As a result of still high inflation and a monetary policy which has so far shown no sign of easing, the economic outlook remains cloudy. But perhaps interest rates could soon start to fall. On Tuesday, four experts presented their point of view on the situation during a conference organized by the Council on International Relations of Montreal (CORIM). Summary in a few key points.
Is a slowdown inevitable?
Jimmy Jean, vice-president and chief economist at Mouvement Desjardins, continues to foresee a recession. “I don’t think it’s going to be a heavy recession. I don’t think it’s going to be an apocalypse, but the other side of the coin is that the recovery will be very slow,” he argues.
Same story from Martin Lefebvre, strategist and head of investments at the National Bank. For him, even if “there is no cycle that is the same”, the common denominator of rate increase policies is that they have “always led to a slowdown, or even worse, to a recession”.
“Central banks always hope to know how to stop at the right time, that inflation will slow down without causing a slowdown which is severe. But if we look in the rearview mirror, on a historical basis, this has never happened,” says Mr. Lefebvre.
“At the rate at which spending is going compared to the rate of increase in disposable income, this is not sustainable. Obviously, there will be a slowdown in consumption in 2024. And it is still a fairly significant risk because 70% of the economy is consumption,” he argues.
What to expect from the Bank of Canada’s monetary policy?
According to Jimmy Jean, the Bank of Canada should achieve its goal of reducing inflation to 2% by the end of next year.
“I think interest rates will start to fall in the spring in Canada and it will be a little later in the United States. We will start to have some respite on that side,” assesses Mr. Jean.
I think that interest rates will start to fall in the spring in Canada and that it will be a little later in the United States. We will start to have some respite on that side.
Martin Lefebvre also believes that the trend is towards lower rates. “I no longer have the impression that rates will fall by 100 basis points [plutôt qu’]increase by another 100 basis points in the coming months. »
Vincent Delisle, senior vice-president and head of liquid markets at the Caisse de dépôt et placement du Québec, specifies, however, that central banks could keep interest rates at high levels longer than during traditional cycles — this is the phenomenon ” higher-for-longer.
What should investors watch for?
” Before [la remontée des taux d’intérêt], we bought on the stock market at all costs. Bond yields were so low that it was not an alternative,” says Martin Lefebvre.
But bonds can now be considered “a good alternative” presenting “less risk”, maintains the National Bank expert. “Today, without really taking any risks, you can have 6% which will develop into 7%, 8%, 9%, even 10% with the additional capital gain, if we think that the rates will fall” , he says.
However, the bond market will remain “turbulent” in the short term, according to him. “The minute that statistics [d’inflation] is a little stronger than expected, it is not long before there is a reversal. But I think that if we are looking at a slightly longer-term investment, it could be beneficial for investors. »
As for the stock market, Mr. Lefebvre recalled the significant correction that took place in 2022 when rates began to skyrocket. “On a mathematical basis of company valuation, assets had to fall. But the minute markets anticipated that rates would stabilize, […] we saw the stock market rebound that we experienced in 2023.”
But the expert expects to see corrections in the stock market in 2024 and pleads for a “cautious scenario”.
What are the repercussions of the fight against inflation internationally?
The tightening of monetary policy is also observed abroad, underlines the chief economist of Global Affairs Canada, Marie-France Paquet.
“The US dollar is still very, very strong. This means that debt service for developing countries is much higher. And this is very worrying in certain cases,” explains the expert.
Mme Paquet noted in particular that debt service has increased by around 35% over the past two years in the poorest countries. “A country that is failing is one thing. A dozen countries that are failing is something else. So it’s definitely a big concern,” she expressed.
Jimmy Jean, from the Desjardins Movement, also stressed that emerging countries are not the only ones to have seen their debt service increase.
“We are talking about it more and more in advanced countries. For the United States, they were at 8% in debt service ratio in 2019, according to estimates from the [Fonds monétaire international]. In 2028, we should be at 14%,” says Mr. Jean, who speaks of a “huge increase in such a short period of time”.
Are governments spending too much?
“When we look at the decisions that have been taken, for example last year in the United States, manufacturing investments are at the highest level since 1980,” noted Vincent Delisle of the Caisse de dépôt.
“There’s a lot of talk about what central banks are doing that doesn’t seem to be working — and let’s not forget that there’s always a lag effect — but in the meantime, governments are spending like crazy. »
This arouses “a little feeling of invincibility” among investors, while “this resilience is not sustainable ad vitam aeternam », According to Mr. Delisle.