Scale of food insecurity, unbridled immigration, muscular deployment of generative artificial intelligence… 2023 has not lacked surprise effects.
What was the dominant scenario forecast for 2023 a year ago? A moderate recession covering the first half of the year, perhaps lasting three months; a stabilization of the key rate, which remained high for a good part of the year before beginning to decline in recent months; and a slowdown in the pace of growth, with inflation still expected to remain above the 2% target.
We’re doing it again this year. The recession may be underway. Inflation persists, but the Bank of Canada takes a break. The consensus among economists is that the key rate will begin to decline in the second quarter of 2024, with the overnight target rate returning to 3% in the second quarter of 2025. Although more and more of them are targeting a first reduction in March and to see the overnight target rate return to 3.5% at the end of 2024, compared to 5% currently. A small handful even dare to suggest an initial decline at the next meeting of the central bank’s monetary committee, on January 24.
The extent and speed of the easing will essentially depend on the performance of the labor market and the degree of deterioration in economic activity. Let us recall the calculation of the National Bank economists regarding the delaying effect of monetary austerity on the economy. They note that 42% of the impact of the increase in the cost of money since 2022 remains to come.
Underestimated impacts
We are talking here about a realignment of forecast scenarios. The underestimated impact is that of the surge in inflationary fever, which has created its share of households suffering from food insecurity. Among which it has been observed that an ever-increasing number have an income above the poverty line. This would be the case for approximately 8 out of 10 families who find themselves in a situation of food insecurity, according to Statistics Canada. This deterioration was not without leading to “unprecedented” traffic at food banks.
It is also that of unbridled immigration fueling the housing crisis, delaying the return to balance in the residential property market and attenuating the effect of monetary austerity on economic activity. The last Monetary Policy Report of the Bank of Canada is rather eloquent. He deplores that public spending contributes strongly to growth, with an average increase of 2.5% expected in 2024, higher than that of potential production, estimated at around 2% over the projection period. Growth supported by “a significant demographic surge, attributable to strong immigration and the uninterrupted arrival of a large number of temporary residents”, underlined the institution.
The same observation applies to the increase in housing costs, which is expected to remain strong driven by the increase in the cost of mortgage interest, the rise in rent prices and the increase in other housing costs. We could read that this increase in rents and other housing costs can be explained, in large part at least, by the strength of the demand for housing – which is fueled by rapid population growth – and the structural deficiency of housing. housing supply.
To further illustrate the distorting effect, let us say that this demographic factor may have explained why slightly positive GDP growth could show a decline when GDP is measured on a per capita basis. “Although overall consumption is supported by strong population growth, per capita consumption is expected to decline further through most of 2024,” the report adds.
And the surprises
What we didn’t see coming? Higher inflation in Quebec than in Ontario. Historically, the inflation differential normally remains to Quebec’s advantage. In 2022, this consumer price index (CPI) gap was 4%. It cost more in Ontario, particularly for housing, purchasing a property, current expenses and household expenses. It has reversed this year, the evolution of the CPI having been stronger here. By way of explanation, economists mentioned three elements, mentioned among others. First, they note the introduction of the daycare program by the federal government, statistics indicating that the cost of daycare services decreased by 2% everywhere in Canada, except in Quebec, which already had its own program. Then, they note a stronger correction in the real estate market in Ontario. Finally, they mention an increase in food prices most felt in Quebec.
Also, the rather explosive impact on the growth and scope of artificial intelligence (AI) of its generative version has stunned many, with OpenAI, developer of the chatbot ChatGPT, grabbing most of the attention . Specialists have highlighted that with generative AI, we are no longer talking about robotization and the impact on repetitive employment, we are entering the world of creation, even consciousness. According to consulting firm McKinsey, generative AI could increase the overall impact of AI by 15% to 40%. For its part, OpenAI has calculated that 80% of jobs in the United States will be affected in one way or another by generative AI and neural networks. large language models “.
Oh yes. A word to mention this umpteenth surge in bitcoin, with a surge of more than 150% in its price that no one saw coming. But without surprising, this cryptocurrency multiplies its ups and downs.
What surprise should you wish for in 2024?