magnitude and speed of interest rate hikes, a significant increase in commodity prices, a real estate market correction or the presence of fiscal austerity are some of the influential factors.
4. Which industries may be most vulnerable to the economic downturn
The most vulnerable sectors are those that are the most sensitive to interest rate increases. The housing market is obviously at the top of the list. Many durable goods expenditures are also affected, such as furniture, appliances and automobiles. In the current situation, sectors that are struggling to recover from the pandemic (e.g., accommodation, food service, entertainment), or those facing debt issues (e.g., accommodation and food service, construction) or labour shortages (e.g., transportation and warehousing, manufacturing), are likely to be the most vulnerable. On the other hand, health, education and primary sectors should prove more resilient.
5. How do you foresee the outlook for the CAD to EURO currency exchange?
We have seen the Canadian dollar weaken against the Euro since the beginning of the month. Given that the Bank of Canada is expected to stop rate hikes after its October meeting, whereas the ECB is likely to continue to hike until the beginning of 2023, we expect to see further weakening in the Canadian dollar against the Euro. The fiscal context in Europe will be a key determinant, however. If we see fiscal policies adopting unsustainable trajectories, notably as they attempt to shield populations from higher energy prices, the Euro will likely be in for a rough ride.
6. Is the upcoming recession scenario still favorable for new immigrants coming to Canada?
The expected recession in Canada is likely to be short-lived and relatively small in magnitude. While this could slightly reduce the demand for foreign workers, the effects will be limited and temporary. Labour shortages will continue to be an issue after the recession, so conditions will remain favourable for immigration from a demand standpoint. Housing availability and affordability is however an ongoing issue in the major urban centres, and could eventually constitute an obstacle to immigration if not addressed.
7. For mortgage renewals, a fixed or variable rate?
There is no right or wrong strategy. The important thing is to respect your risk tolerance when it comes to interest rate fluctuations. In the current context, with the rise in interest rates set to come to an end relatively soon, choosing a variable rate mortgage may make sense. Once markets have more clarity on the end of monetary tightening, five-year bond yields should begin to trend downward, which is likely to cause variable rates to fall. However, the respite is likely to be limited, as central banks are not expected to bring back policy rates to near-zero levels as seen in recent years.
8. The evolution of inflation has surprised on many occasions since the beginning of the year. Should we be concerned that inflation will continue to rise?
Overall, we expect Canadian inflation to average 3.2% in 2023. Our latest forecast calls for inflation to continue to average 6.4% in the fourth quarter of 2022. In 2023, we expect inflation to decline steadily amidst a global economic slowdown, bringing it back close to the Bank of Canada's 2% target by the end of the year.
9. What are the causes of the current labour shortage ?
There are many reasons. First, demographic trends are affecting the evolution of the working age population in Canada, and in many industrialized countries. Quebec and the Atlantic provinces are particularly affected by this issue as the working age population will grow at a weak pace over the next 20 years. Furthermore, the strong wealth gains enjoyed by many older workers in 2020 and 2021 seems to have encouraged them to bring forward their retirement plans. A decrease in the participation rate among those aged 55 and over has been observed recently. In sectors that demand very specialized skills, employers are struggling to find properly qualified and trained young workers to replace those that are retiring.
The pandemic has also led to significant changes in the labour market, with a higher proportion of workers indicating a willingness to change jobs in the next year, as they have the upper hand. This points to a higher-than-usual turnover rate, which tends to keep job vacancies higher than otherwise.
10. Will there be an impact on Canada if Russia decides to categorically cut off gas to Europe?
Natural gas markets largely remain regional markets. The direct effects on prices in Canada should therefore be smaller than those felt in Europe. Furthermore, Canada is less dependent on natural gas for its energy needs than Europe is (particularly Germany). Nevertheless, the European energy crisis is one of the factors leading us to forecast a recession. Given Europe's significant weight in the global economy, there will be indirect effects for Canada if global conditions deteriorate further. This could lead to weaker demand for Canadian exports, and lower prices for its commodities.