Interest rate cuts could arrive with spring: Deloitte

The Canadian economy will return to growth in the second half of 2024, with interest rate cuts as early as this spring, according to a new forecast by Deloitte Canada.

The firm’s economic outlook predicts stagnant growth during the first half of the year as the effects of higher interest rates continue to work their way through the system.

Deloitte Canada chief economist Dawn Desjardins said that while this could mean a technical recession — two quarters or more of negative GDP growth — it’s unlikely the Canadian economy will see the deep decline or labour market rout that typically accompany a true recession.

“We have a pretty substantive recovery in our forecast,” she said.

Momentum in the economy and the job market is poised to improve in the second half of 2024 as confidence starts to recover, Desjardins said.

The Canadian economy shrank in the third quarter of 2023, contracting 1.1% on an annualized basis while growth was flat for a third straight month in October. Statistics Canada’s early estimate for November suggests an increase in real GDP for November of just 0.1%.

The Bank of Canada held its key interest rate target steady at 5% in December after a heavy-handed hiking campaign to fight inflation.

Deloitte said inflation is still uncomfortably high at 3.1% as of November, but it’s unlikely the central bank will hike rates further. It predicts the central bank will begin cutting rates as soon as the path to its 2% target is clear, something that it expects will likely be in the spring.

However, Desjardins said Canadians shouldn’t expect or even want interest rates to return to their pre-pandemic lows.

“We’ve gone through periods post-financial crisis, where we have had globally very, very low interest rates. And that sort of became the norm,” she said.

The central bank’s rate “should be at a level that allows the economy to grow at its potential rate, but that doesn’t exert a lot of pressure on inflation,” said Desjardins. That’s likely closer to 3%, she added, compared with 1.75% where it sat throughout 2019 before the pandemic.

Household spending on goods and services stalled toward the end of 2023, the Deloitte report said, and even though inflationary pressures are easing, shelter costs continue to post strong growth amid a housing shortage and rising population.

“The outlook for consumer spending on housing and goods and services depends on the future path of interest rates and the health of the labour market,” the report said.

The Deloitte report predicts soft job growth in the near term but robust wage gains as workers continue to try and catch up to inflation. However, wage gains will begin to slow toward the end of 2024, while job growth will accelerate, the report said.

Consumer spending will likely remain “muted” through the first half of 2024 before picking up momentum heading into 2025, the report said.

“We have a fairly subdued profile for the consumer, in particular in the first half, but even in the second half, it’s still going to be slower than it would have otherwise been, mainly reflecting the fact that we do have these elevated debt-to-income levels,” said Desjardins.

The biggest wild card going forward will be the labour market, she said: “If the labour market is able to hang in, you know, we’ll get through this.”

Households in Ontario and British Columbia have particularly high debt-to-income levels due to their housing markets, Desjardins said.

Those two provinces, alongside Quebec, have the lowest real GDP forecasts for 2024 in the Deloitte report at 0.2%.

As the economy continued to slow, real non-residential business investment dropped in the third quarter of 2023, the Deloitte report said. That weakness is expected to continue in the near term as businesses are more pessimistic about slowing demand and sales, the report notes — some are planning to slow hiring or invest less in machinery and equipment.

That weakness will likely be most evident in oil and gas and pipelines, Deloitte predicted: oil prices are down from recent highs, work is almost done on the LNG Canada terminal, and work is slowing on the Coastal GasLink and Trans Mountain pipeline projects.

However, BHP’s recent approval of an additional $6.4 billion in spending on its Jansen potash project in Saskatchewan will help offset the decline in pipeline investment, Deloitte said.