Bank of Canada Governor Tiff Macklem arrives for the annual meeting of federal, provincial, and territorial finance ministers in Toronto on Dec. 15, 2023.Nathan Denette/The Canadian Press
Whether you approach the 2024 economy with optimism or trepidation depends a lot on where your focus lies.
Are you focused on economic growth? You might want to get back to me in 2025. Unless you take perverse pleasure in a good recession watch, in which case, stick around, we’re due for a few more quarters of playing will-R or won’t-R.
Are you more obsessed with interest rates, and when/if they will come down? Well, sit back and enjoy the year’s best show. Rate relief is almost certainly coming; the big questions are when, how much and how fast.
The start of a new year is a popular time for economic forecasting – a practice that is both a bit artificial and a bit futile.
Artificial, because the evolution of an economic cycle is not beholden to the Gregorian calendar. The economic issues and questions that prevailed in the last part of 2023 have carried over into 2024; the trends in growth, employment, inflation and interest rates aren’t altered by the start of a new year, nor will they wrap up neatly at the end of that year.
Futile, because forecasting specific year-end statistical indicators, down to the decimal point – as economists are routinely tasked to do around this time of year – is like throwing darts, blindfolded, at a moving target. Many impossible-to-predict things can and will happen between now and the end of the year, variables that no one can include in their projections because they don’t yet exist. You might get lucky, and land on a number that’s close to what actually happens. You might end up looking like a total fool.
What I can say with confidence – as will people with more economic expertise than me – is that 2024 won’t be a great year for Canada’s economy. We enter it with growth stalled, and there’s little reason to expect that to change over the next two or three quarters, at least.
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Economists are looking at real GDP expanding by something less than 1 per cent over the full year. And that’s based on the conditions we can already see. High interest rates have significantly slowed demand, and will continue to do so, as the full impact of rate increases can take as much as two years to sink in. (The Bank of Canada’s rate hikes began in March, 2022.) The job market has slowed, and that, too, will continue. Our major trading partners face the same lingering effects of high interest rates as we do, keeping a lid on exports.
It would take very little, in the way of an unforeseen economic shock, to tip over a stalled economy into outright contraction. A recession may not be in most formal forecasts, but it is certainly not off the table.
A major wild card for Canada, with its high levels of household debt, is the rising impact of high interest rates on mortgage costs. A recent Bank of Canada research paper estimated that only 45 per cent of mortgage holders had actually seen their monthly payments rise with the central bank’s aggressive rate increases of 2022 and 2023. But that is due to grow to more than 60 per cent by the end of 2024 (and 80 per cent by the end of 2025), as more mortgages come up for renewal.
The implication is that a growing proportion of Canadian households are going to be squeezed by interest rates – and that will put even more pressure on already weak consumer spending. With those mounting mortgage pressures coming in a period when unemployment looks likely to be on the rise, the combined effect could put a deep chill on consumption. These are the kinds of ingredients that could turn a slowdown into a recession.
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On the other hand, some relief from those interest rates may be just a few months away – and, once it arrives, that relief will likely grow as the year progresses.
While financial markets and economists don’t agree on the timing of Bank of Canada rate cuts, it’s widely accepted that they’re coming in 2024. The central bank’s current policy rate, 5 per cent, looks like more than the bank will need to hammer inflation down further, given that the economy has already slowed to the point where total demand is less than supply (a disinflationary condition). The bank can, therefore, start to slowly unwind its rate hikes, as it tries to minimize the damage to the economy.
It could start as soon as spring, if pricing in the bond market is to be believed. More likely, the first cut will be around midyear, as most economists expect.
How quickly, and by how much, those rates come down is the most important economic question of 2024. Will mortgage holders a year from now be looking at a Bank of Canada policy rate below 4 per cent? Sure, that’s quite possible. Could it be 3.5 per cent, or even lower? Some economists think so. Could the Bank of Canada cling to higher rates for longer? It’s not in most forecasts, but given the bank’s well-documented wariness about stubborn inflationary pressures, that could easily happen.
The outcome will make a huge difference to the impact on households, on demand, and on growth. It could tip the scales on the recession question. Interest rates are the biggest factor hanging over the 2024 economy – and predicting their outcome could be the hardest call of all.