Sat. Mar 2nd, 2024

Analysis | 2024, a complex year in the economy

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On Bay Street, the financial heart of Toronto, as in economic circles across the country, we are monitoring the possibility of a recession in 2024.

  • Gérald Fillion (View profile)Gérald Fillion

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We are beginning a difficult year economically. After announcing it for 2023, several forecasters are talking about the possibility of a recession in Canada in 2024. However, in their opinion, it will be modest and short-lived, while a series of interest rate cuts is on the horizon. about to begin, which should boost the confidence of households and entrepreneurs.

How many rate cuts are expected in 2024? Great question! I am convinced that many of you are hoping for rate cuts that would come early in the year and on several occasions.

However, according to economists at the National Bank, the key rate in Canada will rise from 5% to 3.25% by the end of the year. At a rate of 25 basis points each time, this would mean that the Bank of Canada would lower its key rate seven times out of the eight announcements planned in 2024.

It is not impossible that the central bank accelerates its rate reduction, if it notices that inflation is falling more quickly than expected and that unemployment is rising more quickly than expected.

Either way, the first announcement of the year will come on January 24 and it is unlikely that the Bank of Canada will start its cutting streak at that time. moment, according to economists. However, the chances of a drop in subsequent meetings are higher. The second decision of the year is scheduled for March 6 and the third for April 10.

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Experts from Desjardins and CIBC predict a slightly less significant decline in the rate director during the year, to 3.5% by the end of 2024. RBC, for its part, believes that expectations on the rate reduction are far too high. It only forecasts a few drops, up to 4% at the end of the year, no more.

It must be said that the fight against inflation is not completely won. The central bank’s target is 2% inflation. Currently the rate is 3.1%. According to economists from the big banks, everything seems to indicate that the inflation rate in Canada will be between 1.9% and 2.1% at the end of 2024.

However, while the fall in inflation from 8% to 3% was relatively rapid, the transition from 3% to 2% is more difficult. The country's inflation rate was at 2.8% last June, but rose to 4% in August. In the United States, we also see that the deceleration of inflation is difficult: from November to December, the inflation rate increased from 3.1% to 3.4%.

Everything seems to indicate that we will however have to go through the recession box in Canada in 2024 according to Desjardins, which forecasts an increase in GDP of only 0.1% in the country over the whole year. The recession will be short, however, and will be concentrated in the first half of the year.

That said, in an economic note published Wednesday, Desjardins affirms that the recession could be twice as long if Canada were to reduce the reception of non-permanent residents, especially temporary foreign workers and foreign students.

Canada welcomed more than 450,000 new permanent residents in the 12 months to October 1, 2023, in addition to a record 800,000 non-permanent residents. The sharp increase in the number of temporary workers is attributable to the labor shortage as companies seek, by all means, to find employees. The Government of Canada has introduced measures to make it easier for them to come to the country.

However, we expect a marked slowdown in the reception of non-permanent residents in the coming months, i.e. half the number of 2023 for the year 2024, and another half of this number in 2025. If Canada reduced further welcoming temporary foreign workers and foreign students, real GDP could fall by 0.7% in 2024 and average growth forecast from 2025 to 2028 could increase from 1.95% to 1.78% annually, depending on Desjardins estimates.

In return, by doubling the expected projections for welcoming temporary immigrants, real GDP could increase by 1% in 2024 according to Desjardins estimates, which would allow the country to avoid a recession. But the danger would be to fuel inflation and especially the housing crisis, which is particularly acute in Canada.

Moreover, population growth remains the main engine of the Canadian economy. According to the following graph prepared by the National Bank, Canada experienced 3.2% population growth from the third quarter of 2022 to the same quarter in 2023. This is well above the OECD average, which is at 0.6%.

All provinces in the country experienced growth twice as fast as that of the OECD, Quebec ( at 2.5%) to Alberta (at 4.3%).

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Furthermore, the National Bank forecasts GDP declines of 1.1% and 1.3% in the first two quarters. For the full year, the bank’s economists forecast a GDP reduction of 0.2%. That said, economists are increasingly hesitant to declare the economy in recession after simply seeing two consecutive negative quarters.

The assessment must be broader, according to several experts. According to the U.S. National Bureau of Economic Research, which defines business cycles south of our border, a recession is marked by a significant decline in economic activity that has spread throughout the economy and which lasts more than a few months.

Quebec Finance Minister Eric Girard declared during the holiday season that Quebec was not in recession, despite two negative quarters in a row. GDP fell 1.9% in the second quarter and 0.8% in the third quarter, annualized. Despite this, domestic demand is increasing and unemployment remains low. It is difficult, according to him, to be satisfied with the technical definition of the two negative quarters to announce a recession in Quebec.

Waiting for a debate emerges on this subject, one day, at the Association of Economists of Quebec, let's stay in the nuances: the Quebec economy is stagnating.

That said, the unemployment rate, which currently stands at 5.8% in the country, will rise to 6.1% at the end of 2024 according to CIBC, 6.5% according to RBC, 6.8% according to the Desjardins forecast and even 7%, in the opinion of economists at the National Bank.

In the circumstances, Eric Girard, like his counterpart Chrystia Freeland in Ottawa, faces significant challenges in trying to maintain control of their budgetary game plan.

In Quebec first, will Minister Girard try to maintain, at all costs, his trajectory towards a balanced budget, despite the additional expenses planned as part of the agreement with the Common Front of the public sector, 'at least $11 billion per year eventually? Will he absolutely want to remain faithful to his budget planning, despite the slowdown in the economy and rising interest costs on the debt?

Pre-budget consultations have been launched. It will be interesting to see what socio-economic players in Quebec will suggest to him in the coming weeks. If we must maintain the balanced budget plan as is, which services will we cut? And if we review the budgetary projections, what will be the roadmap to return to balance?

In Ottawa, meanwhile, the Minister of Finance is facing pressure from all sides. On the one hand, economists Robert Asselin and Theo Argitis (New window), from the Business Council of Canada, point out that the Trudeau government's program spending represents 17.8% of GDP for the next two years. This is the level of the period from 1996 to 1998, when the Minister of Finance at the time, Paul Martin, initiated a major budgetary consolidation of the State.

In addition, the interest costs of the Canadian debt rose by 37% from the third quarter of 2022 to the third quarter of 2023. So what should Chrystia Freeland do in the circumstances, always in a context of minority government having reached an agreement with the NDP that requires additional social spending?

Budgets will be particularly interesting this year.

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