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From the risk of a recession, to the stickiness of inflation, to the prospects for the housing market, TD Economics answers the most asked questions on how the outlook and risks are evolving in its latest report.
Transcript
Greg Bonnell: Are we or aren’t we heading for a recession? That is the big question on many people’s minds. Well, TD Economics just came out with a report looking at this and other questions about the evolving risks and the economic outlook. So let’s get right to it. Joining me now, Leslie Preston, Senior Economist at TD Bank. Leslie, this report covers a lot of ground. Let’s see how much we can get through point by point. Let’s start with the global economy — this question about, are we nearing a recession? And what are the odds?
Leslie Preston: Well, it really depends on where you’re sitting. We do expect Europe is headed into a recession this year. We don’t see it yet for Canada or the US economy. We think the odds — it is a bit of a coin toss, 50/50. But we do expect that coin to land up heads for Canada and the US. Over the next year, we’re not forecasting a recession.
Greg Bonnell: Okay. That leads us into a discussion about cracks emerging in the Canadian economy. Are there cracks emerging in the Canadian economy?
Leslie Preston: Well, first starting point, the Canadian economy was really a world leader in the first half of the year. Some of the strongest growth numbers from any advanced economy. So Canada’s really coming from a position of strength. We are starting to see a few cracks, though, mainly in housing. Housing has really responded to higher interest rates. We’ve seen sales and prices come down quite significantly from their February peaks. We’re also watching the jobs numbers very closely. We’ve had two months of back-to-back job declines. Now, most economists don’t like to draw a trend line from just two numbers. But it is something we are watching closely. Because hiring has been very strong in Canada so far in the recovery. And so we’ll be watching the next number to see if that trend continues.
Greg Bonnell: Before we get to the next one, the housing file always fascinates me in the sense of how important housing became to the economy. If we’re seeing the slowdown, which we are seeing there — some cracks — could that be pretty serious in terms of the impacts?
Leslie Preston: It’s certainly expected to be a negative as far as the GDP growth calculation goes. We are forecasting that. Fortunately, it does have a heavy weight in the economy. We expect it also to weigh in consumer spending. But that’s not the whole economy. Consumers are fairly resilient. We have a very low unemployment rate. So we are expecting the Canadian economy to slow as a whole, and housing is a big part of that. But there are a lot of other sectors that are doing well — oil and gas, for example.
Greg Bonnell: Let’s talk about the commodities space, global commodities. We’ve seen a deceleration after that big price jumps we saw earlier this year. What does that mean for global growth?
Leslie Preston: Well, I think the commodity prices have certainly responded to the global growth story, which is — we do see global growth weakening. And we’ve seen both energy and non-energy commodity prices weaken on that news. One standout, of course, exception to the rule, is the natural gas market, which, of course, is being heavily affected by what’s going on with Russia’s war in Ukraine. But overall, we have seen a fair bit of weakness in commodities as a whole.
Greg Bonnell: Here might be, I think, maybe even the biggest question of the summer — inflation. This is the reason why the central banks are getting so aggressive with hiking borrowing costs. Still expected to stay aggressive heading into the fall. Is it going to stay elevated?
Leslie Preston: We don’t expect it to. Well, we expect inflation has crested in both Canada and the US. But we do expect it to remain above both central bank’s targets through the remainder of the year. The demand has been very strong. And a lot of the supply chain issues aren’t resolving as quickly as we would have thought six or eight months ago. So we do expect it to remain elevated. But that the worst sort of year-on-year rates are likely behind us.
Greg Bonnell: I think a lot of people are hoping that peak has been reached and that these numbers that we saw — at least for this month on both sides of the border, or the most recent month — are going to start to level off. What about the consumer, though? I mean, obviously as you go out and everything costs more and more and more, the question becomes, can they remain resilient in the face of all these pressures?
Leslie Preston: We expect them to. As I was mentioning before, unemployment is incredibly low, both in Canada and the US. We’re at generational lows on the unemployment rate. So consumers are coming from a very strong starting point. Consumer balance sheets also — sort of financial position overall was generally helped by the pandemic. A forced spending vacation for a lot of us with lockdowns really let bank deposits’ balances get a bit thicker. So they do have that cushion as well. That’s not to say we don’t expect consumer spending to slow. We’re already seeing that in the US, given, as you say, the high inflation and also higher borrowing costs. So we do expect it to slow. But we do expect consumers overall to be quite resilient, given the positive fundamentals.
Greg Bonnell: Obviously, the central banks have said, inflation is in our sights. We are going to do what we need to do to bring it back down. You’re saying it’s going to take a while to get there. Some people say, Okay, when do they actually start to back off of those hikes?
Leslie Preston: Well, our forecast calls for them to back off in 2023. We do think the central banks aren’t going to back off until they see inflation headed decidedly towards their roughly 2% target. We think by early next year that’ll be the case. We do think financial markets are getting a little bit ahead of themselves pricing in rate cuts at this point. Because we do think, given history, past experience, where the central bank has thought they’ve reined in inflation, and then inflation crops back up — in fact, we had a little bit of a mini version of that in the US last year. So we think that the Fed and the Bank of Canada will be in wait-and-see mode through 2023.
Greg Bonnell: We’ve already seen, as we mentioned, a very dramatic reaction in the Canadian housing market to these higher borrowing costs. How do the markets evolve beyond this? If this is the scenario, they’re going to have to continue hiking, then there’ll be a pause. But you’re probably — if someone’s wishlist is they’re going to cut right away again, that’s probably — what I’m hearing is, that’s not going to happen. What happens to the housing market?
Leslie Preston: Well, we do expect a continued — what we’re calling a recalibration in the housing market. I think most people are aware of a lot of the headlines through the pandemic, particularly here in Canada, and the US as well. Housing markets really soared and took off. So we do expect there to be a bit of further weakness in prices and sales here in Canada. But we’re calling it a recalibration, because we don’t expect prices to dip below their pre-pandemic levels. Really what we’re seeing is an undoing of a lot of the excesses we saw during the zero interest rate peak stimulus period of the pandemic.
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