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Economic Impact

To keep you informed and stimulate your thinking, Stéfane Marion and Denis Girouard take a look at economic news and share their perspectives in our monthly informative videos. Transcript

Property Perspective

Our National Bank specialists decode the latest trends in the real estate market, including interest rates, the resale market and forecasts for the coming months. Transcript

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Hello, everyone and welcome to Economic Impact. Today is July 11, 2024, and as usual, I am with our Chief Economist, Stéfane Marion. Good morning, Stéfane.

Good morning, Denis.

Once again, we're going to start with the performance of the stock market. It's going well, huh?

Yeah, it's been a hot summer, not just temperature wise. Stock market is on fire. We have records pretty much everywhere around the planet. Notice, Denis, if we focus on the US it’s 17% up this year, but driven by sectors, 2 sector sectors in particular, it's anything related to IT or technology, media and telcos. Yeah.

And they're doing very, very well compared to the rest of the other sectors.

Massively well. So much so that you know, the market share of the TMT sector now accounts for 40% of the S&P 500's valuation, which is a big deal Denis because we haven't seen this in 20 years. So keep this in mind. It represents 40% of the market cap of US equities, but only 24% of earnings. So there's high hopes that to hear that the this sector will continue to deliver on the earnings front.

And not only analysts have hopes for the TMT sectors, but they have hopes also for the whole economy.

Oh yeah. And it's not just that, you know, earnings will continue to do well. It's actually that they will even do better going into the next 12 months. So economy wide US expectations for earnings to accelerate from, you know, roughly 8% where we are now to growth of 13%. Notice on the slide too for the IT sector, the expectations, as you will pick up speed on the earnings growth and reach a pretty impressive figure in the next 12 months, 20%, Denis. So you better hope that everything is fine.

They're drinking nice Kool-Aid, maybe. If you look at the economy and the news that we have and the data that we're collecting so far, it doesn't show that.

I don't mind if they're doing Kool-Aid, but there might be too much sugar in that Kool-Aid right now. Because if you look at the economic surprise index in the US, then it's the worst reading since 2015. So it's been a massive downward surprise recently. It doesn't mean that the economy is not growing, Denis, it's just growing much less rapidly than what we've seen in the past. And this is what you have to take into context. If your economic surprises are negative, can you actually deliver on better earnings growth? And what history suggests is, given the current reading that we're seeing on economic surprise, which is a 2 standard deviation, historically, earnings are actually revised down as opposed to being revised up. So that's the challenge for equity market price for perfection with an economy that does not decelerate. But unfortunately, that's not what we're seeing right now. Economic surprise suggests deceleration.

Yeah. To make things worse, the labor markets, you know, keep deteriorating.

So this is a topic we addressed in the past. You know, in order to, you know, boost your earnings, if you can't do with the higher sells, you have to increase your profit margins. If you increase your profit margins you might need to reposition your hiring pace. And what we're seeing in US right now is the unemployment rate is on the rise up above 4% for the first time since 2021. So clearly that's a big-ticket item for the economy because that's that 60% of GDP in US is determined by consumer spending. I can tell you that when the unemployment rate is rising, Denis, historically consumer spending does not accelerate.

And to keep going in the same direction. Our leading economic indicator keeps going downward.

Yeah, so this is where we are now. So the unemployment rate would be more coincident. So what about the outlook? Well, if you look at leading indicators in the US and leading economic indicators, it's actually back to where it was at the worst of the COVID recession. So again, Denis, it's just to say that anticipating a better economy in the months ahead might be a challenge because most indicators would suggest a weaker economy, not a stronger economy, which opens the door for rate cuts, don't get me wrong. But will the Fed be able to cut rates aggressively given where we already are and that monetary policy remains restrictive? So again, it's a challenge for earnings growth in the months ahead.

And if we come back to Canada, we'll look at the, you know, jobless rate. Not that good too. Well, it was 6.5% of the national level. But if you want to dig a little bit deeper to look at younger people, 15- to 24-year-old, I mean, you know, it's an unemployment rate above 13% for the first time in a decade so there's got to be some frustrated parents around the table nowadays. And it is an issue. And it does show that once the economy starts doing worse, well, yeah, younger people will be hit first. And this is exactly what we're seeing right now. So there's clearly a deceleration of the economy that's ongoing right now in this country. So let's not be too greedy on earnings growth also from a Canadian perspective.

Yeah. And at the same time, you know, we talked quite a lot about the soft landing. Is it still true? Well, the Bank of Canada has been, you know, going public saying that it's mission accomplished on a soft landing or it looks good for that. I would say, well, depends. Denis, there will always be a landing. I don't know if it's going to be soft or hard, but I can tell you in the GTA right now, the Greater Toronto Area, which is 20% of the Canadian economy, retail sales are actually contracting. And that's a reflection of deterioration in labor markets, restrictive monetary policy, mortgage interest rate resets, right. So yes, the economy is clearly slowing from beginning in perspective. So I don't know yet whether it's mission accomplished on a soft landing or not. I do believe that the Bank of Canada is in position to cut rates a little bit more aggressively in the months ahead. But monetary policy will still be restrictive by the end of this year, meaning the economy will underperform.

And to wrap it up a little bit, you know, we're seeing an economy that is slowing down then probably more rate cuts. But at the same time, we have analysts that have a prediction of pretty nice growth of, you know, revenue of a company or bottom line of a company. We need to be careful here.

Yeah, the next few weeks will be very telling. No, next few weeks will be very telling. We're about to start the earnings reporting season. So let's keep an eye on that. I do believe Denis, as you say that expectations are too aggressive from my standpoint.

We haven't talked inflation yet. It's our favorite subject. Now you're bringing us on what's going on in the eurozone.

Yeah, because you asked me to speak to politicians and I have to speak to politicians I have to speak to inflation at the same time. We saw elections in Europe where the incumbents have been defeated and the parties have been elected, whether it's UK or France, are promising to deliver on services to their people, but I'm just not sure they can be very aggressive on that front. And what that does is when you have these politicians that are promising more fiscal stimulus, well, that keeps your inflation and service component higher, which limits the ability for central bank to cut rates. And Denis that's a reality in the US, in Europe, even from a Canadian perspective, and that brings the great uncertainty as we look towards the next 12 months in 2025, how will central banks be able to cut rates if politicians continue to promise to spend more? And if you promise to spend more, keep an eye on service inflation that will determine the ability of these central banks to cut or not. Right now, I have to say some cuts are coming, but they cannot cut aggressively because of politicians.

OK, on that thank you, Stéfane. Thank you, everyone for being with us today. We'll see you back in September because in August, you know, it's holiday season for us too. Then hopefully we'll see you back in September. Thank you for joining us today.

Hello everyone and welcome to this July 16th edition of Property Perspective. Today, I have the pleasure to be with Matthieu Arseneau. Hello, Matthieu.

Hi Simon.

And my good friend, Peter Thompson. Hi Peter.

Hi Simon.

Today, the topic of the day: the importance of loan insurance. But before we enter that discussion with Peter, let's talk with Matthieu about recent economic news that influence the real estate market. Matthieu, The Bank of Canada cut interest rates at the beginning of June, and since then, core inflation data has been less favorable than the previous months. Do you think that the Central Bank regrets having cut rates?

I hope they do not regret in fact, because yes, before they made that decision, there was impressive progress in core inflation.., very low inflation in the first four months of the year. Yes, there has been a bounce back in May, A bit too strong in June, but it's important not to overreact for the monthly volatility. When you look over the past six months and that's the chart I'm showing for current inflation. So when you remove the most volatile components each month, you get 2.2 inflation annualized over that periods. And so it's really close to the 2% target of the central bank. Clearly in our view, the widespread inflation problem is solved in Canada. And you can see that with the number of categories rising above this 2% target at just 23, that's significantly below the 2022 peak and below the historical average. So yes, for us, inflation is a problem that is fixed in Canada and it's not surprising given the economic backdrop in fact. Even in the first two quarters of 2024, we have growth between 1.5 and 2% so far, which is usually great growth for Canada. But given the population growth, it's very much as growth and below the potential of the economy. So, in such a context, no, I hope they do not regret and in fact we expect a rate cuts, further rate cuts in July given this economic backdrop.

Matthieu, we saw that the labour market is showing many signs of slowing, which should obviously help contain inflation over the coming months. What are your thoughts on that?

In fact, given the economic backdrop, it's not surprising to see the unemployment rate rising over the past few quarters. And it was the case in June with a 2-tick increase. In fact, we got a thing, we got a stagnation in employment, but with 100,000 population growth, that kind of gap, we just see that in recession historically. So that was a huge gap. So leading to this increase in the unemployment rate. And when you look since 2022, this kind of hiring freeze that we are experiencing, on the macro perspective, clearly the people try to enter for the first time in the labour market, recent immigrants, people, the youngest one, people age group (15-24), we see a significant rise in the unemployment rate, which are at their highest level since 2014. If you exclude the pandemic and for recent immigrants, the increase is as large as what we observed during the global financial crisis for the magnitude. So, that's worrisome so far and we don't expect improvement in the short term given that labour shortage is a story of the past at this point with only 15% of corporations indicating that they are experiencing those labour shortages. That's the survey made by the Bank of Canada. With only that proportion at 15%, we have only seen this during the last two recessions. So that's very low. And we don't expect a hiring spree over the next few months. Perhaps that hiring spree will continue. So we expect unemployment rate to continue to rise. In such a context, yes, we expect a rate cut in July and further rate cuts down the road. Over the next year, we expect rates to decline by a further 175 basis points. We expect rates to stabilize around 3% by the end of next year.

OK, that's a good news. And Matthieu, as you just mentioned, with interest rates falling, but population growth still very strong, what can we expect in the real estate sector in the next, in the next months?

In fact, these two factors usually typically support the housing markets. So and with the rate cuts we got in June, we saw rebound in a slight, but a rebound in home sales at the national level and in the three largest markets. So Vancouver, Toronto and Montreal experience a pickup of activity. It remains low level of sales at this point. But as you can see on this chart with that kind of level of sales, active listings are increasing, which is good news to bring supply in the market for people who try to buy. So there's more options. So yes, strong population growth, lower rates in the coming months, but at the same time less favorable labour market we saw especially for the younger one. And we have to keep in mind that affordability remains an issue in this country. So, perhaps yes, still increasing sales over the next few months, but perhaps a slight rebound rather than this really strong labour market given this context.

OK, Thank you, Matthieu for your very interesting comments as usual. Now, let's discuss with Peter about loan insurance. Peter, as you know, for most people, buying a property is probably the biggest financial commitment in their lives, especially when you're first-time buyers, right? Often they invested all their savings into this purchase. When you think about it, there are certain risks to be a homeowner. Can you give us Peter, some, advice on how to protect this major commitment?

Yes, absolutely Simon. And I think you put it really well. There are some important risks. It's such a great opportunity and exciting, especially for first-time homeowner to, you know, to have your new home. But with the mortgage come some risks as well. And when it comes to health or death risks associated with the mortgage, there is what we call loan insurance, some people call credit protection insurance. And it really exists to address those risks related to health, or in the worst case, death. And there's three types of coverages that come with loan insurance: disability insurance, critical illness insurance and death insurance or life insurance. And essentially disability, the way to think of it is if you have an accident, for example, which may keep you from working full time and as a result, you're, not getting 100% of your income as you maybe would otherwise, that obviously will put a squeeze on your ability to be able to make your mortgage payment. Sometimes people have a group insurance which helps cover a part of their income, but generally it doesn't cover 100% of the income. So it's important to recognize that and to look at that aspect. And disability insurance comes to make up for that gap, if you will, to ensure that you're able to make your mortgage payments on a timely basis. And it just takes another stress off your mind as you're working on your health and getting back your health. The second type of coverage that is offered through the loan insurance is critical illness insurance. And these are three types of situations which are considered here. You're talking about a cancer diagnosis, a stroke or a heart attack. Those are the typically the three critical illnesses that are addressed, either that protection and when you have that kind of diagnosis, of course is very dramatic type of situation. Oftentimes in order to address the health issue, you may have to go through an extended period of rehabilitation. You may need special treatments. Oftentimes the treatments aren't covered under the public plans and so on. So it becomes a pretty significant financial burden. So you have all these unexpected or unintended expenses added to the fact that maybe you're not able to work normally and you have to take some time off work. So the, the critical illness coverage really once again comes and makes up for that, that gap that may exist on the financial things just to make your life easier so that you can concentrate on getting better once again. So that's the whole critical illness coverage. And finally, the death coverage that is the worst scenario. Or let's say, for example, you have a couple who own a home and they have a couple of children, one of the people of the couple passes away. And that can put obviously from the most beyond the most important, you know, hardship that you have to go through in the mourning process, you have to go through. You don't want to add to that the financial burden that goes along with it, that maybe just having one income makes it very difficult to support a mortgage. And in the worst kind of scenario, you have a family which is no longer able to support their mortgage payments and as a result have to sell a home, move into an apartment with kids and so on. So you're kind of amplifying what is already a very difficult situation. And what is common with all of these three coverages is they really do exist to enable you to focus on your health, on your family, on what's important without having that added pressure of how am I going to make my mortgage payment? How am I going to support that when you're already going through a very difficult life event? So these are important coverages that are available through loan insurance.

Absolutely, right, Peter. That's really important that when an unfortunate event occurs, you want to maintain your lifestyle, your regular routine that you just mentioned that exactly what the good the good coverage can help you do. right? I'm sure your teams hear from clients every week who are going through difficult times and file a claim to get help. Can you give us any examples that Peter, where insurance really made a difference?

Yes, and I think that's really well put, Simon. The whole claims process, of course, when somebody is living one of these experiences, it's just so difficult. So everything are clean team does is so important and it really does require a special kind of person to be able to adequately serve customers when they're in that kind of situation. So the whole claims process is very, very important in terms of what we do. That's the reason we exist. Having said that, the process at the very beginning, the advice that we give to customers to explain to them the risks that they're exposed to and different ways that they can cover those risks or mitigate those risks is just as important that advice that's given at the very start of the process. And I have a couple of examples I think that illustrate the importance of that. The 1st is, we have an advisor in a branch met with the customer and that customer had some concerns about how am I going to include this protection that how am I going to make it fit in my budget. Money is a bit tighter. I'm not sure I can make it work. Should I get it? Should I not get it? And the advisor in the branch was able to help that customer find a way to make it fit. And at the end of the day, that same customer went ahead and took the protection, a couple years later, came back and told the adviser that she had just received a cancer diagnosis and was going to have to be dealing with that for the coming months. Also inform the advisor that she had just separated from her spouse and was now having to support two kids on her own. So you can imagine the financial pressures just to stress that this customer had to live through. But, had this coverage, this critical illness coverage which kicked in, which was able to support her financially and make a huge impact just to alleviate that part of the stress that she had just taken on with this recent diagnosis. So at least the financial burden, what it wasn't what it would have been had she not had that coverage. So that illustrates, I think really well one type of situation which is fairly common. Another one which was quite dramatic is, we had a situation where we have a couple of friends who went out fishing one day and unfortunately the worst you can imagine did happen. Both individuals passed away. The first of those of those gentlemen had gone out a few months prior and gotten protection for his mortgage such that his family was able to remain in the home that they lived in with the kids. The wife and kids were able to remain in that home and not have that financial burden to deal with. Over and above obviously the mourning of having lost the spouse. Unfortunately, the other partner in this story, the other Fisher in this story did not have the protection. And the result was that the financial burden was too much for the remaining spouse and that couple to support. They could no longer make the mortgage payments and therefore had to sell the house, move into an apartment. So you're just kind of amplifying once again, a very difficult situation with an added financial burden and something that's already very difficult. So I think those sorts of cases and unfortunately, as you said, we have all sorts of stories that we hear on a fairly regular basis that just are good demonstrations of the importance of that protection and making sure that you've thought of these things ahead of time.

Peter that makes you think about the importance of protecting yourself. Peter you mentioned “budget”. I like to hear more from you on that. The past few years, as you know have been a real game changer for Canadian owned. Prices have gone to the roof, interest rate have skyrocketed. So our client mortgage payments are higher than ever, right. What would you tell clients who say they don't need or they think they can afford to protect themselves when they taking out or renewing an existing loan?

Absolutely, yeah. And that's really important. So you're taking out a mortgage or you're renewing, your rate is no longer what it was five years ago. There's a big jump in the payments. So that is especially these past couple of years with the impact of interest rates and so on has become an increasing topic of conversation. And we're often asked what do you say to that. So I think that's probably one of the most common questions that we get. And really what we try to, to sensitize customers to is to just be aware that if already things are tight financially with an increased rate and a mortgage renewal and the monthly payments and so on. If already the situation is tight, try to imagine the situation if you did have a disability that prevented you from having your full regular salary for say 6, 12,18 months. What would happen financially? Would you be able to make your mortgage payments and so on? Or what about a critical illness? If something like that happened and, and money is already tight, how will you manage? And oftentimes what our advisors will be able to help the customer find solutions to for sure, it does require some tightening the belt, finding ways to make some adjustments on a monthly basis. Sometimes it means depriving yourself of certain things. But you will be able to find the right balance for you with a good advisor who can help you out in that regard to find that balance so that you're comfortable with everything, both your lifestyle and the protection you have and just being prepared for anything that might come your way in the in the years ahead.

Thank you Peter for your advice and concrete explanation. What's important is to take the time to discuss, as Peter mentioned, loan insurance with your financial advisor and make the right decision in full knowledge of the facts according to your personal situation and needs. The ultimate goal is to make sure that you take the steps that will give you Peace of Mind. So thank you all for watching and see you again for our next edition of Property Perspective.

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