In the second quarter of 2023, Canada saw a 1.6% year-over-year increase in consumption. This is particularly concerning considering a year ago the Canadian economy was still not fully open. When we add onto that the fact that the population has increased 3% over the last year, it means real per-capita consumption is actually declining.

 

We believe one of the main causes of the sluggish spending is high interest rates. High interest rates affect every part of the economy, but they have been particularly hard on Canadian housing costs. In 2023, the average Canadian household has seen its monthly payments increase by 12% upon the refinancing of a five-year fixed rate mortgage. This number trends significantly worse in 2024, 2025 and 2026 as the five-year fixed rate mortgages renew at two, and in some cases three, times their original mortgage rates from five years earlier.

 

There are only two scenarios that will play out in the next few years. In the first scenario, rates stay high and people roll over their mortgages (leaving no excess capacity to spend). This will drive the economy lower at a faster rate and we will have a hard landing recession. In the second scenario, the Bank of Canada will start cutting interest rates to try and soften the blow on the economy, so we have a soft landing.

 

We believe both the Federal Reserve and the Bank of Canada have no choice but to start cutting rates in early 2024. If you look at the chart below, you will see that the market is predicting this as well. If this is the case, it should bode well for bonds over the next 12 months.

 

 

 

I have also included a piece from our CIBC Economics team entitled "Wait until next year".

 

As always, if you have any questions, please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan