RBC economist offers predictions for 2024
Inflation not expected to get to two per cent until first half of 2025
One of the Royal Bank of Canada’s top economists delivered a 2024 economic outlook during an Oakville Chamber of Commerce event on Tuesday, and the news isn’t exactly good.
Robert Hogue, assistant chief economist with RBC, told a crowd of around 200 businesspeople that he believes Canadians will continue to feel the impacts of the economic turbulence brought on by the pandemic.
He said RBC believes inflation will drop down to the Bank of Canada’s two per cent target, but this will probably not happen until the first half of 2025. Hogue also offered predictions on where interest rates will go.
“The Bank of Canada, in our view, is done hiking rates. Its next move will be a rate cut, but that’s not necessarily imminent,” said Hogue.
“We think it is going to be around the middle of this year and then the Bank of Canada will start to proceed fairly cautiously to ease that tightening of monetary policy.”
He said RBC expects the Bank of Canada to cut interest rates by a full percentage point over the second half of 2024 and a further percentage point in 2025, dropping interest rates to about three per cent. Hogue noted that three per cent interest rates will be the new normal.
“Keep in mind that during the period since the global financial crisis and all the way before the pandemic, the policy rates had never gotten above 1.75 per cent. Our view is that the new normal is going to be almost double that,” said Hogue.
“That’s something to keep in mind, especially for those in real estate or anyone with a mortgage. Interest rates will come down, but that doesn’t mean they will come down to where they were before the Bank of Canada started to hike rates.”
The assistant chief economist said one thing economists are currently debating is whether the Bank of Canada’s efforts to cool the economy — and thereby reduce inflation — will result in a recession.
He said Canada already saw a small contraction in economic activity during the third quarter of 2023.
“Our reading of the economy is that for the fourth quarter (2024), it is going to be very close to another negative,” he said.
“So, we could qualify for a ‘technical’ recession, but the recovery that will start in 2024 will be sort of a gradual one.”
Hogue said the cooling of the economy is being felt by businesses who, when surveyed, said their main concern is no longer about labour shortages, but rather a lack of demand over the next year.
As a result, Canada’s unemployment rate has risen eight-tenths of a per cent in the last eight months to around 5.8 per cent.
On the subject of the housing market, Hogue said, things will remain quiet over much of the first half of 2024, but buyers will return to the market in greater numbers after interest rates fall sufficiently.
“We don’t believe it’s going to be a snap back into activity because affordability is still a huge issue for many buyers out there,” said Hogue.
“Nonetheless we think it is going to be a gradual recovery mostly over the second half of this year. This will get the construction activity going as well, particularly on the residential side.”
He said 2024 should prove to be a relatively good year for manufacturers, noting the Canadian dollar is expected to remain at a competitive level between 72 and 76 cents U.S.
Other good news for manufacturers, said Hogue, is that while America’s economy is expected to cool it is believed it will rebalance and realign itself without entering a recession.
Another piece of good news is that with the projected easing of interest rates, Canadian households will have a bit more room to increase their spending in the later part of the year, said Hogue.
This spending will push the economy further into recovery mode.
On the subject of housing affordability, Hogue said, it should improve over the next year and a half as interest rates drop, but he noted the change will not be massive.
He said any kind of further impact will depend on whether a huge ramp up in housing construction can actually be undertaken.
“It will come down to our building industry. Does it have the capacity to ramp up construction that much? There’s a lot of policy discussions, there’s a lot of obstacles that impede this ramp up in activity. We are encouraged to see that all levels of government now are pretty much aligned to work on the supply,” said Hogue.
“But even if all those regulatory obstacles are removed, there are still issues with respect to labour … We need a lot more skilled trades to meet that challenge.”
Hogue said housing would remain unaffordable for many Canadians unless enough housing and the right kind of housing is built to address current shortages and future demand.
‘‘ Interest rates will come down, but that doesn’t mean they will come down to where they were before the Bank of Canada started to hike rates.
ROBERT HOGUE ASSISTANT CHIEF ECONOMIST WITH RBC