2024 Economic Outlook Takeaways

This morning I attended the Economic Club of Canada 's 2024 Economic Outlook Breakfast with a panel of chief economists from all 6 of Canada’s big banks. Here are the key takeaways:

?? Economic Growth and Resilience

- Every economic forecaster was wrong last year as both Canadian and US economies outperformed forecasts in 2023

- Canada's growth was 2x expectations while the US was 5x what economists expected

- There was more resilience on consumer / household spending than expected

?? Spending and Savings

- Canadians are sitting on $374 billion in savings and have been more disciplined in spending in contrast to Americans who have largely spent their savings; US consumer debt is at record levels

- The US government deficit hit a massive $2 trillion at one point, this is unsustainable, however deficit reductions are unlikely due to 2024 being an election year

- 2.2 million Canadians are set to renew mortgages in the next 2-3 years at higher rates which will decrease household spending

?? Mortgage and Housing Market

- Interest rate forecast is for 100-150 basis points in total cuts by years' end bringing the overnight rate down to 3.5%, double the previous business cycle

- Chief economists predict the first cut will begin sometime between April and June of this year

- Bank analysis says most mortgage holders can handle higher rates because a) they went through a mortgage stress test and b) wages have increased since the beginning of terms; but borrowers will need to cut back on spending and “eat pasta instead of steak”

- There is massive pent up demand in the housing market - many home buyers feel their mortgage will be on sale 25-50 bps if they wait a few months

- Whether the first rate decrease is April or June the housing market will almost certainly boost whenever this cut occurs

?? Economic Predictions

- 2024 is expected to be a year of deleveraging, ultimately this will lead to spending cuts, job losses, lower growth and ultimately rate cuts

- Long-term, once we get over this cycle, economists expect interest rates to settle between 2.5-3%, roughly twice as high as the previous economic cycle

- The world of ultra low interest rates and negative real rates is over

?? Inflation and Immigration

- Canada’s CPI is different from the US as Canada's Consumer Price Index (CPI) includes mortgage interest

- Estimates show that 200bps out of 450bps of increases were the result of the factors within BoC and/or government control, such as interest costs and government support programs to help citizens manage higher inflation costs (which in itself is inflationary)

- Removing shelter costs (such as mortgage interest) Canada is at at its target 2% inflation rate today

- The BoC cutting rates will be the final stake bringing inflation down to 2% because of the previous points

- Property taxes in Toronto are rising 10.5% this month which will add to inflationary pressures through higher shelter costs

- Canada faces structural shortages with 1.25 million people immigrating last year but only 300k homes being built, this is helping to dive rent increases that range from 7-11% year-over-year

??? Economic Challenges and Opportunities

- Two biggest challenges facing Canada right now are disastrous productivity and lack of affordable housing

- Immigration, productivity and affordable housing are all linked; we’ve looked at immigration as a way to help companies hire but we have neglected investing in companies and technology and innovation that make our businesses more efficient and productive

- Canada needs to do a much better job of aligning immigrant skills with job market demands for productivity gains, and investing in companies to increase the level of technology and innovation

?? Business and Investment

- The US has a competitive tax advantage and could / should pressure Canada to adopt more favorable tax policies

- A Trump victory in the US would lower corporate taxes from 21% to 15% and increase the pressure on Canada to create a more competitive tax policy

- To increase productivity Canada should focus more on building global leading companies and not selling early, large domestic companies are where major productivity gains are built; rather than sell to Google we should be building our own Googles / how do we build more Shopifys

- Canada should be investing in and embracing the areas we are very good at such as resources, AI and automotive

- Norway by comparison is the most productive of all OECD countries because they embrace their resource industry and is a good example for Canada to look at

?? Final Comments on Market Outlook

- Generally the economists see stagnant economic growth with persistent recession risks

- Most see the stock market finishing the year marginally higher, largely because 2025 looks more optimistic

- Any material growth to the upside would be a surprise

Hopefully you found these takeaways helpful and informative.. #EconomicOutlook2024 #CanadianEconomy #GlobalTrends

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