Will central banks succeed in their soft landing maneuver? In analysts’ scenarios, recession does not emerge as the dominant eventuality for economies on both sides of the border. But the odds are higher in Canada, where sensitivity to interest rate fluctuations is higher.
On Wall Street, the major benchmark indices flirted with the zone of bear market — or a fundamentally bearish market — under investors’ fear that the Federal Reserve will be forced to add muscle in its fight against the inflationary slippage. The odds of the US economy falling into recession in 2023 have been bumped up a notch or two. But even if the storyshows the lack of success of the monetary authorities to carry out such a soft landing maneuver, many analysts still believe that the United States will avoid recession. One holds that the particular dynamics of the current post-COVID expansionary phase would give space to the Fed.
Oxford Economics is one of them. Although end-of-cycle signals are lighting up here and there, an expected increase in the supply of both jobs and goods, driven by an expected easing of the supply shock, will ease the pressure on prices while prolonging the expansion. The Oxford scenario hinges on further increases in labor market participation rate tempering wage demands and mitigating the risk of a price-wage spiral. Added to this are long-term inflationary expectations that remain anchored.
The analyst firm expects less stress on the supply chain next year and relies on the quality of the balance sheets of American companies and households. Debt remains contained, and revenues are still on the rise, even if companies are feeling pressure on their profit margins. Moreover, households only used 40 billion, or 1.6% of the 2.5 trillion US dollars of excess savings accumulated during the pandemic, calculates Oxford. A key piece of data for fuel savings, mainly for consumption expenditure.
Higher risk in Canada
A recession averted is also a consensus in Canada, but the sky is more overcast here, as the Canadian economy is more sensitive to the vagaries of interest rates. Canadian household debt is the highest of the G7 countries, and the real estate overheating calls for a correction scenario. An average price drop of 24% across Canada is to be expected, starting in the fall and extending to 2024, predicts Oxford. An average contraction of 12% in Quebec from the peak reached this summer to extend to 2023, Desjardins Group advances in its new projections.
Here too, the excess savings (of 245 billion) accumulated during the pandemic will allow households to cushion the shock and fuel their spending, but the erosion of purchasing power is gaining ground.
The Bank of Canada has been engaged since March in a process of tightening its monetary policy, which, in this context of persistent high inflation, could push the key rate to 2.25% at the end of the summer and to 2.5 %, or even 2.75%, at the end of the year, it is believed. Other forecasts see the target rate at 3% next year, a far cry from the 1.75% before the pandemic. If the central bank is forced to venture beyond the so-called neutral rate, the landing is likely to be felt much more heavily.
In April, after raising its target rate by 50 points to set it at 1%, the Bank of Canada revised upwards its estimate of the neutral rate, i.e. the interest rate compatible with production that remains at its potential level and an inflation rate that remains on target. Its estimate is now between 2% and 3%, against 1.75% and 2.75% at the start of the year. If we take the middle of the range as a target, this neutral rate now goes to 2.5%, against 2.25% previously. “If demand responds quickly to higher rates and inflationary pressures ease, it may be appropriate to temporarily halt our tightening once we get closer to neutral, and take stock. On the other hand, we may need to raise rates a little above neutral for a while to restore the balance between supply and demand and bring inflation back to target,” she said. taken care to warn.