North American stock markets are pricing in a soft landing, with economic conditions anticipated to steadily recover in the years ahead.
However, there may soon be shifts to these forecasts of economic resiliency.
In an economic outlook published last month, Desjardins’ chief economist and strategist Jimmy Jean said the biggest risk to the outlook for the Canadian economy is the outcome of the upcoming U.S. presidential election. Depending on the election results, economic uncertainty and volatility in equity markets may rise.
The Globe and Mail recently spoke with Mr. Jean for a two-part interview. In part two of this interview, Mr. Jean shares his perspectives on the economy, interest rates, the housing market and the Canadian dollar.
Earlier this week, part one was published, which featured Mr. Jean’s outlook for equity markets, as well as his sector and asset mix calls.
What probabilities do you ascribe to a soft-landing scenario versus a recession in Canada and the U.S.?
We’ve been in the whereabouts of a 30 per cent odds of a recession in the U.S. and in Canada as well. We think the U.S. and Canadian labour markets have lost its dynamism but it’s not showing the layoffs that’s typical of a recession. So, we can’t say we are in a recession, but it is certainly something we’re watching closely. Central banks are responding and that makes a difference as well.
I believe you are calling for a 50 basis points cut by the Bank of Canada in October?
Yes, that’s right.
Is the Bank of Canada behind the curve? Do you think they are too slow in lowering the overnight rate?
We think the Bank of Canada is probably 25 basis points behind the curve. Back in April, I said it was able to cut rates, but it chose to wait until June. But now, given what we’re seeing and given the Fed has done it already, I think the Bank of Canada has the ability to do 50 in October and then to continue at a 25-basis-point pace.
After October, you expect the Bank of Canada to cut 25 basis points at each meeting until the second half of 2025 when you believe the pace will slow to just one 25 basis point cut in the third quarter and one 25 basis point cut in the fourth quarter with a terminal rate of 2.25 per cent. If this forecast were revised, which direction would it be?
Right now, we’re focusing on the downside risks from a number of factors.
There’s obviously the U.S. election. If Trump is re-elected the odds of a recession would rise dramatically so that would warrant deeper rate cuts.
And there’s also demographics, how well the federal government will be able to execute its plan to reduce temporary immigrants.
I think those two factors speak to the downside risk to the growth profile. If those risk factors were to materialize, I think the Bank of Canada could go lower than 2.25 per cent.
Earlier you said there is about a 30 per cent probability of a recession in the U.S. and Canada. How would that probability increase with a Trump victory?
I would put it at 50 per cent in the U.S. and Canada. That’s what our analysis says.
Why do you believe the odds of recession will rise dramatically with a Trump victory?
Largely because of the tariffs. The tariffs would cause an increase in prices and in costs and would cause a reduction in economic activity. Also, deportations would have an impact on the availability of labour.
How great of a risk is deflation for the Canadian economy?
I think it’s a remote risk because we still have the shelter component that is very strong because of rent primarily. So, rents are still at 9 per cent inflation and that speaks to the supply/demand imbalance in the rental market. It’s a pretty important component of CPI.
Having said that, we are seeing many more components of CPI that are running below 1 per cent right now than there are growing above 3 per cent. So, the distribution is certainly shifting down.
I think it would take a major shock, it would take a recession to get a deflation scenario.
Is there a major economic indicator where you have a notable change forecast for next year, which you believe will have the greatest implications for individuals?
The go-to variable for the cycle is always the unemployment rate and the unemployment rate profile we have is that it continues to rise into year-end, but it starts stabilizing and gradually falling into 2025.
What it assumes is that we don’t see layoffs picking up. What we’re really watching attentively is those layoffs because if they start shooting higher that means that the unemployment rate increase is not just due to more newcomers unable to find a job, it’s due to people who are working who are losing their jobs. And that is a completely different dynamic for the economic cycle and for the Bank of Canada. So that’s one indicator we’re looking at very attentively.
In 2025, you have the annual average unemployment rate ticking up to 6.6 per cent from 6.4 per cent in 2024. When does it peak out?
We have it peaking in January and then ebbing lower going forward, a lot of which is because of the demographic effect with less newcomers so less rapid expansion of the labour force.
In a report that you published in September, you indicated that the five-year fixed mortgage rate may be nearing a bottom and might tick slightly higher in 2025 if economic conditions improve. That doesn’t sound too positive for homeowners whose mortgages reset in 2025 and 2026.
It implies that the five-year mortgage rate is already discounting everything that we’re saying will happen as far as the Bank of Canada’s monetary policy goes. So, there’s not a whole lot of room on the downside. It would need a shift in expectations from the market to get significantly lower interest rates. Further out, we have interest rates in Canada creeping back up, but very gradually.
I think the main message is that we don’t have a lot of room on the downside for mortgage rates. So, those who have been waiting to buy a house because they’re waiting to get even better rates that strategy might not serve them well.
You have the five-year variable rate bottoming around a year from now.
The variable rate is a short-term rate, and it tracks the overnight rate by the Bank of Canada. So that one is still pretty high, but we have it dipping below the fixed rate about a year from now. It would be the first time since 2022 that variable rates are back below fixed.
Given your mortgage rate forecast, what are your home price and home sales expectations for the Ontario and BC housing markets, areas with low affordability?
We have home prices grinding higher but it’s very slow and the same thing with sales, it’s a very slow grind higher. It’s mostly stable.
For those who want to buy a first home, it’s still going to be tough and that’s why the government made that announcement on changes to mortgage rules, which might have a near-term effect on driving demand, but it will also drive prices for a new home builds. So, we’re not convinced that it will have a lasting effect on affordability.
You see the Canadian dollar being relatively stable from now all the way through 2025, trading around the 74, 75 cent level relative to the US dollar. With the U.S. Federal Reserve not expected to cut rates as much as the Bank of Canada and your slightly stronger economic growth outlook for the U.S. economy, annual average 2025 real GDP growth of 2 per cent versus 1.8 per cent in Canada, why don’t you see the Canadian dollar weakening or vulnerable to a slight pullback?
The Canadian dollar, right now, it trades almost strictly off the U.S. dollar index. It’s not so much responsive to rate differentials, or risk sentiment, or even oil. It’s all about the U.S. dollar. We’re seeing the U.S. dollar on a weakening trend with those expected rate cuts and that’s what’s been fueling the Canadian dollar.
Following the Bank of Canada’s next meeting, we’ll have more rate cuts remaining in the U.S. than we’ll have in Canada because the Bank of Canada started earlier. So, that plays into it.
And, while the Canadian dollar is less responsive than in the past to oil, but it’s still has some response. We have oil a little bit higher next year so that’s also a modest support for the Canadian dollar. In the past, we would have had the Canadian dollar probably much stronger but we’re aware that it’s less responsive.
Broadly speaking, it’s still a story of a range bound Canadian dollar.