The Economic Club of Canada is our country’s most respected platform for non-partisan dialogue among the world’s most notable thought leaders. Its annual outlook breakfast is its signature event. This year, the breakfast featured four of the country’s top chief economists responding to a series of questions designed to encourage predictions about 2023. First National attended and shares these highlights.
Is the Canadian economy headed for a soft landing or a full-on recession in 2023? It looks like we are in for a monetary-policy induced slowdown and possibly a soft landing where inflation is tamed without devasting impacts on the economy. While economists and policymakers have fairly consistently underestimated the resilience of the Canadian economy in the past three years, the expression ‘never bet against the Fed’ still applies. In the post Second World War era, every time the US Federal Reserve and the Bank of Canada raised rates as much as they have this past year the following year saw an economic slowdown.
Is the Bank of Canada nearing the point of pausing its policy of increasing interest rates? Notwithstanding the possibility of another 0.25 basis point increase on January 25, it looks like the Bank is signalling that it is comfortable with what it has done so far and is aware that recent rate hikes are creating challenges for Canadians. It may pause after January for a few months and reassess if further moves are necessary based on inflation reports.
Is there a risk the Bank of Canada has gone too far, too fast to tame inflation? Yes and there may be more pain to come because of recent policy rate increases. There are also secular headwinds that used to be tailwinds for the economy to sort out. Free trade has been replaced by re-shoring and protectionism which hurts Canada because we are an export nation. Carbon used to be free and it isn’t now. The housing market has rolled over because it is an interest-rate sensitive part of the economy. The are too many headwinds to completely avoid some form of recession.
When will inflation moderate? By year end 2023, inflation in Canada will be at the one to three percent range and core inflation will be right at 3%. Recent three-month rolling averages of inflation look to be trending in the right direction in both Canada and the U.S. Food and energy price inflation in particular have declined. However, there is a risk that inflation settles in at 5% which would require additional action by the Bank of Canada.
Will there be job losses in the Canadian economy this year after such a strong month of job creation in December 2022? Employment is a lagging indicator of economic health, but the creation of 100,00 jobs in December was a positive sign. Going forward, it is likely that there will be job losses and possibly as many as 100,000 across Canada. But in context, job losses in many past recessions numbered 300,000. Some industries did have significant employment gains in the past two years including technology, financial services and public administration but other industries do not have slack capacity which means they may be cushioned from future job cuts. For example, manufacturing typically employs 2 million Canadians and sheds 300,000 jobs in a recession. However, the industry now only employs 1.7 million so it is unlikely that job losses, if they occur, will reach that traditional 300,000 level.
Are or were we in a housing bubble? It depends on where you are in Canada because there are extreme differences between the Prairie provinces (no bubble) and southwestern Ontario (a bubble). In the first two years of the pandemic, Canada’s house prices increased by 50% and now depending on location, they are off by 20 to 25% from the peak. The net result is home prices are still higher than they were pre-pandemic.
Will housing become affordable in the next two years? Very unlikely. The housing market is more likely to become less affordable at least in the near term even as a record level of new supply comes on stream. That supply will not keep up with new demand driven by immigration and as many of Canada’s 10 million millennials begin buying their first homes.
Will OSFI change/tighten mortgage qualification rules this year? The regulator has opened public consultations on its Guideline B-20 (Residential Mortgage Underwriting Practices and Procedures) with the intention of completing those consultations by April 14, 2023. It is unlikely to make any changes until it observes spring housing market activity. Since OSFI exists to manage risk, not to make housing more affordable, changes – if any – would tend to respond to their view of the relative risk in the system. So far, Canadians have handled interest rate shocks very well and as a result, mortgage lenders have seen remarkable stability in credit performance.
How does Canada’s economic outlook compare to America’s. America has the potential to be more resilient because U.S. consumers went through a deleveraging cycle after the financial crisis whereas Canadians levered up. This difference shows up in share of income that is devoted to debt service in Canada versus the U.S. In the U.S., consumer debt service is at historically low levels and in Canada it’s about to become historically high. American firms did not hire as aggressively as Canadian firms either, meaning fewer areas of the job may be at risk. However, Canada has a higher personal savings rate, and our provincial and federal fiscal positions are better than those in the U.S.
Is the Canadian dollar poised for a rebound? Most of the recent weakness in the Canadian dollar is due to the relative strength of the U.S. dollar but our currency has also been held back because of commodity prices. It is possible that the U.S. dollar will weaken later this year with a benefit to our currency, but as is, the Canadian dollar is currently trading close to its fair value.
Wherever the economy lands in 2023, you can count on First National to be here to serve your needs. Please contact us if we can be of assistance.