The Bank of Canada's aggressive interest rate hikes since March 2022 may soon be followed by cuts, according to Scotiabank's chief economist, Jean-François Perrault. This shift in monetary policy reflects signs of a potential economic rebound, with the Bank of Canada revising its 2024 real GDP growth forecast for Canada upwards to 1.5%.
Key Takeaways
- U.S. vs. Canada: While the U.S. Federal Reserve may hold off on rate cuts due to strong economic data, Canada's inflation slowdown suggests the Bank of Canada could cut rates as early as September 2024. Perrault anticipates 75 basis points of cuts this year.
- Resilient Growth: Economic data has surprised on the upside, with both the U.S. and Canada experiencing stronger than expected growth. Retail sales in the U.S. remain robust, despite rising interest rates.
- Business Concerns: Businesses are cautious due to the delayed impact of monetary policy, but wage growth remains significant and labor shortages persist. However, optimism is building as lower interest rates are anticipated.
- Commodity Prices: Rising commodity prices pose a risk of increased inflation as the global economy rebounds and central banks ease monetary policy.
- Investor Earnings: Perrault believes strong economic growth, particularly in the U.S., will translate to higher corporate earnings, despite potentially higher interest rates.
- Election Uncertainty: The outcome of the U.S. election in November is a potential surprise for investors. Perrault highlights the possibility of a trade war if Trump wins and enacts his proposed tariffs.
- Canadian Tailwinds: Favorable factors for the Canadian economy include a strong commodity sector, the upcoming operation of the Trans Mountain pipeline, healthy household and corporate balance sheets, and continued population growth.
- Headwinds: Low productivity remains a significant headwind for Canada, impacting competitiveness and standard of living.
- Housing Market: Perrault predicts continued house price increases due to persistent supply shortages. Affordability is unlikely to improve in the next five years.
- Bitcoin: Perrault does not consider Bitcoin in his currency analysis due to its lack of intrinsic value and its reliance on speculation.
Impact on Real Estate
Perrault's forecast of continued house price increases aligns with concerns about affordability in Kelowna's real estate market. While potential rate cuts could stimulate demand, low supply remains the primary driver of price increases. This situation is unlikely to improve significantly in the next few years.
