Deloitte Canada expects economic growth to resume next year, and predicts that the Bank of Canada will reduce its key interest rate below 3% by mid-2025.
In its fall economic outlook, released Thursday, the company says it expects the central bank’s interest rate to be cut to 3.75% by the end of 2024, then forecasts a return to neutral rate of 2.75% by mid-2025.
At the same time, she anticipates the economy will grow moderately as labor market conditions deteriorate, especially since many homeowners have not yet faced higher rates as they refinance their homes. ready.
“We think we’re going to have a decent year next year,” said Deloitte Canada chief economist Dawn Desjardins.
Return to a neutral key rate
According to M.me Desjardins, it appears that Canada will manage to avoid a recession, despite the impact of rising borrowing costs on the economy.
“It would be difficult to argue that the economy is weathering this period of higher interest rates easily. That said, the overall figures continue to show that the economy is growing,” she stressed.
“Yes, the job market has weakened, but I don’t think we’re in a crisis right now. »
The Bank of Canada has cut its benchmark rate three times so far this year as inflation has fallen, and it has already signaled more cuts are coming.
Inflation hit the central bank’s 2% target in August, down from 2.5% in July but also its lowest level since February 2021.
However, rising rates have weighed on economic growth and the job market.
Deloitte’s forecasted neutral rate of 2.75% – the rate at which the central bank’s monetary policy neither stimulates nor restrains the economy – is higher than the rate around which rates hovered in the years before the COVID-19 pandemic. 19.
According to Mme Desjardins, Deloitte’s forecasts agree with Bank of Canada projections. Several factors that could increase the risk of inflation are on the horizon, she warned, including climate change.
“These are costly factors that we will have to manage and which will be integrated into the prices. This is how we arrive at this rate of 2.75%,” she explained.
Optimism in an uncertain context
In its forecasts, Deloitte recalls that the global context remains difficult, with the protracted wars in Ukraine and the Middle East, increasingly significant trade tensions and the uncertain outcome of the presidential election in November in the United States. United.
Consumers and businesses are therefore still facing great uncertainty, mentioned Dawn Desjardins.
This increased instability, particularly due to the American election, is making companies reluctant to invest, but the situation should change next year, in his opinion.
“Inflation will go down and interest rates will go down. These are two powerful factors that will support improved confidence on both the consumer and business side over the next year,” she said.
Overall, Deloitte remains optimistic about the Canadian economy next year.
“Cutting rates will ease enough of the burden on the highly indebted household sector to support increased spending and a recovery in the housing market,” the report reads.
“After two years of below-average growth, we expect the economy to return to strength in 2025.”
Not yet enough housing to lower the cost
Despite falling inflation, the cost of housing, particularly rent, “remains too high,” according to Deloitte.
The drop in interest rates should, however, “revive construction activities”, which should gradually increase over the course of the year.
Although rate cuts can help stimulate the real estate market, Deloitte expects this recovery to be modest, in a context of low affordability.
According to Dawn Desjardins, without a significant increase in supply, the problem of accessibility should not ease.
“We know that Canada has a fairly significant supply deficit in housing,” she said. “And we can’t create housing overnight. »
However, she also does not expect a significant increase in prices.
“I think we’re going to see some reduction in demand from new Canadians. So this could bring a little relief,” she analyzed.