State of the Canadian Economy

Inside is a pulse check on the Canadian economy. Check it out!

September 19th, 2024

Read Time: 3 minutes

CIBC's Senior Economist, Katherine Judge, gave the morning address at the Apartment Conference last week.

She nailed it.

Our team broke her keynote down to 10 big takeaways.

(Number 7. stood out to me)

Let's dive in!

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1. Interest Rates: Pressure to Cut More Aggressively

The Bank of Canada is under pressure to accelerate rate cuts, possibly by 50 basis points.

Inflation has been below target for most of the year (excluding mortgage costs), raising questions about the central bank’s slow response.

What more evidence do you need? The Bank of Canada needs to get on these rate cuts now," Judge emphasized.

2. Recession or Not? Canada’s Economic Reality

Canada might already be in a per capita recession, with recent growth driven largely by immigration, rather than business investment.

The lack of business investment has been a long-standing issue: "Our entire past economic expansion was driven by debt… We just have not been able to attract business investment."

With unemployment set to rise to 7%, concerns about the depth of a recession loom.

3. Household Debt: A Ticking Time Bomb

Many Canadian households are facing significant increases in mortgage payments as loans taken at low rates in 2020-2021 come up for renewal, with monthly payments expected to jump by 15-20%.

"Excess savings are completely dried up… and that wave of renewals will result in higher payments on the monthly payment of around 15%," which could severely impact consumer spending and the broader economy.

4. Housing Market: Sluggish Response to Rate Cuts

The Canadian housing market, particularly in condos and apartments, is not responding quickly to recent rate cuts.

"You won’t see a drop-off in construction in the multifamily sector yet, but it’s coming… Pre-construction sales are already down heavily," reflecting challenges in attracting new investments.

Negative cash flow positions are common for condo investors, further slowing development.

5. Rent Surge Continues: A Long-Term Challenge

Rents have risen 9% year-over-year and are expected to stay high due to limited supply.

Higher interest rates have driven people from the housing market into rentals, but this has not eased affordability pressures.

Despite potential drops in mortgage costs, the rental market will likely continue to see elevated prices well into next year.

6. US Economy: Canada’s Lifeline (and Risk)

With 75% of Canadian exports going to the U.S., the health of the American economy is critical for Canada.

The U.S. has shown some economic weakness, but it remains better insulated from global shocks than Canada.

Katherine Judge warned: "If the U.S. goes into a recession, Canada follows." The differing monetary policies between the two nations is a risk, though it has not yet hit the Canadian dollar.

7. Population Growth: Fuelling Housing Demand

Immigration has fuelled demand for housing, but it has also strained supply. Population growth will slow from 3% to 1% over the next few years, but the supply shortage will remain a major issue.

Despite new immigrants creating more consumption, they also add to the labor supply, which can offset inflationary pressures, Judge explained.

8. Wages: No Longer a Threat to Inflation

Wage growth in key sectors like construction has slowed, easing inflation concerns.

"Businesses are reporting that they're not offering big increases. Wage expectations are down, so that threat to inflation has kind of gone away," Judge remarked, suggesting that this trend supports the case for more aggressive rate cuts.

9. Labor Shortages and Productivity in Construction

Canada’s construction sector is facing productivity challenges due to a shortage of trained workers.

The number of construction workers per site has steadily declined, leading to slower project completion times.

Judge highlighted, "You’re not getting good matches for the job, so construction productivity is way down."

10. Bank of Canada’s Next Moves: Faster Rate Cuts Are Likely

The forecast suggests the Bank of Canada could bring rates down to 2.25% by 2026, though this might happen sooner if economic pressures continue.

"The Bank of Canada needs to accelerate rate cuts… and potentially cut even more," said Judge, reinforcing the urgency to act before the economy worsens.

This trajectory should eventually ease housing market pressures and stimulate more activity.

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