Canada’s economy is weak and interest rates will be falling soon to help out investments. That was the takeaway from the new Bank of Canada (BoC) Market Participant Survey (MPS). The survey asked representatives from banks, dealers, pensions, insurers, asset management, and research firms about their expectations for the economy in the near-term. The results reveal Canada’s finance community expects low economic growth, and rate cuts in the not-so-distant future.
Canada Is Forecast To See Low GDP Growth, Recession Likely
Canada’s gross domestic product (GDP) is expected to show low-to-negative growth in 2023. Negative growth showed the highest average probability (48.5%) over the next year. Growth between 0% and 1% sees the probability fall significantly (32.8%). It drops off sharply for anything higher.
Bay Street Has Low Expectations For Canada’s Economy
The average probability of Canadian gross domestic product (GDP) growth in 2023.
Source: Bank of Canada Market Participant Survey; Better Dwelling.
Low growth expectations are accompanied by a recession call, as one would expect. The median probability was highest for a recession within 6 to 12 months (50%). Earlier or between 12 to 18 months were both tied (40%), with the second highest probability. The BoC defined recession as two consecutive quarters of negative GDP growth.
Probability of A Recession In Canada
The median market participant response for the probability of when a recession is expected to hit Canada.
Source: Bank of Canada Market Participant Survey; Better Dwelling.
Canadian Interest Rates Are Expected To Fall Starting This Year
A softening economy typically means lower interest rates, and that’s also what market participants see. The first half of the year is now confident that cuts will happen. By September, that’s where they were spit with the median response showing a policy rate of 4.38%. This implies some expect a cut, while others don’t—sending the median forecast slightly lower.
Expectations of falling interest rates become more common shortly afterwards. The median forecast for October (4.25%), shows a full cut is generally expected by that month. December (4.00%) also reveals eroding expectations.
Next year, monetary conditions are expected to ease considerably as the economy slows. The BoC policy rate’s median forecast in the first quarter of 2023 (3.50%) is a full point lower than today. By the end of 2023, expectations fall even further (3.00%). Though few see a return to the rock bottom rates seen during, and since the Global Financial Crisis.
Canadian Interest Rates To Remain Higher Despite Cuts
The neutral rate is the level where the policy rate has no influence on inflation. It’s high enough that it reduces inflation, but low enough that employment remains robust. The median forecast for the long-term neutral rate was 2.50% in the survey. In other words, lower than the current rate but higher than anything seen between 2008 and 2022—so a completely different environment.
Canadian Interest Rates Are Forecast To Fall Starting This Year
The median market participant forecast for the Bank of Canada overnight rate for each meeting in 2023, and quarterly for 2024.
Source: Bank of Canada Market Participant Survey; Better Dwelling.
The BoC Market Participant Survey generally revealed easing market expectations. It’s not great news for a central bank trying to cool inflation. If market participants think rising rates are temporary, they may not cool speculative demand for commodities and housing—keeping inflation lofty. That can require rates to remain elevated for longer, or even require further hikes to break the sentiment.
How much of Bay Street forecast rising rates? It’s my understanding most, especially those pension nuts, didn’t see it coming. Of course they’ll see the cuts coming though.
Not sure, but just because they see it doesn’t mean it’s the right move. In the early 80s they cut largely because people were complaining, and then inflation surged over the next year (along with home prices).
That’s how you get to a double-digit policy rate—you ignore what you have to do, and try to appease people.
If cut and a dead cat bounce leads to inflation/wage spiral. Homeless people will be everywhere. It’s like they’re trying to make it a bailout.
Note the Bank of Canada definition of a recession is different from the one the government wants to use now. We’re seeing this in the US, where the target moves to avoid impacting the public’s view.
Per capita recession is more likely than two quarters down IMO. They can always game the aggregate by adding economic units (immigrants), and inflation (CPI-basket weight over adjusting), but people won’t feel it if it’s a lie and that’s going to have its own unique impact.
CPI is junk and I can’t believe all of the banks can criticize the measurement, and people just chug on with it. Now politicians have tied basic concepts like inflation to politics, which is just nuts since most of us don’t care who’s in power—it’s why no one votes, FFS.
The banks and JT are lined up on one side, the real world is on the other, and poor Tiff is caught in the middle. If he sides with JT and the banks then we will have a recession and a wage price spiral just like the late 70s (I was in the middle of that mess and, yes, it can happen again). Of course, if the Fed stands up to Joe, then the loonie will tank to about 60 cents.
It is all about JT and Tiff keeping their jobs. To hell with the rest of us.
The Department of Finance and the Bank of Canada have made their own bed and now they have to lie in it. The Bank of Canada is the only G20 central bank that includes mortgage interest costs in its target inflation indicator. The unprecedented string of interest rate hikes that took the overnight rate from 0.25% to 4.50% are still increasing the wedge between the annual inflation rate for the CPI and for the CPI excluding mortgage interest. The Bank of Canada has actually had better success in reducing inflation if you look at the CPI excluding mortgage interest than if you look at the All-items CPI. I told both Governor Macklem and Minister of Finance Freeland that they should switch to the CPI excluding mortgage interest as the target inflation measure with the 2021 renewal agreement, but they didn’t pay any attention to me. It would also automatically have brought the inflation rates shown by their operational guide down.
In any case, the Bank of Canada has been acting more like the Federal Reserve Bank of Ottawa than an independent central bank, trying to guess what the US Fed is about to do in advance and matching their increase. If the Fed is done raising rates and its next move is down, the Bank of Canada is likely to do the same. If the Fed is not finished raising rates and still has another 25 basis points hike in store, the Governing Council may just want to let this one go, even if it has a bad impact on our exchange rate and hence on our inflation rate. That’s what I would be inclined to do; I’m not saying that’s what they would do. I don’t claim to be a BoC whisperer.
“Day and night the telescreens bruised your ears with statistics proving that people today had more food, more clothes, better houses, better recreations—that they lived longer, worked shorter hours, were bigger, healthier, stronger, happier, more intelligent, better educated, than the people of fifty years ago.”
– George Orwell, ‘1984’.
These are the same bankers who were saying that every rate hike was the last one.