The Economic Club of Canada’s annual panel of economist forecasts event was once again held this January. They highlighted the continued economic risks North America must navigate, namely, inflation, interest rates, recession, commodity prices, geo-political tensions, and housing. In the interest of time and space we will not attempt to address all the details of the topics listed above. Many of these topics will likely remain relevant through 2023.
The following comments are based on the presentations made by the Chief or Deputy Chief Economists from the Canadian Banks: BMO, TD, RBC and Scotia.
Looking back at 2022, everyone was surprised with many of the events that unfolded and to the extent in which they unfolded. There was much discussion surrounding the topic of inflation at the tail end of 2021 coming into 2022. Inflation is still prevalent in Canada but seems to have peaked in June of 2022 at 8.1%. The economists have forecasted that inflation will continue to moderate through 2023 and are forecasting roughly 3-4% by the end of the year. A few factors are contributing to this including increased interest rates along with reduced supply chain issues.
In response to increased inflation the Central Banks have been raising interest rates. Through 2022 the Bank of Canada raised the rate by 4% while the US Federal Reserve raised the rate 4.25%. Both Central Banks have increased rates by 0.25% in 2023. The economists agreed that they see 1-2 rate increases this year and we have already seen one.
Recessions are never a positive thought in the minds of anyone. So far, Canada has been able to avoid recession due to the strength of commodities as well as the continued demand in the labour market. If earnings do begin to slow or decrease, we may see companies start to reduce their workforce. The economists did mention that the risk of recession is still a possibility as the economy continues to work through all the intervention from the last few years.
Commodities are a historically difficult sector to predict in the short term. There was some commentary on this topic from the BMO Chief Economist. Commodities are linked to the US dollar and as the US dollar loses some steam this should help boost the price of commodities. The reopening of the Chinese economy from their Zero Covid policy should also help boost the price of commodities as the Chinese economy starts to demand these products again. The BMO economist also made mention on the other side that historically higher interest rates have been a headwind for commodities. It appears the other economists had a neutral view on commodities as well.
The geo-political tensions continue to be a recurring news story. The panel participants all had comment on this topic. The consensus had three parts; this has had a large impact on Europe, this likely benefited North America and it made a bad problem worse with inflation. The impact on Europe is well known. Europe hitched their wagon to the proverbial horse who is Russia when it comes to their energy supply. Europe so far has had a mild winter which has allowed time to continue to find alternative sources for energy. North America has the resources to fill this gap for Europe. The US is now the largest exporter of natural gas in the world due to their infrastructure on the Eastern seaboard. Canada does not have the same infrastructure so much of the natural gas produced in Canada is sent to the US for export. There was much discussion that the conflict in Ukraine was driving the inflation around the world. Although it cannot be denied that there was decreased supply of oil and gas the inflation rate was already rising. When the invasion happened in February 2022 the US had an inflation rate of 8% and Canada had a rate of 5.7%.
Housing has been a top-of-mind topic for the last few years. With the increased rates through 2022 we have seen prices start to moderate and work back down. This has been more difficult on people with variable rate mortgages along with people renewing fixed rate mortgages. Canadian homeowners have handled this increase well for the most part. Many had excess savings from the last few years that has allowed them to cover extra mortgage expenses. The area most impacted has been Southern Ontario. They saw the largest increase as well as the largest pull back so far. There are 300,000 housing units in the pipeline in Canada currently. As increased levels of immigration continue this will provide support to housing prices.
As we are almost through the first 2 months of the year, we are starting to see some of these predictions present themselves. The Bank of Canada has indicated that they are going to pause the rate hikes for now as inflation has been slowing. With that in mind labour numbers continue to stay strong in both Canada and the US continuing to keep inflation an item that needs to be watched. This will likely result in a pivot in rates being pushed into 2024 to make sure that they have slayed the inflation dragon. Every year unforeseen events can arise and give us a new topic to deal with. We will continue investing in responsible, balanced, and diversified portfolios. Staying calm though volatile periods leads to long term success in portfolios.
All the best through 2023.