Martin Lefebvre
Hi everyone, thank you for tuning into our NBI Podcast series. My name is Martin Lefebvre, Chief Investment Officer at National Bank Investments. I'm your host for today's discussion, which will be on the Canadian economy. And to do so, I'm joined by Daren King of our Economics and Strategy team. Hello, Darren. Thank you for being with us.
Daren King
Hi, Martin. It's a pleasure.
Martin Lefebvre
Daren, like I said, the topic will be on the Canadian economy, which is clearly showing signs of slowing down. Can you just give us an overview to begin with?
Daren King
Yes, so like you just said, we're seeing a slowdown into the economy in Canada. Definitely the monetary policy has an impact on inflation and on the economy. So that's good news for the Bank of Canada. Their work is doing its effect. So that's good news. But at the same time, we're seeing the damage on the economy and that has an impact on people's life, of course. When we're looking at GDP data, for example in March, GDP was flat and we're expecting the economy to be quite slow during the next two quarters. Also, when we're looking at the job market data, we're seeing the unemployment rate going up over the past few months now. So definitely we're seeing a slowdown on that front too. So that will help ease the pressure on inflation and maybe we can hope for interest rate cuts in the next few months.
Martin Lefebvre
So we're talking about stagnation for the month of March. Are we talking more about a slowdown, a stagnation or an outright recession? Is this still in the cards and when should that occur if it were to do so?
Daren King
I think we can call that a recession, but that won't be a big recession. So you just said a stagnation. It will probably feel more like that, really slow economic growth. Maybe we can have a technical recession with two quarters of decrease in GDP numbers. But I mean, if you have a small decrease or small increase, it's marginal. So you can call that as well a recession if you want. So probably more of a recession with not a lot of damage on the labour market, but still we are expecting some probably the unemployment rate can rise to maybe 7% slightly below that. But still, I think we can probably recover from that recession quite fast in the coming quarters in 2025 after that. So let's hope we won't have a full on recession with a lot of damage to the economy.
Martin Lefebvre
Yeah, and we've seen historically a few episodes when the unemployment rate deteriorates in Canada. But if the U.S. economy stays afloat, usually Canada being a very open economy manages to not slow down too much. But nevertheless, we're foreseeing a slowdown here in the country. So that should lead to rate cuts, as you mentioned. So when do you see that happening for the first rate cut?
Daren King
I can definitely expect a first rate cut in July, maybe before in June. Economists, we don't all agree on that. We're approximately 50 -50 for the first rate cut in June. We'll have more economic data between, until the meeting in June. So maybe that can happen if we are seeing a bigger deterioration of the labour market, for example. But I think it's definitely on the table for July for sure. We're expecting approximately three interest rate cuts in Canada, 25 business point each time here. But I think the Bank of Canada will be cautious when they do a cut. So probably we'll have a cut in July or June, a pause the next meeting, another cut after, and they'll continue like that and be cautious, just to make sure inflation is on the right path. And yeah, so we might expect three interest rate cuts this year in Canada, maybe four next year. So yeah, that's our baseline scenario for the moment.
Martin Lefebvre
Meanwhile, south of the border as we as you know, the economy is still fairly resilient. There was an excess savings on the part of households over there, but also a very steep budget deficit last year, which also helped keep the economy afloat. And usually with the economy being sort of the at the end of the cycle, there's still pressure on wages. And we see that inflation is a little bit more resilient. So how big a gap could it be between Canadian and U.S. rates? Is it really plausible to see the Bank of Canada lower rates before the U.S. does?
Daren King
I think it is. I think we will. We will probably see that, but of course there's a limit to the Bank of Canada cutting rates if the Fed is not cutting their rate on their side. I think we can probably see two or three interest rate cuts here in Canada before that causes a problem for […] to do additional cuts. But I think we'll see interest rate cuts by the end of the year in the U.S. I mean, we're yes, the economy is more robust on the south side of the border, but we are starting to see some sign of weakness. We had GDP data over the past few weeks and the GDP growth was slower than expected. We also had labour data, which clearly is moderating also. So we'll probably see interest rate cuts in the U.S., maybe one, maybe two interest rate cut on their side. So that will provide more room for the Bank of Canada to do additional cut later this year and the beginning of next year. So yeah, I think definitely we can see that gap between the Bank of Canada and the Fed, but I think a 1 % gap might be something that they are able to realize. Yeah.
Martin Lefebvre
OK, so if rate cuts are coming, that should have an impact not only perhaps later on the economy, but more perhaps a little sooner on the real estate market. What's what do you think will happen to the to the real estate market over the next few couple of quarters?
Daren King
Yeah, I think if you can expect a pickup in the real estate market. Just to give you an idea, in December, January, when the narrative of incoming rate cuts gained more traction, we saw a rebound in activity. So when we will effectively see those rate cuts, I think we'll definitely see a rebound. But I don't think that will last very long. So we'll probably have a very hot end of spring and summer. But the fall and winter, I think we can expect a slowdown in transaction because, yes, interest rate will decrease, but they will remain in restrictive territory. So that will continue to be really tough to get a mortgage and affordability remains really difficult. And we're expecting the Canadian economy to continue to slow down over that time. So that means that some people will lose their jobs. They'll be tighter in their budget. So we can expect after that rebound, the slowdown to a level of transactions that is more in line maybe with the historical average. But yes, in the meantime, I think we can expect a pickup. And what is really interesting at the moment is before the pandemic, we always said that the real estate market is not one market is a lot of different markets that we aggregate together. But over the past four years, it wasn't true at all. I mean, every market evolved in the same direction at the same time because of interest rates, because of the change in consumer preference for housing. So they all evolve in the same direction at the same time. But now we're starting to see discrepancies between markets. So that will be really interesting to look at because now there's some regional momentum that are different than what we observed previously. So especially in Toronto, for example, we are even though we're seeing a transaction increase in Vancouver and Montreal, we're still seeing decrease on that front with inventories increasing really fast, especially in the condo market. We have never had that amount of inventory in the condo market in Vancouver. So that will be real interesting to look at in the coming months.
Martin Lefebvre
What about mortgage renewals? We hear that every now and then the impact or the negative impact it should have on the Canadian economy. There's been few households who were lucky enough to contract a mortgage at very, very low rates during the COVID episode as interest rates went to historical lows. So renewals are in the cards a bit this year, but probably more so in 2025, 2026. What will be the impact of that in your opinion?
Daren King
Yeah, definitely, your right Martin. When we're looking at, for example I crunched numbers just to give you an idea, but if you are someone who took a mortgage in May 2019 at the rate of 3 .65%, your monthly payment for a mortgage of $500,000 is approximately $2 ,500 per month. Now, if you renew your mortgage at the current rates, approximately 5%, your payment is now $2 ,850. So it's approximately an increase of 12%, which is manageable. I mean, in the meantime, you also add probably salary increases. If you follow inflation, it's above 12 % over that period. So you will probably be able to absorb that increase. Now that's for this year. Of course, the real challenge will be in the two coming years when people add interest rate of approximately 2%. Of course, we're not expecting interest rate to decrease back to 2%. Unfortunately, even though we're still expecting some decreases on mortgage rates in the coming years, but still they'll be higher than that. So, unfortunately for those people, they'll have probably to pay more for their mortgage. But like I said, you probably had salary increases during that time, so that won't be as huge as you think it is. But you still need to prepare for it, to budget for it, and to do some calculations with your advisor to look at what will be the impact. We're still expecting, like I said, slight decreases on the fixed rate mortgages, for example, but we'll need to see more progression on the inflation in the U.S. to see that happen. But in the meantime, like I said, it's better to prepare for it. And that won't be as huge on as we might think on an aggregate level and the impact on the economy won't probably be as big as we can expect. Given all the news we're seeing about that, I think that people will prepare for it and the adding salary increase. So they'll be able to absorb it, I think.
Martin Lefebvre
Okay, so it seems like it's the real estate market is a bit of a mixed bag with positives and negatives. What about this phenomenal growth in population we saw over the last year and the impact on the inventory of houses? Would that be a huge impact going forward?
Daren King
I think definitely it will be. I mean, we had a record population growth in Canada this year. 1.3 million people added to the population. 97% of that is from immigration, approximately slightly higher than that actually. So that will have a huge impact going forward because us in start are just not following. So we need to build way more homes to be able to put a roof over those people’s head. And we already had a lack of supply in the housing market before the pandemic. So that was already a problem. And so now it's just exacerbated that issue and that will probably push home prices higher because of that, for sure. So there's a lot of political will to build more units over the coming years, but we simply don't have the capacity to do that. For example, we already had a record percentage of people working in the construction sector. So do we want even more people working in that sector? Maybe, but still they're not working somewhere else. So we have capacity issues on that front. We won't be able to build enough homes for all those people. So we'll continue to have supply shortages in the housing market and that will continue to drive home prices up, I think, in the coming years.
Martin Lefebvre
Okay, excellent, Darren. That's all the time we had this morning. And for everyone, well, thank you very much for being with us.
Daren King
Pleasure.
Martin Lefebvre
And for everyone that had tuned in to this NBI Podcast, thank you very much. And we'll talk again next month.
Martin Lefebvre
