January 18, 2024
After a year of surprising resilience in the face of high interest rates, Canada’s economy enters 2024 in an uneasy state. It’s almost universally accepted that rate cuts are coming, but when, and by how much, is uncertain. Will recession come to Canada? What will happen to housing markets? Can paycheques keep up with inflation? And is your job safe from artificial intelligence?
To explore these questions and more, The Globe and Mail reached out to dozens of experts, including economists, academics, investors and business leaders, and asked them to each pick a chart that highlights an issue that will be important to watch in 2024 and explain why — just as we did for 2022 and 2023. The result covers everything from Canada’s population boom, the interest-rate outlook and housing to markets, trade and the new frontier of AI.
Households, work and wages
Workers strike back
Jim Stanford, economist and director, Centre for Future Work
Some observers called 2023 the Year of the Strike, and at times that moniker was fitting. Across a wide range of industries, workers hit the picket lines to support demands for pay increases that kept up with surging inflation. Over the first nine months of 2023 (the latest data at time of writing), Canada lost a total of 2.2 million work days to work stoppages – the highest since 2005. To the end of 2023, total days lost will be even higher: more than 2.5 million days (boosted by walkouts that include huge public-sector strikes in Quebec in December).
Workers have seen their real purchasing power eroded by the outbreak of inflation as the COVID-19 pandemic has eased, and they are angry watching share prices and chief executive officers’ bonuses soar while their own standard of living has been squeezed. Low unemployment and higher job vacancies strengthened workers’ bargaining position – although that is changing in the wake of aggressive Bank of Canada interest-rate hikes.
Expect labour strife to continue for a while yet. Lest anyone complain that strike-happy workers are undermining Canadian productivity, keep in mind that work stoppages amount to just 0.05 per cent of all days worked in Canada. That’s one-tenth the proportion of days lost during the peak strike years in the bad old 1970s.
More is less
Stephen Tapp, chief economist, Canadian Chamber of Commerce
In 2023, higher interest rates set by the Bank of Canada finally slowed consumer spending. Analysis by the Canadian Chamber’s Business Data Lab uncovers interesting links between higher interest rates, housing affordability and consumer spending. Specifically, we find that consumers in regions with bigger housing-affordability challenges have cut back more on spending. And because spending restraint translates into weaker sales, it’s no surprise that businesses in regions with unaffordable housing markets are also less optimistic about the year ahead.
After adjusting our high-frequency payments data for seasonality, inflation and population growth, our tracker estimates that spending in Canada is down nearly 4 per cent, year over year. When more people are paying more money to buy less stuff, it’s no wonder consumer confidence has fallen to its lowest level since early in the pandemic.
Looking to 2024, with $190-billion of mortgages coming up for renewal at higher interest rates, many households could see their mortgage payments rise by 20 per cent or more. This means more consumers will pull back their discretionary spending – and if inflation finally comes under control, the Bank of Canada will be under increasing pressure to cut rates to provide relief for consumers and businesses.
Boom, bust and uh-oh
Ted Mallett, director of economic forecasting and Pedro Antunes, chief economist, Conference Board of Canada
The Bank of Canada’s aggressive interest-rate increases aim to stabilize inflation, but this approach has hit young and low-income households the hardest.
Using Statistics Canada wealth data by age cohort and conducting our own analysis, the proportion of after-tax income dedicated to debt financing has surged to more than 12 per cent for young households.
Gen Xers have seen a 2.9-percentage-point increase in the weight of interest payments on disposable income compared with 2019. Millennials face an even larger blow, with a 3.4-percentage-point higher burden on disposable income. As more mortgages come up for renewal, the impact on disposable income is poised to linger, even when rates start to ease.
Older generations, however, appear to be unloading debt quite significantly. Even with higher interest rates, average loan cost burdens on baby boomers and the pre-1946 cohort are about 1.5 per cent lower than prepandemic levels.
Gloom of youth
Claire Fan, economist, RBC
Finding your first job out of school can be tough in its own ways. It tends to be even tougher during periods of underwhelming economic growth. Historically, young Canadians have seen a much steeper increase in the rate of unemployment during recessions compared with the average increase for the overall labour force.
Students who will graduate this year also had their education suffer from disruptions brought on by the pandemic. Acute labour shortages that have curbed business output over the past few years could mean more weariness against letting workers go, altering the impact of the labour market downturn even as economic growth stalls.
A real help
Dawn Desjardins, chief economist, Deloitte Canada
The combination of rising interest rates and elevated household debt balances is constraining consumers’ ability to spend. After bursting into 2023 with a flurry of spending, consumers pulled back as rate increases bit. Deloitte’s holiday retail survey showed Canadians planned to cut their recent seasonal spending by 11 per cent, with more than half saying they believed their financial situation had worsened, citing rising rents or mortgage payments. But consumers are getting some relief fromwage gains that have runfaster than inflation for the past nine months. Wage gains are expected to slow in 2024, but so is inflation, which should give consumers sufficient room to navigate through a stressful period. But it will be tough sledding until interest rates start to move lower in the second quarter of 2024.
Fit to bust
Peter Berezin, chief global strategist and research director, BCA Research
My pick for the most important chart for 2024 is the U.S. jobs-workers gap, which shows the difference between job openings and unemployed workers. Everyone is focused on the fact that employment in the United States has remained resilient. But there is a fly in the ointment: Job openings continue to trend lower.
We estimate that by the second half of 2024, job openings will have fallen low enough that workers who lose their jobs will struggle to find new ones. Workers who are still employed will become increasingly antsy, causing them to raise precautionary savings. With most of the excess pandemic savings exhausted by then, the economy will start to suffer from a shortfall of spending. A “state transition,” as physicists call it, will occur. Not from liquid to ice, but from boom to bust.
Falling behind
Royce Mendes, managing director and head of macro strategy, Desjardins
Whether or not you believe Canada is headed for a recession, the path ahead is looking more difficult for workers. A year and a half ago, businesses were scrambling to address labour shortages, giving workers more negotiating power. Fast forward to 2024 and there are 1.25 million unemployed people in Canada, 234,000 more than in July, 2022. The reason is that for much of the past year employment grew at a slower pace than what would have been implied by surging population growth.
The spike in the size of the work force, combined with a slowdown in demand for workers, drove a sea change, and it is now more difficult to find work. Looking ahead, even if Canada can avoid a recession, these trends suggest that employee wage growth is likely to cool off from recent highs. However, if the economy tips into recession, many workers will have more to worry about than just slow wage growth.
Inflation and interest rates
See the world through central-banker-tinted lenses
Mark Rendell, economics reporter, The Globe and Mail
After surging to a four-decade high in the summer of 2022, the annual rate of Consumer Price Index inflation has declined, falling to the top of the Bank of Canada’s 1-per-cent to 3-per-cent control band in November. The outlook for the Canadian economy in 2024 depends to a great extent on how long it takes to cover the last mile down to the central bank’s target of 2 per cent.
Inflation for durable and semi-durable goods – such as furniture, clothing and appliances – is already back below target. Service prices, by contrast, continue to grow relatively quickly.
Bank Governor Tiff Macklem said in December he expects headline inflation will be “close” to 2 per cent by the end of 2024. The bank could start cutting interest rates before then, he said, but only if it’s confident inflation is on a “sustained downward track.” Here, the bank will pay close attention to core inflation measures, which strip out volatile price movements. If you want to see inflation like the BoC does, look at three-month annualized growth in CPI-trim and CPI-median, the bank’s two favourite measures of core inflation.
It’s not all about housing
Beata Caranci, chief economist, TD Bank
Be it markets or media, nobody questions that 2024 will mark the year of the rate cut. However, it’s going to be a tricky communication exercise for the Bank of Canada, especially if rate cuts – even modest ones – spur housing demand and strong home-price growth. That’s because households anchor their inflation expectations to personal experiences, and following home prices is practically a sport in Canada. Households also tend to overweight inflation expectations toward experiences that reflect extreme movements. This may condition household expectations to be even more sensitive to upside shifts in prices than when inflation was quite a boring affair.
So why cut rates at all if inflation isn’t yet at the desirable level? The bank must remain mindful of the financial risks that flow out of leaving rates too high for too long. And the breadth of consumer items driving core inflation metrics should be comfortably narrowing, a trend that started 18 months ago.
Central bankers will need to trust the process and start cutting interest rates, while also convincing the public that they know what they’re doing. The first will encompass a bit of a leap of faith, because there’s always embedded forecast error from known and unforeseen events. The second will require a pivot in communication on why shelter costs do not define the inflation universe for Canada.
Popular demand
Farah Omran, senior economist, and René Lalonde, director of modelling and forecasting, Bank of Nova Scotia
Since the second quarter of 2020, actual consumption in Canada has been below Canadians’ desired level of consumption, our measure of households’ optimal consumption level based on factors such as income, interest rates and wealth. The gap between the two – a measure of pent-up demand – explains in, large part, how incredibly resilient the Canadian economy has been to the rapid rise in interest rates. Even as the Bank of Canada began raising its policy rates, the real rate – the nominal rate minus the expected inflation rate – remained negative and accommodative throughout 2022 as inflation roared. Only when real rates began to increase did pent-up demand begin to ease.
Despite that slowdown, our estimates suggest there is still a fair amount of pent-up household demand. That, together with still reasonably healthy household balance sheets and a record pace of population growth, suggests material downside risks to Canadian household spending are overblown.
We forecast pent-up demand to wind up by the second quarter of 2024, around the same time we expect the BoC to begin its rate-cutting cycle. The elimination of pent-up demand would reduce the risk of undermining the BoC’s efforts to tame inflation as it begins cuts.
It’s a time thing
David Rosenberg, chief economist, Rosenberg Research
The six-month trend in the core personal consumption expenditure deflator, the U.S. Federal Reserve’s preferred inflation indicator, is now running a tad below target at a 1.9-per-cent annual rate. It was last there in September, 2020. As commentator Dandy Don Meredith would sing if this were a Monday Night Football telecast back in the 1970s, “Turn out the lights, the party’s over.”
We have also now learned the time dimension of “transitory” inflation: 18 months. In the annals of economic history, that’s a blip. This ain’t the seventies, folks. The thing is, the Fed always goes further than it thinks at the onset of easing and tightening cycles. But the tightening cycle is in the rear-view mirror, and the easing cycle is now staring us in the face.
U.S. Treasury yields are melting, and it’s not over. The 10-year Treasury-note yield at 4 per cent has sliced below its 200-day moving average, and there is nothing but dead air from here to a resting spot of 3.25 per cent. Mean-reverting the yield curve to the norm of the past 20 years (business icon Bob Farrell’s rule No. 1) says we are going to or below 3 per cent on the 10-year note. That would imply a total net-positive return of 15 per cent for 2024.
Even the high-flying and overextended stock market may have trouble keeping up with that performance.
