Yes, the coming years seem crazy to us, but maybe not for the reasons we would have liked? As the pandemic hit hard in 2020, I was preparing for the celebrations surrounding a long-awaited change of decade. First upset to have to start my quarantine practically in quarantine (!), I pulled myself together, convinced that I would celebrate harder, longer, later. Perhaps my optimism was unconsciously influenced by that of many economic analysts who, over the months following the massive financial support of governments in their local economies, promised us a strong and vigorous economic recovery.
Never have individuals had so much savings, we were told then. When the pandemic is behind us, consumers will want to make up for lost time by spending lavishly on new experiences (other than renovating and resuming parenthesized family celebrations, if you know what I mean!).
The only problem is that this damn pandemic has stretched so long that it has given inflation time to set in. Difficulties with supply chains, the scarcity of labour, the massive injection of cash into the economy by the state and, lately, the geopolitical conflict between Russia and Ukraine are just a few. one of the factors that explain why this inflation — initially characterized as temporary — is now in danger of continuing. So much so that the word “recession” is now on everyone’s lips. The Roaring Twenties didn’t have time to begin as the party is already finished.
Predictable but unplanned increases?
This week, Bank of Canada Governor Tiff Macklem said inflation was no longer seen as temporary and Canadians should expect interest rates to continue to rise to more normal rates, still considered within the 2-3% range that prevailed before the pandemic.
Concretely, the key rate going to 1% quickly turned into interest rate hikes offered by the banks. Concretely, rate hikes always benefit savers and hurt borrowers, as you probably know. If you signed a variable rate mortgage, you suddenly pay much less capital on your loan. I have, in the context of this same column, warned households against the temptation to spend this additional savings in order to maintain sound finances in the coming quarters and the coming years.
Panic or stay calm?
Although sometimes difficult for households to cope with, the rate hikes are necessary to slow down economic overheating. So it’s better to adjust quickly than to panic. Moreover, although monetary policy is required for the management of inflation, our consumption choices also contribute to it, since the price is also influenced by supply and demand. You will always have the choice between saving more or buying a house with higher bids, renovating at all costs despite the rising price of materials or changing your car despite a dizzying rise in prices… As far as food and other basic goods are concerned , we are obviously more limited in our consumer pressures.
You begin to know me; I am not one of the followers of dramatic scenarios, but I advocate cautious optimism. Although some economists are still talking about a return to normal economic cycles as early as 2023, I prefer to advise you to approach the next few years with realism.
Revise. It will be important to focus on your savings rather than discretionary spending. Revise your personal budget accordingly, but above all reduce your consumer loans if you have any.
Plan. If you own rental real estate, personally owned, or if you are self-employed and you still have personal loans with non-deductible interest, consult a financial planner to set up a strategy for setting aside money. .
Resist.As a precaution, resist non-essential purchases, postpone your non-urgent work and, above all, make responsible consumer choices, prioritizing local purchases and quality over quantity.
To consult. If you have a variable rate loan or one whose maturity is imminent, consult a mortgage broker to choose the best option for your personal situation.
Wait. Be patient with real estate investments, especially if this is your first purchase. Who knows, maybe a recession will give you better opportunities…
Yes, my reflection of the last few days leads me to say that we have been living for two years in very special years. Crazy, but not necessarily easy, years may be ahead of us. And for the delayed celebrations of my 40th birthday, no, I no longer have any hope of making this famous trip at low cost!