Desjardins’ vice president and chief economist says in his latest forecast that a quiet downturn of the global economy after the post-pandemic frenzy is now less likely, due to persistent inflation driving all central banks to aggressively raise interest rates.
Posted at 7:00 am
“All the ingredients are there to cause a recession in the UK and Europe, but also in Canada and the US,” said Jimmy Jane. The surprise is that there are still those who think it can be avoided. »
in Canada first
Desjardins’ chief economist said, because household debt is among the highest in the world, the economy is more vulnerable to higher interest rates. The effect of monetary tightening is already being felt in the real estate sector, and the unemployment rate is beginning to rise.
He predicts that “after real estate and construction, the effect is not yet visible in other economic sectors, such as consumption,” because it takes several months before monetary policy affects the entire economy.
In the United States, the real estate sector is less vulnerable to higher interest rates due to the possibility of obtaining 30-year mortgages. But the US economy is not immune to a recession, Jimmy Jane now thinks, especially since the Fed has indicated that rates should rise above 4% and the economy will have to struggle to beat inflation, which is tougher than she expected.
Recession without unemployment?
Given the lack of employment, it is possible that we will see a decrease in vacancies rather than an increase in the unemployment rate. Companies having difficulty hiring may hesitate before laying off workers. The result will be a stagnation that will not necessarily be accompanied by a significant increase in the number of unemployed. “It would be the first order, but it is theoretically possible,” says the economist. You’ll have to see it to believe it. »
If this hypothesis is correct, the recession may be shorter and less superficial. “Companies won’t want to get rid of their workforce or want to rehire more quickly,” he says. The recession is temporary, it usually lasts for a few quarters and the good weather eventually returns. »
Less difficult in Quebec
According to Desjardins, the recession scenario will not develop in the same way from one province to another. British Columbia’s chief economist expects British Columbia to suffer more due to the heavy weight of real estate in its economy. Ontario, given the importance of real estate and the weight of its financial sector, will also be affected more severely. At the other end of the spectrum, the oil-producing provinces of Alberta, Saskatchewan and Newfoundland and Labrador will do better.
Quebec will be somewhere in between. “The next few quarters will be more difficult in Quebec, but worse elsewhere in Canada,” Jimmy Jane summarizes.
What will help Quebec’s economy is family savings which, although beginning to decline, are still high. In the second quarter, Quebec’s household savings rate was 10.2%, compared to 6.2% in Canada.
In Quebec, as elsewhere in the world, there is strong pressure on governments to help families cope with rising costs. Be careful, the economist says, that some measures, such as tax cuts, can feed inflation and make the job of central banks more difficult.
According to him, the UK government, which has just granted huge tax breaks to British taxpayers who have been stifled by nearly 10% inflation, is the example not to follow.
“Moderation tastes so much better when it comes to moving forward with these procedures,” he says.
Desjardins believes that a rate hike is coming to an end in Canada. The Bank of Canada will raise interest rates to 3.75% and then pause.
The Bank of Canada was very bold in raising interest rates, having thought that inflation was a passing phenomenon. “The process could have started earlier, but it would still start to tighten monetary policy ahead of the Fed, notes Jimmy Jane. It has been aggressive so far, but in the end the Fed is likely to go further and may overtake the Fed. England 6%.”
He pointed out that the central banks succeeded in convincing the financial markets that they would have the upper hand over inflation. “Mission accomplished. We now have to convince households and businesses. There is still a perception that higher interest rates are causing inflation. The Bank of Canada is making outreach efforts to demystify these questions, and that is a good thing.”
He said the Bank of Canada’s mandate is to fight inflation, not avoid recession. “It does not want to cause a recession, but if a recession is necessary to successfully return inflation to its 2% target, it is ready to live with it.”
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