Canada’s economy posted slight growth in November, with gross domestic product (GDP) inching upwards by 0.2% following three consecutive flat months.

New figures released by Statistics Canada showed the economy performed better than analysts had expected for the month, with economists having anticipated GDP growth of 0.1%. For the full fourth quarter, real GDP likely grew at a clip of 0.3%, according to a preliminary estimate.

That would reverse some of the setbacks experienced in Q3, when GDP declined by 1.1%, and bring overall economic growth for the year to 1.5%.

Goods-producing industries such as wholesale trade and manufacturing contributed significantly to the economy’s improved November performance, while the education services sector contracted.

Industrial production ticked upwards by 0.8%, with a 0.9% jump in the national manufacturing output bolstered by recovery in chemical and metal subsectors.

What’s next for the Canadian economy?

The news marks the first time Canada’s economy has grown in six months – but is unlikely to change the Bank of Canada’s thinking on a timeline for possible rate cuts.

Royal Bank of Canada (RBC) economist Claire Fan said in a note that the economy’s faster pace towards the end of the year should be taken “with a grain of salt” as early GDP estimates can often be prone to revision.

Much of the economy’s perceived strength in November, she added, could be attributed to one-off factors including recoveries from strike action and factory shutdowns “that are unlikely to be repeated in the following months.”

Nor is the economy likely to heat up significantly in the opening months of the year, according to Fan. “Overall, we continue to expect pressures from elevated interest rates to curb consumer demand, stalling growth in both output and inflation over the first half of 2024 before the Bank of Canada is expected to cut rates in June,” she wrote.

Source CMP
By Fergal McAlinden

The Bank of Canada set out its stall for the year ahead in its first interest rate decision of 2024 last week, reaffirming what was already clear: that bringing down inflation remains its number-one priority for the next 12 months.

While it held its benchmark policy rate steady in that announcement, the central bank also expressed its concern over the inflation outlook and reiterated the importance of core inflation continuing to ease.

Mortgage interest payments, which have swelled since the Bank began hiking rates in 2022, continue to represent one of the most significant contributors to annual inflation, spiking by 28.6% on a yearly basis in December.

With that in mind, could cuts to the Bank’s policy rate – currently at its highest level since 2001 – help put a dent in inflation by bringing down those soaring borrowing costs?

Mortgage, shelter costs excluded from key BoC inflation measure

The cost of servicing a mortgage might be driving up overall inflation, but the Bank is unlikely to use it as a reason to lower rates imminently, mainly because it’s probably excluded from some of the most important inflation measures it studies.

Among those is CPI-trim, an inflation measure that excludes 20% of weighted monthly price variations at both ends of the distribution of price changes – essentially removing 40% of the total CPI.

Dominique Lapointe, director of macro strategy at Manulife Investment Management, told Canadian Mortgage Professional that while the Bank does not disclose what’s included in that measure, “you would guess that mortgage interest costs, at [around] 30% of inflation, is excluded from that index.”

That means there’s little chance of the Bank striking a more dovish tone on the inflation outlook, he added, with mortgage and shelter costs probably already taken out of its core measures.

Meanwhile, the fact that rates have stabilized, and are likely to tick downwards by the end of the year, will also mean immediately addressing that mortgage payment inflation surge isn’t a top priority for the Bank compared with other measures of inflation.

“Once interest rates settle, and we’ve seen that over the past month or two – this component will decline, because it’s based on the past change in mortgage rates,” Lapointe said. “So when we’ve seen mortgage rates setting in, the change goes negative, and that component will roll over.

“They can actually say, ‘We know when it’s going to come down, so we’re not worried about this inflation – but we’re not also discounting it.’ They’re not going to lean hawkish nor dovish because of it.”

How will the US Fed influence the Bank of Canada’s approach on rates?

The US Federal Reserve’s first rates meeting of the year takes place this week hot on the heels of the latest Bank of Canada decision, with market observers north of the border taking a keen interest in the Fed’s approach and what it could mean for Canada.

Like Canada’s central bank, the Fed has hit pause on rate hikes in recent times after a series of aggressive increases in 2022 and the first half of 2023, and is expected to begin cutting at some point this year.

The US economy has thus far defied projections of a sharp and painful downturn, posting stronger growth than expected in the fourth quarter amid hopes that inflation can be returned to the 2% target without triggering a recession.

Still, that’s unlikely to increase the risk of further rate hikes this year, Lapointe said, with odds still firmly on cuts both in Canada and the US.

“I think there’s an upside risk coming from the US,” he said. “At the same time, the Fed is betting on the soft landing.

“So it doesn’t mean that rates will be higher for longer because the US is doing well – I think the Fed might look to cut interest rates this spring or early summer even if the economy’s doing well because they’ve made progress on inflation. The Bank of Canada will also be in a position to do so.”

Source CMP
By Fergal McAlinden

While the Bank of Canada left interest rates unchanged as expected in its opening decision of 2024, the most noteworthy part of its announcement was the conspicuous lack of reference to possible future rate hikes, according to a top economist.

Benjamin Tal (pictured), deputy chief economist at CIBC World Markets, told Canadian Mortgage Professional that the central bank’s decision, which saw its benchmark rate remain at 5.0%, marked a clear sign that rate increases appear to be in the rearview mirror – even if the Bank is anxious to pour cold water on market speculation about an imminent rate cut.

“I think the most significant issue is that they removed the statement that they’re keeping the right to continue to raise interest rates. [It was] very much a less hawkish statement, but they’re still concerned about service inflation,” he said.

“This, to me, means that they are done [hiking] for sure – but at the same time, they probably want to make sure that the bond market is not too excited about the first cut. The market is talking about April for the first cut; the Bank of Canada would like to make us believe that maybe that’s too early.”

The Bank’s Wednesday statement reiterated its long-standing concern about risks to the overall inflation outlook, emphasizing the need to see a further downturn in core inflation.

Still, it expects inflation to hover around the 3% mark throughout the first half of this year and returning to 2% only by 2025, indicating a level of comfort with the current outlook and a willingness to tolerate higher inflation than expected, according to Tal, in the knowledge that the trajectory is downward.

“This is a less hawkish bank than a few months ago, clearly talking about [how] they’re still concerned, basically paying lip service about the persistence of service inflation,” Tal said, “but at the same time telling you that they’re not willing at this point to continue to raise rates and they’re basically done. That’s a very clear statement from the Bank of Canada.”

When will the first rate cut of 2024 take place?

The beginning of last year saw the central bank strike a dovish tone on interest rates, pausing its rate-hiking cycle in a message that saw an unexpected uptick in housing market activity across the country during the spring.

That’s a mistake the Bank seems keen not to repeat again in 2024, with its latest statement “keeping us guessing” on when rates might begin to fall, according to Tal.

“If they become too bearish, or too less hawkish, the market will start discounting a March or April move, which will basically lead to a rally in the long end of the curve, and that’s the last thing they want,” he said. “So I think they’ll keep us guessing but they will become less and less hawkish with time.”

While the Bank deliberately steered clear of putting in place a timeline for rate cuts with its January statement, Tal said it’s reasonable to expect June or July will herald the opening move of a rate-trimming cycle – but an April cut seems a fanciful prospect.

“I think that April is too early. It’s a tug of war between a slowing economy and still-elevated inflation, and elevated inflation eventually will raise the white flag,” he said. “But it will take longer than expected, and I think the Bank of Canada is not willing to cut prematurely.”

How the housing market will factor into the Bank of Canada’s thinking

Indeed, the protracted slowdown witnessed in Canada’s housing market since the beginning of the central bank’s rate hikes is one of the key reasons its language and tone have become increasingly less aggressive in recent statements, Tal said.

While national home sales saw an unexpected 8.7% uptick in December compared with the previous month, the market’s performance was largely sluggish throughout 2023, with similarly subdued activity expected in the opening months of this year.

“I don’t think they’re too concerned about it. I think they view it as a very healthy process,” Tal said. “And the last thing they want is to actually provide the injection of optimism that the price will be going down very quickly, and that will lead to another wave of buying in the housing market.

“So they would like to see a more modest recovery in the housing market – not something [like what] we saw early last year.”

Source CMP
By Fergal McAlinden

Any rate cut decision on the part of the Bank of Canada is not likely to reignite a speculative bounce in home price growth, according to David Rosenberg, founder of independent research firm Rosenberg Research and Associates.

Rosenberg said the central bank will have to do a lot more beyond just adjusting the policy rate to address what he considers the most important element undermining housing demand: the dangerously stretched homeowner affordability ratio.

“Because of uber-inflated home prices and punishingly high interest rates, affordability is currently 50% more stretched relative to the historical norm, which classifies as a 2.5 standard-deviation level,” Rosenberg outlined.

“The last time the affordability was this bad was in 1982 when interest rates were sitting at 14%. We would need a 30% surge in personal incomes for the affordability ratio to mean-revert, hardly likely now that the unemployment rate has climbed nearly a full percentage point from the cycle lows (to 5.8%).”

Rosenberg said that while a 20% decline in the average Canadian home price could help the market become more attractive to investors, “would ‘speculators’ or even ‘real buyers’ want to purchase real estate knowing the extent of the overvaluation that lingers in the residential real estate market?”

Mortgage rates will also “have to drop 150 basis points, all else equal, to normalize the severely strained affordability ratio,” Rosenberg said.

Credit availability another major factor preventing speculation

Rosenberg added that aside from the BoC rate, the availability of credit is equally crucial, especially considering the apparent pullback in credit extension by banks.

“The number of Canadian residential mortgages in arrears has jumped 11% over the past year, matching the trend we saw in the pandemic days of July 2020,” Rosenberg said. “As the loan loss provisioning cycle accelerates, look for the lenders to become much more circumspect on their credit-extension policies.

“With the most recent data to 2023 Q3, the banks have, on net, been tightening non-price terms on residential mortgages for three quarters in a row.”

The prevailing household debt-to-income ratio will also stymie any speculative boom.

“How can households think about leveraging up at a time when the overall debt-to-income ratio sits at a near-record 173%?” Rosenberg said. “At the credit bubble peak in the United States in the mid-2000′s, the comparable ratio sat at 127% (and by way of contrast, is now at 93% or 80 percentage points below today’s Canadian household debt ratio).

“This means that at the current level of interest rates, as of 2023 Q3, 15.2% of Canadian personal incomes are now being siphoned into debt-servicing costs compared to 14.2% the year before, attesting to the fact that Canadians are choking on their current debt burdens. To think of piling on even more leverage is almost unthinkable, no matter what the Bank of Canada does from here.”

Source CMP
By Ephraim Vecina

It goes without saying that Ontario homebuyers could do with catching a break on the home price front, with affordability out of reach for many despite a climbdown in values last year. But is any relief likely to arrive in 2024?

The most comprehensive measure of annual average prices across the province dipped by 6.3% last year over the 12 months prior, according to the Ontario Real Estate Association (OREA), coming in at $872,312.

Still, the regional real estate board for Toronto – by far Ontario’s hottest housing market – said average home prices in the city jumped 3.2% in December compared with the same time last year, tipping above $1.08 million, with a further rebound expected in the year ahead.

John Lusink, president at Right at Home Realty in Toronto, told Canadian Mortgage Professional that the company had noted a striking trend in last year’s real estate market, having tracked almost 120,000 transactions in Ontario over the past six years.

“Prior to the last two years, price appreciation hit 45%. We’ve seen it drop down now – our five-year price change is 29%,” he said. “In 2023, it was the first time at Right at Home we actually saw a drop in our average price, by 7.95%.”

Whether home prices will start to tick up again in 2024 depends on the market, Lusink added, with the Greater Toronto Area (GTA) likely to record a stronger recovery than other parts of the province – and different property types set to have a greater impact than others.

“I do see the GTA as being something of an outlier,” he said. “We already saw a slight bump in TRREB [Toronto Regional Real Estate Board] reported stats, but I think we’ll see maybe a 5-7% increase across the board on average.”

Certain high-demand areas of Toronto such as Leaside and Bloor West Village are likely to see the strongest price growth in the detached home segment, Lusink said – “but the condo market’s a whole other discussion. So that will pull the overall average down.”

Where are home prices headed this year?

Home resales across Ontario rebounded noticeably at the end of the year, RBC Economics said, driven by a big Toronto surge and strong performances in London-St. Thomas, Ottawa, Brantford, Cambridge, North Bay, and Kitchener-Waterloo.

However, that spike took place from “historically weak levels,” the bank noted, with prices continuing to trend lower for now amid a soft market. “The tightening in demand-supply conditions in December would need to be sustained for several more months in order for prices to change course,” assistant chief economist Robert Hogue and economist Rachel Battaglia wrote.

Royal LePage, meanwhile, forecasts a gloomier outlook for buyers in the Toronto market in 2024, with the city expected to trail only Calgary in price appreciation this year. Prices are anticipated to post a 6% jump in the 12 months ahead, the company has predicted, and climb to an average of nearly $1.2 million.

Lusink said that’s likely to mean no letup in the continuing struggles of first-time homebuyers hoping to afford a property in the city’s eyewatering housing market.

“Short of getting back to the interest rates of 1% or whatever they were, I just don’t see it. There’s not a lot of relief for first-time homebuyers,” he said.

How will inventory challenges affect Ontario’s housing market?

Supply also continues to represent a chronic issue across the province, although a recent increase has proved helpful for the home price outlook, according to Lusink.

“On the Right at Home side, we track our listings daily, and certainly for the last year we’ve been at 2,000 and up as high as 3,000 on a regular basis,” he said. “That’s across the board – from Ottawa up through Barrie over to Niagara. So it’s a broad area.

“Do I see this making a bit of a difference? I think there’s a stabilization in pricing happening because of the listing inventory.”

That said, part of that increase has also been skewed somewhat by condo listings rising 30% over the previous year, Lusink said, with single-family inventory only up by around 5% – too modest an increase to make a noticeable impact on the inventory side.

“I don’t see supply coming on in the way that we need to, for example, to help that first-time group,” he said. “Certainly, it’s not going to be enough to sway from a strong seller’s market to a strong buyer’s market.”

Source CMP
By Fergal McAlinden

As the Bank of Canada gears up to announce its next interest rate decision Wednesday, economists will be on the lookout for any clues on when it plans to start cutting interest rates.

Overall, Wednesday shouldn’t bring any big surprises. The central bank is widely expected to continue holding its key interest rate steady at 5%, the same as it has at its last three interest rate announcements.

“What I’m looking for is what I would call the next step,” said Dominique Lapointe, a global macro strategist at Manulife. “By the next step, I mean acknowledging that the rate hikes are done.”

So far, the Bank of Canada has not ruled out the possibility of raising interest rates again if inflation doesn’t co-operate. But forecasters don’t believe another rate hike is actually on the table.

Nathan Janzen, RBC assistant chief economist, says that although the central bank might still keep the door open to more rate hikes on Wednesday, it’s “unlikely that they’ll need to exercise that option.”

The Bank of Canada is expected to cut interest rates as early as this spring in order to avoid a sharper economic downturn than is necessary to fight inflation.

Over the last year, the Canadian economy has stagnated as borrowing costs have weighed on businesses and consumers. This weaker growth has translated into a less frothy labour market with fewer job vacancies and a higher unemployment rate of 5.8%.

The Bank of Canada’s recently released business outlook survey found labour shortages are no longer a top concern, and instead firms are worried about slowing sales.

Its consumer expectations survey found Canadians are also pulling back on their spending as higher interest rates force mortgage holders to cut on expenses in order to afford larger monthly payments.

This pullback in consumer spending is expected to chill the economy even further this year.

Manulife’s economic outlook for 2024 suggests the economy will shrink in the first half of the year before growing again.

“It’s going to be a weak year, regardless (of whether) we get a technical recession,” Lapointe said. “The question will be, how long will this slowdown be? And can we get sustainable recovery in the second half of this year?”

He added that the expected bounceback in the second half of the year hinges on interest rate cuts.

But the Bank of Canada isn’t expected to start discussing rate cuts just yet, particularly since inflation rose last month.

Canada’s annual inflation rate picked up to 3.4% in December, while underlying price pressures failed to ease. Lapointe says the fact that core measures of inflation — which strip out volatility in prices — picked up last month poses a communication challenge for the central bank.

“I think it’s a problem for the Bank of Canada — it’s a problem for the consumers too — in the fact that it does suggest that price pressure(s) on the core front are more persistent than we thought. And this is probably complicating their messaging next week,” he said.

The Bank of Canada has previously acknowledged that the journey back to 2% inflation will come with some bumps along the way. Governor Tiff Macklem has said that the central bank won’t be responding to each hiccup, but instead will respond to consistent trends.

“We still think the most likely path for inflation is lower. The economy looks softer, the monthly inflation data will bounce around, but generally has been trending lower,” said Janzen.

In addition to its interest rate announcement, the Bank of Canada will be publishing its quarterly monetary policy report on Wednesday. The report will include new forecasts for the economy and inflation.

In October, the Bank of Canada was projecting inflation would fall back to 2% in 2025.

Source CMP
By Nojoud Al Mallees

The Bank of Canada is likely to leave its overnight rate unchanged in its first decision of 2024, according to new forward guidance by the Royal Bank of Canada (RBC).

The central bank is set to make its opening rate announcement of the year next Wednesday (January 24), with little indication that it will diverge from a course that’s seen the policy rate – which leads variable interest rates in Canada – remain unchanged for three consecutive decisions.

RBC assistant chief economist Nathan Janzen and economist Claire Fan said in a Friday note that while observers would be closely watching for hints on a timeline for possible rate cuts, the central bank was likely to pour cold water on the prospect of an imminent shift to lower rates.

“There is some potential that the central bank could hint at an earlier-than-expected end to quantitative tightening policy but would likely take pains to communicate the primary objective of that change would be to ensure adequate liquidity in funding markets rather than flagging a shift to easier monetary policy and imminent rate cuts,” the economists wrote.

The Bank has hiked its benchmark rate by a total of 475 basis points since March 2022, taking an aggressive stance in the face of inflation that surged to a 39-year high of 8.1% in the summer of that year.

The consumer price index (CPI) has ticked down substantially since that June 2022 peak, although Janzen and Fan noted that stickier-than-expected recent inflation and wage growth probably indicate it’s too early for the central bank to consider easing rates at present.

“Consumer prices rose 3.2% year over year in Q4, slightly below the 3.3% increase that was last projected by the central bank in October,” they said.

“But the details in the December inflation report – including a reacceleration in the closely-watched three-month average increase in the BoC’s preferred core measures to the 3.5% to 4% range – was a reminder that inflation is not yet fully back under control.”

Inflation will still probably trend lower in the coming months, Janzen and Fan added, with mortgage interest costs currently accounting for a “disproportionate” share of overall price growth.

A softening economic landscape marked by lower consumer demand and per-capita GDP – as well as a jump in unemployment – suggest inflation will continue to trend lower.

Still, “the BoC will be cautious about declaring victory over inflation too soon,” Janzen and Fan said. “We expect the first decrease in the overnight rate to come around the middle of this year, and for that to be followed by 75 bps [basis points] more later in the year to lower the overnight rate to 4% by the end of 2024.”

Source CMP
By Fergal McAlinden

Dropping interest rates on both the fixed and variable fronts are expected to be among the big trends of the year in Canada’s mortgage market, although there’s little consensus as to when both rates will start to fall in earnest – and how far they’ll slide.

Fixed rates have already been on the way down in recent weeks, with top banks cutting in response to plunging bond yields, while all eyes are on the Bank of Canada and a possible date for the beginning of cuts to its benchmark rate, which leads variable mortgage rates.

In its newly released forecast for the year ahead, digital mortgage brokerage nesto noted that each of Canada’s five leading banks anticipate a lower central bank policy rate by the end of the year.

The company highlighted that Bank of Montreal (BMO), Royal Bank of Canada (RBC), and Scotiabank all believe the Bank of Canada’s trendsetting rate will have fallen to 4.0% by the end of the fourth quarter, while Canadian Imperial Bank of Commerce (CIBC) forecasts a 3.50% rate by then and National Bank see it sitting at 3.25%.

What effect would rate cuts have on the housing market?

With scores of would-be Canadian homebuyers reportedly sitting on the sidelines and waiting for rates to drop before they push ahead with their purchasing plans, a Bank of Canada cut would spell welcome news for the mortgage market.

Still, it’s also worth noting that too steep or dramatic a cut could propel a big upsurge in market activity, nesto’s co-founder and principal broker Chase Belair (pictured) told Canadian Mortgage Professional – one that could also herald a spike in home prices.

“It should bring some fuel to the market, but it’s a double-edged sword at the same time because if you have a lot of borrowers with new access to high mortgage amounts or properties, then it’s going to put upward pressure on home prices again,” he said.

“Our real estate market is quite fragile with the amount of homebuyers we have on the sidelines and the shortage of homes that we previously had available, where I was slightly concerned that there could be a surge in home prices if rates go down too quickly or too much.”

What the mortgage industry and borrowers should be hoping for, Belair said, is a “soft balance” between affordability and a modest increase in home prices, with price data throughout the year set to present an intriguing indicator of whether stronger market activity is eroding affordability further.

How has the latest news on inflation and housing impacted the BoC’s thinking?

With inflation trending upward at last reading and Canada’s housing market posting a surprisingly resilient end to 2023, there seems little chance that the central bank will consider rate cuts early this year.

BMO chief economist Doug Porter said the fact that core inflation appeared to be lingering around the mid-threes was “unsettling” and reiterated the bank’s stance that rate cuts are unlikely to arrive until the June meeting.

“Given that wage trends are also stuck in the 4%-to-5% range, and now even housing may be showing a pulse, suggests that the Bank of Canada will doggedly maintain a cautious stance at next week’s rate decision and MPR [monetary policy report],” he wrote.

That’s likely to mean the subdued activity that characterized much of last year’s housing and mortgage markets could continue at least for the opening months of 2024 – although Belair said those with homebuying intentions could still benefit from moving sooner rather than later.

“That doesn’t mean that someone who wants to buy today should wait until June,” he said of the prospect of a cool market in the first few months of the year. “I think it means almost the opposite. It means everyone will be ready by June. Everyone waiting for one more sign before they go on into the housing market is going to get their sign by June.

“If you wanted to try and be an early adapter or get ahead of the market or find value before everyone else, there’s a window, and that window is now. It comes with its own risk, though, because if the data goes the other direction or inflation goes the other direction, then it’ll push the Bank of Canada’s forecast and, of course, the rate drop forecast.”

Source CMP
By Fergal McAlinden

Canada’s annual inflation rate rose in December, inching away from the central bank’s 2% target in an increase that had been widely expected by economists.

The consumer price index (CPI) jumped by 3.4% last month compared with the same time in 2022, Statistics Canada said on Tuesday, accelerating from 3.1% in November. The national statistics agency said that increase was caused largely by higher year-over-year gas prices, although those declined on a monthly basis for the fourth straight month.

Mortgage interest costs were yet again the sole largest contributor to higher inflation, rocketing by 28.6% compared with the previous December as interest rate hikes saw borrowing costs balloon.

Increases in the cost of rent, air transport, fuel oil and passenger vehicles also contributed to the higher December figures, while grocery prices jumped 4.7% over December 2022 – seeing no change from their November pace.

Canadians paid 7.7% more for rent last month than a year previously, StatCan said, a jump from 7.4% in November. Higher interest rates were described as the main factor behind that uptick, with Ontario (6.9%), British Columbia (8.6%) and Quebec (6.8%) seeing the most noteworthy year-over-year increases.

The December figures mean Canada’s average annual inflation rate for 2023 was 3.9%, a marked change from the prior year when the average CPI surged to 6.8%.

The Bank of Canada is scheduled to make its first announcement on its benchmark rate in just over a week (January 24), having held that rate steady in each of its last three announcements. The central bank is widely expected to keep rates where they are for now, with an eye on possible cuts later in 2024.

Source CMP
By Fergal McAlinden

After a year that might charitably be described as an up-and-down one for Canada’s mortgage market, homeowners and buyers alike are hoping for a sunnier outlook in 2024.

Rising interest rates helped further squeeze housing affordability for new buyers and pummelled the budgets of many existing owners during the past 12 months, with the Bank of Canada’s war on stubbornly high inflation helping contribute to a gloomy market throughout the year.

Still, there was some room for optimism at year-end, with three consecutive rate holds by the central bank – following an aggressive 16-month campaign of hikes – fuelling speculation that rates will begin to fall in the coming year.

While that might see hopes rise for a resurgence in Canada’s housing and mortgage markets, it’s important not to lose sight of the likelihood that the economy will remain sluggish for much of this year, according to a leading economist.

Speaking to Canadian Mortgage Professional in December, Bank of Montreal (BMO) chief economist Doug Porter said that the Bank of Canada’s rate increases throughout 2022 and 2023 would probably continue to stymy chances of a significant economic upswing.

“We think a good way to look at it is [that] over the last six or seven months, the economy really hasn’t grown at all,” he said. “We think that’s going to be the story for the next six to nine months as well. It’s going to be a challenge to grow.

“The reality is the economy and the mortgage market have not completely digested the rising interest rates we’ve seen to date. We think it will weigh on the economy further. It’s possible that we are looking at a shallow recession.”

Home sales uptick provides BoC with food for thought

December saw home sales post a surprising spike across many major Canadian markets, a development Porter noted this week may be greeted with dismay by observers hoping for imminent rate cuts by the central bank.

“While it’s always dicey to read much into housing activity in the middle of winter, even a flash of strength on this front could revive bad memories for the Bank of last spring’s surprising snap-back in home sales and prices,” he wrote.

The Bank will be viewing sales activity with great interest in the opening months of this year, Porter said, as it weighs up whether the economy has cooled sufficiently to open the door for a rate drop. “Activity is still quiet, but even a hint of a firmer demand/supply balance amid pending rate cuts could readily fire the sector back up again.”

Wage growth, meanwhile, continued at a noteworthy clip in December, coming in at 5.8% for the month despite a higher unemployment rate on a year-over-year basis.

Still, “mixed” labour market data provided just enough indication that the economy was still soft in the fourth quarter, according to Royal Bank of Canada (RBC) assistant chief economist Nathan Janzen.

He said in a note that while “the bottom wasn’t falling out from under Canadian labour markets in December” the unemployment rate had still risen noticeably in recent months and hours worked outright continued to fall.

“The Bank of Canada will still be cautious about pivoting to rate cuts too quickly – and wage growth is still running above the pace historically consistent with their 2% inflation target,” he said.

“But our own expectation is that the economic backdrop is soft enough for inflation to continue to move lower and that the BoC will start to push the overnight rate lower around mid-year this year.”

How significantly could Canada’s economy slow in 2024?

Fears of a sharp and protracted downturn for Canada’s economy have thus far proven ill-founded, with the labour market and overall output remaining steady, if muted, last year in the face of central bank rate hikes.

A meltdown is unlikely to occur in 2024, Porter told CMP in December, although that’s not to say it’ll be plain sailing all the way.

“I’m often asked: ‘Will this be a soft landing or a hard landing?’ I say it’s going to be a bumpy landing,” he said. “Maybe not hard. But there are some challenges, and we’ve already had a big bump with the unemployment rate going up a fair bit last year and that negative quarter of GDP [gross domestic product] in the third quarter. It shows the economy already is struggling.”

Source CMP
By Fergal McAlinden