As recession looms, financial markets act as if the worst is over and interest rates will soon begin to come down. Error, according to Desjardins.
“The markets are too optimistic,” said the chief economist of Desjardins, who updated his economic forecasts during a videoconference. “Interest rates are not going to come down quickly because central banks are going to want to make sure that inflation doesn’t come back. Their credibility is at stake,” he said.
The S&P 500 is up 5% year-to-date, he observes, reflecting over-optimism about corporate profitability and the likelihood that rates will come back down soon.
It won’t happen, he says. Economic conditions are expected to get worse before they get better. Desjardins is revising its forecasts at the start of the year when contradictory signals are piling up.
The ideal scenario of a soft landing for the economy after the pandemic shock is a little more likely at the start of the year in Canada and elsewhere in the world, believes the Desjardins economist, like several of his peers.
PHOTO FRANÇOIS ROY, LA PRESSE ARCHIVES
Desjardins Group’s Chief Economist, Jimmy Jean
The energy crisis that we feared for Europe did not take place, and the spectacular reopening of the Chinese economy changes the situation, he specifies. But the impact of interest rate hikes will continue to be felt over the next few months, further dampening growth, says Jimmy Jean.
The mystery of employment
It is the evolution of the labor market that will make the difference between a slight recession or very weak growth, according to him.
“It’s great, the mystery of employment,” jokes the Desjardins economist. For the moment, the labor market remains solid on both sides of the border, while all the other indicators are weakening.
The US economy even added 517,000 jobs in January, while 188,000 were expected. These are startling figures, which probably do not give a good idea of the real slowdown in the US economy, where layoffs are piling up, says Jimmy Jean.
In Canada, the unemployment rate should begin to rise in the coming months, reaching 7%. It should reach 5.6% in Quebec by the end of the year.
The Quebec economy is already one foot in recession, while across Canada, the gross domestic product (GDP) is still in positive territory. Will Quebec suffer more from the rapid rise in interest rates?
No, believes Jimmy Jean. “I have the impression that the GDP statistics don’t tell the true story of the economic situation elsewhere in the country,” he explained in an interview with The Press.
The difference is probably due to exports, especially in the energy sector, which inflate the GDP figures, he said.
“In Quebec, as in Ontario and British Columbia, household spending has slowed considerably, the residential sector is correcting as much, in short, it’s the same story everywhere.
“We expected Quebec to be more resilient, because of the savings accumulated during the pandemic and a less vulnerable real estate sector, recalls Jimmy Jean. The numbers surprised us. »
The Quebec economy shrank by 1.9% in the third quarter of 2022, and the last three months of the year are expected to be negative, which corresponds to the definition of a recession (two consecutive quarters of decline).
Before officially declaring the start of a recession in Quebec, Desjardins is waiting for the latest data and frequent end-of-year revisions from Statistics Canada.
“We won’t be better off [que l’Ontario et la Colombie-Britannique], now believes its chief economist. We are in the same boat. »