Richter’s Economic Forecast 2024

Featuring Mr. Benjamin Tal of CIBC

This year, Richter’s annual Economic Forecast featured an insightful discussion with Mr. Benjamin Tal, Managing Director and Deputy Chief Economist at CIBC Capital Markets Inc. Richter partner Brett Miller interviewed Mr. Tal on everything forecasted for 2024 – from inflation to the upcoming 2024 Federal Budget, to the potential impact the US elections may have on Canada. Here are some of the highlights of their conversation.

INFLATION 

“In any marathon, the last mile is the most difficult.” The goal for the Bank of Canada is to bring inflation down to 2%. They will do what it takes to achieve this, but doing so may create major implications for short- and long-term interest rates. The Bank of Canada, as well as the Federal Reserve in the US, seem to be overshooting to try to quell inflation, not just by raising interest rates, but by keeping them higher for longer. Interestingly, the gap in interest rates between the Bank of Canada and the Federal Reserve is also much narrower than it used to be.

The question now is how do we move from 3% to 2%? Many inflationary forces that existed in the past are turning disinflationary (i.e., commodities). However, the hot topic is the supply chain. It is not perfect, but it is almost back to where it was pre-pandemic, which is important for three reasons. One: when there is more supply, the price of goods won’t rise the way they did; second: the pressures are coming from outside of Canada, so effective monetary policies are crucial; third: profit margins – many retailers were affected by the supply chain, however, as it normalizes, profit margins are again back to close to zero. We will get to 2%, the only question is, at what cost?

The ‘costs’ are already being felt, as seen in the housing market, which is in a recession (but nearing its end). Although, one thing that was postponing the pain in Canada was the $165B in extra savings Canadians acquired during the pandemic. So, when the Bank of Canada began raising interest rates, Canadians were spending their extra savings, which was neutralizing the efforts. Today, those savings are close to zero, so the consumer is more exposed, which explains why the last few rate hikes have been more difficult for many.

Given these factors, it will be a slow process going from 3% to 2%, but the first interest rate cut is anticipated for June. It’s forecasted that the interest rate it will reach 2% by 2025. What’s the main risk in the Bank of Canada overshooting? The main risk here is that you could see a recovery that is more subdued, or a recession that is more severe. There are two ways they can overshoot: one is to take interest rates higher, and the other is to keep them up for a longer period of time. It’s believed that inflation will stabilize in the coming months, and that is likely enough for the Bank of Canada to start cutting rates once again.

What about a recession? Typically, whenever the yield curve is inverted, we have a recession. The indicators suggest a recession, but we’ve been largely able to avoid this due to strong immigration numbers. Is a full-blown recession probable? A full-scale recession is different than a soft-landing scenario. For a full-scale recession to happen, the economy would have to experience further complications and interest rates would have to rise from current levels, which we’re not seeing at the moment. Unfortunately, there is no shortage of geopolitical issues, which can lead to higher interest rates, but the narrative right now is indicating a very, very soft landing versus a large-scale recession.

THE LABOUR MARKET & AI

Wages are rising and the labour market is beginning to normalize, despite what some may view as remaining relatively tight. The rate at which people are quitting their jobs is going back to pre-pandemic ‘normal’ levels, as is the trend of professionals jumping from one industry to another. Industry-jumping skyrocketed during the pandemic but is now slowing down.

Will artificial intelligence (AI) impact the labour market? It seems to be the case that we are generally overestimating its impact in the short term and underestimating it for the long term. One area in which it could assist companies is profitability. There have been significant changes in the structure of the economy since the pandemic, and companies are largely experiencing declining profits and tighter margins. We’ve also experienced a shift from globalization to deglobalization, and other negative forces that impact profitability including inventory levels and overstock, the shift away from cheap labour and the greater demand for collective bargaining, as well as green initiatives (which are positive in the long run but costly up front). Soon, one of the options to improve profitability will be to replace labour with AI. Manufacturing will likely be most impacted – and likely the sector to optimize and benefit from AI the most in the short term – but so too will the construction sector. Unfortunately, there will be some winners and some losers, just like with any other technological change.

REAL ESTATE

From a long-term perspective, Mr. Tal noted being bullish on industrial, but it is expensive. With multi-residential units, the only thing that can slow down this market is high rent, because supply is limited, and the demand is exceedingly high. There have been small victories to encourage the building of more rental apartments like government incentives from the federal and provincial levels (in most provinces), but the market is still asymmetrical, and more supply is needed.

When it comes to commercial real estate, its barometer for success depends on what segment of the market is being evaluated, and the location of said market. For offices, core markets are doing better than expected but not great. Capacity in offices is typically 50% on Mondays and Fridays and roughly 80% midweek. Core retail is still suffering because of this, however, non-core retail is doing better than expected.

For residential housing, the market is still a buyers’ market, just with no buyers – especially in places like Toronto and Vancouver. The low-rise segment of the market is starting to improve but there is a reduced demand from investors in the condominium space. While it might not be strong, the market is better than it was before. This fall will likely see stronger tides once interest rates start going down. Long term, the demand will likely be strong, yet the supply will remain minimal.

The “mortgage cliff” (a higher mortgage payment for a homeowner come renewal time) for a significant number of Canadian mortgages isn’t likely to be an issue. Roughly 50% of the market has already reset their mortgages. The only time we may see a significant rate of change in payments is in 2026 for people who need to renew from 2021 rates. The view on this overall, is that it won’t be a catalyst for a recession.

THE FEDERAL BUDGET & GEOPOLITICAL ISSUES  

Housing will continue to be a major factor for all governments at all levels. The Federal Government is focused on housing and targeting the level of debts, so they will likely concentrate on fiscal responsibilities. With the upcoming US election, the impact felt in Canada will depend on who wins. Deglobalization will be the number one issue if Trump wins, which will get worse, and will likely lead to a lot of tariffs. To what extent Canada will be affected is to be seen, but if we see tariffs, prices will rise, meaning interest rates will also have to be higher, not to mention the uncertainty that brings with it. From a global economic perspective, this would be negative all around.

The geopolitical issues in the Middle East also may have bearing on Canada both positively and negatively if oil prices rise. Another uncertainty is the conflict between China and Taiwan. Canada’s exposure here may be minimal, but there may be indirect impacts experienced in the future.

Overall, 2025 will be a better year, but Canada needs to adjust the way it does business to improve the GDP per capita before companies have no choice but to replace labour with AI to stabilize profitability. For many years, corporate investment and productivity has been a weak spot in Canada, as there was no motivation to invest because profit was easy. But now with the downward pressures on profitability, companies will need to start investing in and improving productivity. We are likely to see this being the case in both Canada and the US, which is seen as positive.

A big thank you to Mr. Tal for joining Richter and lending his time and thoughtful insights to this event. For further questions or information about any of the topics discussed, please contact your Richter partner.