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Economic and Financial Outlook

Conditions Are Becoming Increasingly Favorable for an Upcoming Cut in Policy Rates

March 21, 2024
Jimmy Jean • Randall Bartlett • Benoit P. Durocher • Royce Mendes • Hélène Bégin • Tiago Figueiredo
Francis Généreux • Lorenzo Tessier-Moreau • Hendrix Vachon

Editorial

By Jimmy Jean, Vice-President, Chief Economist and Strategist

The global economic rebalancing remains difficult, as indicated by the soft end of the year 2023 that was experienced in Germany, France, the UK and Japan. After an encouraging cooldown last year, the inflation outlook is now complicated by shipping disruptions in the Red Sea and the Panama Canal that could re-ignite inflationary pressures in the goods-producing segment. Early surprises in goods inflation and producer price indexes in a few regions suggest that the disruptions could counterbalance the deflationary impact of China’s economic slowdown on its exports. This had been a contributing factor to the disinflation trend globally.

 

It may complicate the calculus somewhat for some central banks. In the United States, Fed Chair Jerome Powell had opened the door to rate cuts back in December. That early signal was premature in retrospect. US growth has been remarkably resilient and inflation has shown unpleasant surprises lately. US economic strength is nonetheless being tested by a cooling job market, evidenced by downward revisions to payrolls numbers and a creeping unemployment rate. Consumer spending also began 2024 on a softer footing, although partly because of weather effects. On net, signals remain mixed and the Fed will want to see more consistent signs of disinflation before cutting rates, though we continue to believe that those signals will have sufficiently accumulated by June.

 

North of the border, the outlook presents its own set of challenges and contradictions. The headline Canadian GDP print was decent for the fourth quarter of 2023, but a closer examination revealed underlying weaknesses, notably in real GDP per capita and business investment. The Canadian economy struggles against a high household debt service ratio, rising consumer delinquency rates and surging business insolvencies. The saving grace for Canada’s economy has been its strong population growth, which has helped normalize job vacancies. However, the labour market is now struggling to keep up, leading to a peculiar situation where consistent employment gains aren’t preventing the job market from slackening. Importantly, signs indicate that the momentum in wage growth is beginning to soften, a crucial factor for the Bank of Canada as it considers the timing for rate cuts.

 

Meanwhile, the steamroller of mortgage renewals carries on. This year will be relatively forgiving, as the bulk of renewals in 2024 will involve mortgages initiated in 2019, mostly at fixed rates and at the peak of the last rate cycle. In contrast, the 2025 and 2026 cohorts, with a higher proportion of fixed-payment variable-rate mortgages, are likely to face significant lump-sum payments upon renewal. Canadians are preparing for this inevitability, as evidenced by a higher savings rate than in the United States. Combined with the higher mortgage payments, it’s no surprise that consumer spending per capita has contracted for three straight quarters—a trend that should be sustained into 2024. Moreover, more financially squeezed households are struggling to keep up with auto loan and credit card payments. Outstanding balances on credit cards were up a whopping 12.7% as of December. Should these households reach their short-term borrowing limits, this could lead to further reductions in consumer spending.

 

So in essence, Canada’s historically strong demographic growth has prevented it from suffering the same fate countries in Europe experienced late last year. But to paraphrase Robert Solow, one can see the mild recession everywhere but in the GDP and employment statistics. For the Bank of Canada, this means whatever few kilometers remain to be traveled on inflation, it doesn’t need to speed through them. We think that it will come to this realization by June.

NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.