BMO Financial Group's Director and Senior Economist Sal Guatieri told SHURE GTA that inflation had made more progress in the U.S. and Canada and expects the Bank of Canada to start cutting rates by the summer of 2024.

BMO Chief Economist expresses limited optimism for 2024: “The Canadian economy is basically stalled”

December 15, 2023

SHURE Initiative

Sal Guatieri struck a more optimistic tone at this year’s SHURE GTA event on November 16, compared to comments at the same event in late 2022. Guatieri, who has been working at BMO for three decades, thinks there are positive signs for real estate, yet a more normal Canadian interest rate environment may still be at least two years away. However, despite the modestly optimistic tone, the senior economist said the Canadian economy has been ‘flat on its back’ since January.

Sal Guatieri, Senior Economist and Director, BMO Capital Markets was a featured speaker at SHURE GTA on November 16, 2023.

“Ever since central banks began raising interest rates last year, everyone is wondering what kind of landing we will get?” Guatieri asked the audience. “Will the plane land pretty gently or nose first into the tarmac?”

Guatieri pointed to improving inflation. However, the U.S. economy is quite strong, creating a challenge for interest rates.

“Let’s not get greedy. A soft landing would be perfect, especially given how badly central banks botched this flight by allowing inflation to soar into the stratosphere. To achieve it, the central banks will need to stop pressing on rates – and there’s a good chance that that will be the case.”

Guatieri told the SHURE audience that the Bank of Canada and the Federal Reserve have completed their rate-raising cycles. “In the U.S., because of the better inflation news we’re seeing, even though its economy is still growing strongly and in Canada, because our economy is flat on its bed.”

Guatieri said interest rates are likely heading lower but cautioned his audience. “We’re not going to go back to the lows we saw after the great financial crisis.”

According to Guatieri, a severe recession would be necessary to see the interest rate environment of the financial crisis (2009-2011) and expects rates to fall more slowly than they increased. Canada’s rate may not get to three percent until 2025.

However, despite his optimism about easing inflation and declining rates, Guatieri said there are challenges. “The economy is flat on its back and will likely stay that way for the next couple quarters or so.”

Canadians’ loaded up’ on mortgage debt, particularly in the last decade and during the pandemic and they refinanced at very record low interest rates, according to Guatieri. The senior economist said the average Canadian household will pay from $3,000 to $15,000 more yearly in mortgage payments for the foreseeable future. “Cumulatively and by 2026, three years from now, all those mortgages will have reset at much higher rates, and you’re looking somewhere in a range of 30 to 75 percent over those next three years.”

Canada’s population growth of 3% annually has warded off a recession, according to Guatieri, and may prevent a housing crash.

“You’re probably asking, why are we not in a recession right now, an actual recession? Well, it’s because there are still some buffers, and the biggest of us is our population, which is growing at the fastest rate in seven decades. It’s easier to get your economy to contract when the underlying activity base, population growth, which supports demand and supply, is not growing at a three percent annual rate.”

A SHURE audience member audience asked Guatieri when he foresees peak mortgage defaults occurring. Guatieri’s answer appeared more favorable.

“We’re not expecting much of a correction in house prices because the reason is that the population, which effectively, as I hinted at earlier, puts a floor under your economy.”

Guatieri added that he does not see much of an upturn in mortgage delinquency rates until Canada’s unemployment rate hits 8%. Currently, the unemployment rate in Canada is 5.8%. The senior economist expects the unemployment rate to be around 6.5% by mid-summer 2024.

 

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