Economy will slow at start of new year, but pick up later
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The Bank of Canada will likely start cutting interest rates in the second quarter of 2024, predicts the chief economist at Deloitte Canada.
Deloitte is forecasting three 25-basis-point cuts from the central bank, which would reduce its overnight policy rate from five per cent to 4.25 by the end of 2024.
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“We’re going to have two per cent [inflation] in the Bank of Canada’s sights,” Dawn Desjardins said in a recent interview with the Financial Post’s Larysa Harapyn. “That will open the door for them to start to give some interest rate relief.”
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Canada’s inflation rate is still a ways away from the Bank of Canada’s two per cent target, but continues to come down. The consumer price index slowed to 3.1 per cent year over year in October from 3.8 per cent the month before.
Meanwhile, the economy remains weak as we exit 2023. Real gross domestic product shrank by 0.3 per cent in the third quarter and 1.1 per cent on a yearly basis.
Desjardins is anticipating these trends to continue in the new year. The Bank of Canada will then be in position to lower policy rates.
“A lot of things are sort of in train,” she said. “We see that the inflation pressures have eased considerably.”
She added that consumers and businesses are expecting the central bank to be successful in getting inflation back to two per cent.
“We’re going to get through this hump,” Desjardins said. “This provides some support for households.”
Desjardins added that Canada is currently experiencing a mild recession. She believes that 2024 will have a slow start but the economy’s pace should pick up a through the course of the year.
The unemployment rate, now at 5.7 per cent, is set to rise above six per cent from Canada’s rapid growth in population, but there won’t be a huge weakening in the labour market, she said.
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“We’re not looking for wholesale job losses,” Desjardins said. “That’s one of the mitigating factors for the economy.”
She added that employers will be more likely to retain their current work force following the “significant trauma” they went through during the pandemic and the reopening of the economy.
Desjardins said that companies, which right now are facing intense pressure from higher wages and interest costs, might be able to negotiate lower levels of wage growth in the year ahead.
“As a worker, if we’re starting to see some fraying in the labour market, we’re probably not going to be quite as aggressive in terms of our negotiations for wages,” she said.
In terms of recovery, Desjardins sees the economy moving back into positive growth territory before the end of 2024, as long as the labour market holds up.
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“We have a very low growth rate overall in 2024 but I think the pattern is going to be more encouraging,” she said.
Desjardins stressed that the Bank of Canada will remain cautious so that inflationary pressures are not reignited before we hit a two per cent inflation rate on a sustained basis.
“If they ease too early or too much, it could really just reignite a cycle that puts upward pressure back on the inflation rate,” she said. “That’s one thing that they really do want to avoid.”
• Email: novid@postmedia.com
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2023-12-16 16:02:26Z
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