You will have to be patient, very patient. Because at the rate things are going, the interest rate cuts, which affect your mortgages and lines of credit, will come later than expected. And they will probably be less generous.
So what’s going on? The economy is growing much more than we imagined. Too much, in fact, to permanently subdue the bane of the Bank of Canada: inflation. The central bank even said it was ready on Wednesday “to raise the key rate further if necessary in order to bring inflation back to the 2% target”.
At the National Bank, economists believe that the Bank of Canada’s message implies that “we are now in a higher rate environment for longer”.
And at the Mouvement Desjardins, it is judged that “strong wage growth and inflation from services”, among other things, will have the effect of deflating the inflation balloon more slowly than expected.
Oh sure, price growth will be less in 6 months than today. On Wednesday, the Bank of Canada also reiterated its forecast of an inflation rate of 3% in mid-2023 – in less than 3 months, casually – which would be a relief.
But the holy target of 2% is not in sight before the end of… 2024, that is to say in 18 to 20 months!
And what are these indicators that delay the achievement of the target? First, employment. In the first quarter of 2023, against all odds, 200,000 jobs were created in Canada. All provinces are in positive territory and wages are up more than 5%.
Then the GDP. Data for January and February point to economic activity growth of 2.3% in Canada, or even more, which is well above expectations. On Wednesday, the Bank of Canada also revised its real GDP growth forecast for 2023, raising it from 1% to 1.4%.
Real estate: investment is holding up!
For my part, I combed through Statistics Canada data on real estate investment, the latest version of which was also released on Wednesday.
Result: the sharp rise in the key interest rate, which began in March 2022, has not yet clearly slowed down real estate investments. In fact, the residential and non-residential sectors have two very different behaviors.
Non-residential investment (industrial, commercial and institutional) has grown at an 8% pace since the Bank of Canada began raising interest rates in March 2022. As of February 2023, the last month for which data is , non-residential real estate investment amounted to $5.6 billion in Canada (seasonally adjusted).
The sector is holding up in the four main provinces, as can be seen in these charts.
Meanwhile, in the residential sector, real estate investment has fallen by just 1.4% in Canada since the first rate hike in March 2022.
This time, the spreads vary markedly by province, with Quebec being the hardest hit (-18%), while in British Columbia and Ontario, interest rate hikes have slid like water on the back of a duck, with jumps of 12.3% and 3.7%.
In February 2023, the last month for which we have data, residential investment amounted to $15 billion in Canada (seasonally adjusted).
That said, the increase in interest rates, in Canada as in the United States, will eventually have an impact, estimates the chief economist of the National Bank, Stéfane Marion.
In March, for example, the producer price index in the United States fell by half, to 2.7%, whereas its growth was 11% last spring. However, this index is a very good predictor of future profit margins for companies.
An index that is deteriorating so quickly suggests a drop in corporate profits and, ultimately, an increase in unemployment and a drop in inflation.
The population is exploding
At the same time, various phenomena suggest that in the medium and long term, prices will continue to be under pressure.
First, in Canada, strong population growth will fuel the real estate market and residential investment. The population aged 15 and over grew by 80,000 people in Canada in March and by 205,000 in the first quarter, a record.
Assuming a ratio of 0.6 housing starts per new person of working age, the number of housing starts would have to be doubled to house all these people. Since the industry cannot support such growth, an increase in rents and the price of houses and condos is to be expected in Canada.
Two other structural shocks could make life difficult for the Bank of Canada.
First, geopolitical tensions (China and Russia) are pushing companies to repatriate their sources of supply to local suppliers, which has inflationary effects. Second, the decarbonization of the economy will cause the prices of several products to rise over the next decade.
In this context, we must put a cross on the low interest rates that supported the economy after the 2008 financial crisis (average key rate of 1% for 10 years).
And when the Bank of Canada eases its policy, once inflation is under control in 2024, its key rate of 4.5% should not drop below 3%, believes Stéfane Marion. Welcome to the new era!