Interest rates

TD Economics Q&A: Answers to the most frequently asked questions about inflation, interest rates and housing

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From recession risk to inflation stickiness to the outlook for the housing market, TD Economics answers the most frequently asked questions about the changing outlook and risks in its latest report.


Greg Bonnell: Are we headed for a recession or not? This is the big question that many people are concerned about. Well, TD Economics just released a report on this and other questions about evolving risks and the economic outlook. So let’s go. With me now is Leslie Preston, senior economist at TD Bank. Leslie, this report covers a lot of ground. Let’s see what we can do point by point. Let’s start with the global economy – this question, are we close to a recession? And what are the odds?

Leslie Preston: Well, it really depends on where you’re sitting. We expect Europe to be heading for a recession this year. We don’t see it yet for Canada or the US economy. We think the odds – it’s a bit of a draw, 50/50. But we expect this coin to land opposite Canada and the United States. Over the next year, we do not expect a recession.

Greg Bonnell: OK. This brings us to a discussion of the cracks that are appearing in the Canadian economy. Are cracks emerging in the Canadian economy?

Leslie Preston: Well, first place to start, the Canadian economy was truly a world leader in the first half of the year. Some of the strongest growth figures of any advanced economy. Canada is therefore truly in a position of strength. We are starting to see some cracks though, mostly in the housing. Housing has really reacted to rising interest rates. We have seen sales and prices drop quite significantly from their February highs. We are also monitoring the employment figures very closely. We have had two consecutive months of job losses. Now, most economists don’t like to draw a trendline from just two numbers. But it’s something we’re watching closely. Because hiring has been very strong in Canada so far in the recovery. So we will be watching the next number to see if this trend continues.

Greg Bonnell: Before moving on to the next one, the housing file still fascinates me in terms of how important housing has become to the economy. If we see the slowdown, that we see there — some cracks — could that be serious enough in terms of impacts?

Leslie Preston: It is certainly expected to be negative when it comes to calculating GDP growth. We anticipate it. Fortunately, it weighs heavily in the economy. We expect this to weigh on consumer spending as well. But that’s not the whole economy. Consumers are quite resilient. We have a very low unemployment rate. So we expect the Canadian economy as a whole to slow down, and housing is a big part of that. But there are many other sectors that are doing well – oil and gas, for example.

Greg Bonnell: Let’s talk about the commodities space, global commodities. We have seen a deceleration after the strong price increases we saw earlier this year. What does this mean for global growth?

Leslie Preston: Well, I think commodity prices have certainly reacted to the global growth story, which is that we see global growth weakening. And we have seen energy and non-energy commodity prices weaken as a result of this news. An exception to the rule, of course, is the natural gas market, which, of course, is heavily affected by what is happening with Russia’s war in Ukraine. But overall, we saw some weakness in commodities as a whole.

Greg Bonnell: Here is perhaps, I think, perhaps even the biggest issue of the summer – inflation. This is why central banks are getting so aggressive with rising borrowing costs. It is still expected to remain aggressive as fall approaches. Will it stay high?

Leslie Preston: We don’t expect it. Well, we expect inflation to have peaked in Canada and the United States. But we expect it to remain above both central banks’ targets for the rest of the year. The demand has been very strong. And many supply chain issues are not resolving as quickly as we would have thought six or eight months ago. We therefore expect it to remain high. But that the worst kind of year-over-year rate is probably behind us.

Greg Bonnell: I think a lot of people are hoping that this peak has been reached and that these numbers that we’ve seen — at least for this month on both sides of the border, or the most recent month — will start to stabilize . But what about the consumer? I mean, obviously, as you go out and everything costs more and more, the question becomes, can they stay resilient in the face of all these pressures?

Leslie Preston: We expect them to. As I mentioned before, the unemployment rate is incredibly low, both in Canada and in the United States. We are at the generational low of the unemployment rate. Consumers are therefore starting from a very solid starting point. Consumer balance sheets as well – sort of the overall financial situation has generally been helped by the pandemic. A forced vacation for many of us with lockdowns has really left bank deposit balances getting a bit thicker. So they also have this cushion. That’s not to say we don’t expect consumer spending to slow. We’re already seeing that in the United States, given, as you say, high inflation and higher borrowing costs. So we expect it to slow down. But we expect consumers as a whole to be quite resilient, given the positive fundamentals.

Greg Bonnell: Obviously, the central banks have said it, inflation is in our sights. We’re going to do whatever it takes to bring it back down. You say it will take time to get there. Some people say, okay, when do they actually start giving up on these hikes?

Leslie Preston: Well, our forecast is for it to pull back in 2023. We think central banks won’t back down until they see inflation moving firmly towards their target of around 2%. We believe that by early next year, that will be the case. We think financial markets are getting a bit ahead of themselves in pricing rate cuts at this point. Because we think, given history, past experience, where the central bank thought they had inflation under control, and then inflation goes back — in fact, we’ve had a bit of a mini version of this in the United States last year. We therefore believe that the Fed and the Bank of Canada will be in wait-and-see mode until 2023.

Greg Bonnell: We’ve already seen, as mentioned, a very dramatic response from the Canadian housing market to these higher borrowing costs. How are the markets evolving beyond that? If this is the scenario, they will have to keep walking and then there will be a break. But you’re probably – if someone’s wish list is that they’re going to cut again right away, it’s probably – what I’m hearing is that it’s not going to happen. What about the housing market?

Leslie Preston: Well, we expect a continuation — what we call a recalibration of the housing market. I think most people are aware of many of the pandemic headlines, especially here in Canada and the United States as well. Housing markets have really skyrocketed and taken off. So we expect some more price and sales weakness here in Canada. But we call it a recalibration, because we don’t expect prices to fall below their pre-pandemic levels. What we’re really seeing is the reversal of a lot of the excesses we saw during the stimulus period from the pandemic’s zero interest rate peak.

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