Benjamin Tal: 2023 Economic Outlook - Light at the end of the tunnel?
2023 Economic Outlook – Light at the End of the Tunnel?
[Soft music plays]
[Benjamin Tal, Managing Director and Deputy Chief Economist
CIBC Capital Markets Inc.]
Everybody is talking about inflation. But the reality is that at the end of the day, this is not
[Sheets of currency being printed. The Bank of Canada, in Ottawa. The Federal Reserve in
This is about the cost of bringing inflation down to 2%, which is the target. The Bank of
Canada, the Fed in the U.S., have established their reputation as inflation fighters. They are
not going to toss it away. Given a choice between a recession and inflation they will take a
recession any day. That's the reality.
[Sources of inflation]
The trajectory of inflation is important here. This trajectory is changing.
[An aerial view of a shipping dock. A person online shops on their phone. An aerial view of a
warehouse and shipping center.]
At any point in time, there are two sources of inflation, supply driven inflation and demand
[A full warehouse. Bustling shipping docks. The Bank of Canada building. A timelapse of
What we are seeing more and more, is that the contribution of the supply driven inflation is
diminishing, which means that the supply chain is improving, shipping cost is down. And
that's actually extremely good, because it means that the Bank of Canada is becoming more
powerful in its ability to deal with the situation because more and more inflation is not
coming from the outside, but rather from domestic sources which the Bank of Canada can do
So, what's the next move?
[The Bank of Canada building.]
The Bank of Canada is now at 4.25% overnight rate. We think it's done. We think that's the
end of it. Maybe another 25 basis points if they have to, but we are, basically, extremely
close, maybe at the end of the hiking cycle.
The next question, of course, is what's next? When are you cutting? Usually, the lag between
the last hike and the first easing move is relatively short. This time we believe it will be
relatively long, maybe a year, maybe early 2024.
[The Federal Reserve in Washington. Sheets of currency being printed.]
Why? Because the Bank of Canada and the Fed have to make sure that inflation is dead
before they ease monetary policy.
[An aerial image of the Brooklyn bridge in the 1970s. A CIBC branch in Toronto in the 1970s.]
The last thing they want to do is to repeat the mistakes of the 1970s when monetary policy
was eased prematurely and led to another wave of inflation, and therefore, the double dip
recession of the early 1980s. They would like to avoid that and, therefore, they will wait until
inflation is dead before they cut.
And then when they cut by how much? Now, we started this saga at 1.75% overnight rate.
We are going to 4.25%, 4.5%. We rest for a year. And then cut––to where? I say about 3%. A
full percentage point, maybe more, above the rate we have seen before the crisis.
Why? Because in the background there are three inflationary forces that are putting pressure
on overall inflation.
[A low angle view of a Canadian flag in Ottawa. A full warehouse. A woman carries a box of
We are talking about deglobalization. We are talking about Just-in-case inventories that are
replacing Just-in-time inventory. And clearly the labour market is much tighter now with
vacancy rates in the sky. And the target is the same target, still 2%. So, in order to achieve
the same target with more inflationary forces, by definition, interest rates have to be higher
and the new neutral rate, about 3%, clearly higher than what it was before the crisis.
[The risk of central bank overshooting]
What's the risk? Overshooting. To the extent that supply chain does not behave. To the
extent that we don't see a significant decline in the external source of inflation, that will lead
to a situation, in which the Bank of Canada will overshoot, will raise interest rates to 5%,
[The Bank of Canada crest. A person fills out a job application. People sit in a waiting room.]
That will take you to a real recession, with the unemployment rate rising significantly. Every
economic recession was helped, if not caused by a monetary policy error, in which central
bankers raised interest rates too much.
[The Bank of Canada building.]
At this point of the game, it seems that the Bank of Canada is getting it. They would like to
avoid this risk. Basically, stop at 4.25%. That's the main case scenario.
[The Housing Market]
Let's talk about the housing market now. The housing market is extremely sensitive to higher
interest rates than in any other time in history.
[An aerial view of houses in Toronto.]
It is slowing down. Is it a correction? Is it a crash? Is it a meltdown? In order to answer those
questions, we have to understand what happened to the housing market during COVID. We
know that prices went up by 46% in two years. The question is why? The answer is the
asymmetrical nature of the crisis. All the jobs that were lost were low paying jobs.
[An empty warehouse. A person reads a layoff notice. Apartment buildings in Toronto.
Homebuyers look at listings in the window of a real estate office.]
Young people, renters. That's why rent actually went down during the pandemic.
[A young couple looks at the front door of a house.]
At the same time, homebuyers and even potential homebuyers, their jobs were there. They
were assuming their income was there and interest rates were in the basement. So basically,
we have a situation in which, if you think about it for a second, homebuyers during COVID
got the benefit of a recession, vis-a-vis extremely low interest rates, without the cost of a
recession, vis-a-vis a broadly-based increase in the unemployment rate.
[A street view of a residential neighbourhood.]
There was a sense of urgency to get into the market. So, if you have a sense of urgency to get
into the market, you frontload activity. You borrow activity from the future. We are in the
future. This is not a freefall. This is not a crash. This is a reallocation of activity over time. We
frontloaded activity, now we are resting due to higher interest rates. That's a very positive
development. It's not over.
[A “For Sale” sign on a lawn.]
Now, this is the first correction ever, in which the supply resale activity is actually down.
Usually, you see supply listings going up when the market is correcting. This is not the case
now. Supply is down because people simply are worried about the overall situation, they are
not willing to list, and therefore, supply is down by 10% on a year-over-year basis. That's
protecting prices from falling further. I believe that will change in 2023 and 2024. We will
see supply rising because the fog will clear.
[An aerial view of houses in Toronto.]
But also, some people will be forced to sell given the huge increase in interest rates and the
shock that they will experience moving from variable rates to fixed rates or renewing their
variable rates. And therefore, I see further downward pressure in the housing market in
2023. However, it's not a crash, it's not a meltdown. It's a very healthy correction.
[An aerial view of houses. A plane lands at an airport. A woman waits for a ride at an airport.
A man holds up the Canadian flag. The Ukrainian flag flying over Kyiv. An agent shows a
couple a condo]
So, expect to see further declining sales and clearly declining prices, especially in the low-rise
segment of the market. At the same time, remember, the fundamentals of this market are
still very strong. This year alone, we got 700,000 new immigrants, plus non-permanent
residents, foreign students, and people from Ukraine. 700,000. None of them carries his or
her house on their back. The demand is there and what's happening to supply? We are not
[An aerial view of houses in Toronto. The interior of a semiconstructed apartment.]]
One third of activity is being canceled or delayed because of the fact the cost is rising too
So, you don't have the supply coming. The demand is definitely there. You don't need to be
an economist to see what will happen two or three years from now. So, the fundamentals of
the market, the lack of supply, a lot of demand still there. But at the same time, the market is
now adjusting, basically reflecting the asymmetrical nature of this recession.
[This video is provided for general informational purposes only and does not constitute
financial, investment, tax, legal or accounting advice nor does it constitute an offer or
solicitation to buy or sell any securities referred to. Individual circumstances and current
events are critical to sound investment planning; anyone wishing to act on this document
should consult with his or her advisor. All opinions and estimates expressed in this video are
as of the date of publication unless otherwise indicated, and are subject to change.
The CIBC logo is a trademark CIBC, used under licence.
The material and/or its contents may not be reproduced without the express written consent
[The CIBC logo is a trademark of CIBC, used under licence.]
Tax Benefits of Charitable Giving
Light at the end of another tunnel
January 20, 2022
2022 Economic Outlook – Light at the End of Another Tunnel
[Soft music plays] [Benjamin Tal, Managing Director and Deputy Chief Economist CIBC Capital Markets] 2022, so what should we expect? Early in this madness, we looked at the trajectory of the economy and we said it's going to be like a zigzag economy. The economy will be dancing to the tune of the virus, and that's exactly what we are seeing. We can discuss the numbers, but the trajectory in many ways is predictable. [Empty airports in winter.] Basically, the winter is bad. [A time-lapse image of a bustling airport.] The summer is much better. We have seen it in 2020, 2021, and we will see it in 2022. [A man in a mask walks down a winter street. A man in a mask picks up a winter jacket in a store. A close view of an empty luggage carrier at an airport. A food courier in a mask walks down a winter street.] Now we are, unfortunately in the winter, it's going to be a long winter and we see some seasonality when it comes to the virus. So, we know that the first quarter of the year will be actually negative. [A bird’s eye view of people jogging on a bridge in spring.] The spring will be better. [High angle view of a crowded beach. Time lapse images of bustling malls.] The summer will be on fire as people start spending this mountain of cash that they are sitting on. So, it's very predictable. We know that it's going to be very complicated, and we know that in the case of Canada, it's going to be more complicated than, let's say, in the U.S. and even Europe, because we reach capacity in our health care system much faster than most other OECD countries. [Images of busy hospital hallways.] And therefore, we have to introduce restrictions much faster. And that's why Canada has been lagging the U.S. economically. We will see the same in 2022, but it will be mostly in the first half of the year. In the second half, especially this summer we are going to see actually very strong growth. Overall, you sum it up, and we are talking about GDP growth in 2022 of about 4%, 4.5%, starting from a very low base in the first quarter, as we go through the winter. [Inflation] In the background, we have inflation. And we have to watch this inflation. And let me tell you one thing. Nobody knows where inflation will be six months from now. [Low angle view on a Canadian flag attached to a government building. Low angle view on an American flag attached to a government building.] And when I say nobody, I include the Bank of Canada and the Fed in that. Everybody's pretending, but nobody knows. So, clearly there is a risk here and the source of this inflation is coming from wages. The labor market is very tight. Vacancy rates are extremely high. We cannot find people. [A shipping barge docked in ice. An empty warehouse.] We have supply chains that we are all aware of. And we have this kind of spending that will be coming in the second half of the year. [A woman shops for shoes on her phone followed by images of people online shopping on their computers.] When it comes to supply chain, it's very important to understand that it's mostly a demand led shock. Listen to this. In the U.S., this huge increase in spending on goods, and it's easy to spend on goods; [A woman rides an exercise bike in her living room.] You press a button, and you get your exercise bike, it's very easy. [Images of multiple people parachuting through the sky followed by someone landing on the ground.] This extra spending is equivalent to basically overnight, parachuting 75 million people, extra people, into the U.S. and the minute they land, they start spending. This is a demand shock, and even a normally functioning supply system will have difficulties facing this demand shock. And this is not a normally functioning supply system. So, I think it's reasonable to assume that it will take a while. [The exterior of the Bank of Canada building. The exterior of the St. Louis Federal Reserve building.] The Bank of Canada, the Fed underestimated how long it would take. Now it's clear that this supply chain issue will be with us until late 2022, so inflation will be there. [Interest rates] Wages are rising, and that's something that will lead to higher interest rates. [The exterior of the Bank of Canada building.] Now the market is pricing in no less than six or maybe five moves by the Bank of Canada, namely 125 basis points in 2022. That's a significant increase. That's what the market is expecting. I believe that the market is wrong on that because I think that the Bank of Canada is aware that the number one enemy of the economy is overshooting. You don't want to raise interest rates too quickly. Every economic recession over the past 50 years was helped, if not caused by monetary policy error in which central bankers raised interest rates too much. [The crest of the Bank of Canada building. The Bank of Canada building at night.] Therefore, we believe that the Bank of Canada will be more muted. They will move only by three times, namely 75 basis points in 2022. They will continue to go in 2023. Overall, we see the bank rates rising from 25 basis points to maybe 2% by the end of 2024, but a very gradual trajectory as opposed to a very quick trajectory, what the market is expecting now. [Stock and bond market implications] This, of course, has major implications for the stock market and asset allocations. [Computer generated imagery of market data. A bank of computer monitors featuring market data.] Clearly, the bond market is not your friend at this point. I believe that rates will be rising, reflecting inflation expectations, and reflecting the rebound in the economy in the second half of the year. Therefore, in the stock market, clearly you have to be very choosy. [Market data on various tablets and screens.] And I would focus on growth-oriented stocks. I would focus on stocks that are actually going to pay back investors, dividend paying stocks like banks, utilities that will benefit from this environment. [An aerial view of a hydro electric dam. A low angle view of bank towers.] Banks will benefit also from higher rates. The spreads will improve. That's another positive, and we believe that all this is under one big assumption that Omicron is basically a transition from a pandemic to endemic. And by spring, summer of 2022, although COVID will not disappear, we will learn to live with the virus, basically coexist with it as an endemic as opposed to pandemic. And this, of course, has implications for the market. So overall, economic growth, mostly in the spring and the summer in 2022, it will be strong. I believe that inflation will last in 2022 above target. Therefore, the Bank of Canada will be raising interest rates, but not as quickly as anticipated by the market at this point. This has implications for not the bond market, but the stock market. I believe that when it comes to the stock market, we are going to see growth-oriented dividend paying stocks outperforming in this environment of rising interest rates. As well, I believe that service-oriented companies will be benefiting due to the fact that the consumer, especially in the spring and the summer, will be spending this mountain of cash that they are sitting on at this point. [This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this video are as of the date of publication unless otherwise indicated, and are subject to change. ™The CIBC logo is a trademark of Canadian Imperial Bank of Commerce (CIBC). The material and/or its contents may not be reproduced without the express written consent of CIBC.] [CIBC Logo] [The CIBC logo is a trademark of CIBC, used under licence.]