Among the truisms for economists is “Stein’s Law,” credited to the late U.S. economist Herbert Stein. The law says, “If something cannot go on forever, it will stop.”
So it was with the Great Recession, and now with Canada’s disagreeable economic conditions.
The anomalies of pandemic, decades-high inflation and interest rates, and a cost-of-living crisis cannot go on forever.
So, they will stop. The only question is when. And the answer is, probably sooner than most think.
This week, the Bank of Canada (BoC) released its most recent surveys of business and consumer sentiment.
The surveys showed greater economic optimism based on population growth, expectations of lower borrowing costs and other encouraging factors.
Improved economic conditions by end of 2024
That renewed optimism, an important turning point, follows two years of deterioration in the BoC surveys. The recent upturn is based in part on a widely predicted recession that has not occurred and seems less likely to with each passing month.
To the contrary, in its latest forecast, the International Monetary Fund (IMF) expects Canada to register the third-fastest GDP growth among developed economies this year, at 1.4 per cent, trailing only the U.S. (2.1 per cent) and Spain (1.5 per cent).
And the IMF expects Canada to outpace all advanced economies in economic growth in 2025, at 2.3 per cent, while the U.S. posts a 1.7 per cent gain.
To be sure, Canadian lenders are continuing to build their reserves against loan losses, especially in the vulnerable SME sector (small and medium-sized enterprises).
But bank CEOs anticipate improved economic conditions in the second half of 2024.
“We expect North American economic growth to remain subdued in the first half of this year,” BMO chief executive Darryl White said in February, “before recovering towards the end of the year.”
But decision-makers in business, who plan for the long term, are looking beyond the likely tepid growth of the first half.
A growing commitment to long-term investments
In the BoC business survey respondents expressed a growing commitment to long-term investments to expand their businesses into new products and geographic markets.
Along with lower interest rates expected this year, SMEs stand to benefit from declines in wage growth.
Wage growth peaked in February 2021 at 8.4 per cent. By January of this year, it had dropped to 3.9 per cent.
The Canadian Federation of Independent Business (CFIB) has reported that in its latest survey of members, who account for the largest number of Canadian employers, SMEs expect to raise their wages by just 2.5 per cent over the next 12 months.
And the CFIB’s SME members plan to raise prices by 2.8 per cent in that period. That’s down from SME pricing expectations that peaked at 4.9 per cent in May 2022.
Those lower wage and price increases will help spur a recovery in an SME sector that has been battered by high labour costs and weak consumer spending.
Expected relief in lower mortgage rates
The wage and price declines also give the BoC more reason to feel safe in beginning to cut interest rates without a resurgence in inflation.
Estimates of the size of the interest rate cuts expected this year, down from the bank’s current policy rate of 5.0 per cent, range from 0.5 per cent to a full per cent.
National Bank of Canada is forecasting a further drop in borrowing costs next year, with a BoC policy rate averaging just 2.75 per cent in 2025.
That near-halving in borrowing costs will accelerate business investment, notably in the key residential construction sector.
And the relief it provides in lower mortgage rates will increase disposable income available for a rebound in consumer spending.
Without question, economic doomsayers have much to work with.
Underwhelming export trade in recent months has been a drag on economic stimulus. Consumer and business insolvencies have spiked, though they remain below 2019 levels.
‘Not only a great place to live, it is also getting better’
And at least for now, high amounts of household debt and the unaffordability of shelter continue to restrain consumer spending.
“The Canadian economy is still slowing as the lagged impact of earlier interest rate increases materializes,” warns RBC Economics, citing the upward surge in mortgage payments and rents.
But the many Canadian reports of a Canadian economy in distress prompted Tyler Cowen, an economics professor at George Mason University near Washington, D.C., to object.
Canada has a housing crisis, Cowen acknowledged in a recent Bloomberg column. And like most advanced economies it trails the U.S. on some important measures.
But Canada has a deep talent pool, Cowen noted. It has “more egalitarian policies” than the U.S. And contrary to the frequent assertions of local pundits, Canada is experiencing a steady rise in GDP per capita, a leading measure of standard of living.
“Canada,” Cowen concluded, “is not only a great place to live, it is also getting better.”
As we struggle with a cost-of-living crisis, the country can seem broken. That’s when outside perspectives can be helpful.
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