Heavily indebted Canadians are particularly vulnerable to the current rise in interest rates. Ironically, the shock of the economic slowdown (already underway) will be even harder if they adapt to it by reducing their lifestyle.
Economists used to say that the natural death for a period of economic growth is to fall under the blows of central banks and their interest rates. The tightening of their monetary policy has, in fact, been one of the main factors responsible for 29 recessions in the G7 countries since 1960, compared to 19 for the bursting of a credit bubble or 13 for an oil price shock. or for the bursting of a real estate bubble, calculated the economists of the National Bank.
And this time will be no exception, speakers said Thursday at a conference on economic conditions organized in Montreal by the Association of Quebec Economists, talking about the effect of the Bank’s meteoric rise in interest rates. of Canada in its war on inflation.
At Desjardins Group, we have already been predicting a “slight recession” in Canada for some time. It would take the form of a modest economic contraction during the first half of 2023 and a slow return to the starting point during the second half of the year. At the same time, the average unemployment rate would go from 5.4% this year to 6.5% next year.
However, the Canadian economy could count on the help provided by global demand for oil and raw materials. Some also raise the possibility that the energy crisis caused by the invasion of Ukraine will cause a certain deindustrialization in Europe and benefit North American factories, observed Matthieu Arseneau, deputy chief economist at the National Bank.
For many, the labor shortage of the past few months has “traumatized” businesses, which will hesitate before laying off employees. Matthieu Arseneau is not so sure. Moreover, as the Canadian population continues to grow, employers will only have to freeze their hiring to increase unemployment, he points out.
Households in debt
At Desjardins, we still thought, until very recently, that the Quebec economy would stay within the Canadian average, benefiting in particular from a real estate market that has not experienced the same excesses as elsewhere in Canada, in addition to counting a higher household savings rate.
But Quebec was already, in July, in a fourth monthly decline in its gross domestic product (GDP), which we have not seen since 2009, notes chief economist Jimmy Jean. As for consumer confidence, it is falling faster than elsewhere. We are now wondering whether the recession will not ultimately be stronger there than in the rest of the Canadian economy.
It should also be remembered that Canada is one of the countries with the most indebted households in the world, with a total debt equivalent to 107% of GDP, compared to 86% in the United Kingdom, 78% in the United States , 67% in Japan and 57% in Germany. This indebtedness is due in particular to the sharp increase in the price of houses, which is also one of the highest in the world in relation to the disposable income of families. However, the accelerated rise in interest rates is not only putting a strong brake on economic vigor, it is also increasing the cost of this household indebtedness in addition to making the value of housing on which their debts are based.
In its reference scenario, Desjardins predicts that, faced with an economic slowdown, Canadian households will reduce their savings rate to what it was before the pandemic in order to be able to maintain a certain level of consumption. However, if they choose instead to maintain the same savings rate and offset even half of the increase in their mortgage costs by reducing their expenses, Jimmy observes, Jeans. We would then find ourselves faced with a situation unpleasantly similar to the long and painful recession of the early 1990s, that is to say a fall in consumption which would cause a decline of 1.5% in GDP next year and a average unemployment rate which would drop from 5.4% to 7%.
delay effect
It is usually said that it takes 18 to 24 months before a change in monetary policy produces its full effects on the economy, recalls Sébastien McMahon, chief strategist at iA Financial Group. This means that we would have to wait until 2024 to take full measure of the consequences, in Canada, of the rise in interest rates of 3.5 percentage points since March.
This influence of the Bank of Canada on households and businesses, however, may be exerted more quickly today, now that central bankers have learned to be clearer and more transparent in their decisions and their communications, notes Jimmy Jean. .
One thing is certain, we hope that the Bank of Canada will soon consider that it has done enough to bring inflation back to its target of 2% in the medium term, confided Matthieu Arseneau. At the National Bank, it is estimated that this moment will not come before another 0.5 percentage point increase in its key rate, which would take it to 4.25%. But as the situation will have already started to change, it is to be expected that interest rate cuts will come as early as the end of next year.