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Economic Impact

In order to help keep you informed and stimulate your thinking with regards to the current financial context, Stéfane Marion and Denis Girouard take a look at economic news and share their perspectives via our monthly informative videos.

Hello, everyone and welcome to Economic Impact. Today is June 11th, 2024 and I am with our Chief Economist, Stefane Marion. Hello, Stefane! Morning. How are you today?

I'm good. Thank you very much.

Stefane, for change, we're going to start with rates or inflation?

We've been talking about potential rate cuts for a long time Denis. I don't know how many months it's been. First rate cuts in over four year... Last time we had a rate cut in Canada was the US presidential election. And so be it. We have rate cuts on the same year that we got another presidential election in the US but I don't think it's because of the US election that they're cutting rates.

I don't think so.

Now they're cutting rates because we're feeling the impact of restrictive monetary policy and case in point, profitability of US, of Canadian corporation has been declining in recent months. So yeah, I think it was time to cut rates. And at the same time, we're seeing a private employment kind of a stagnation. Well, I used to think policy makers or politicians don't like to admit if you don't have profits in your economy, there's a good chance that private sector employment won't do well. And the reality is with lack of profits, we've seen some stagnation in terms of private sector jobs. And you know Denis, the latest employment report in Canada show that on a monthly basis, the month of May was not very good, with seven of 10 provinces reporting a decline in job creation. It's actually outright job contraction. So yeah, you know what? It was time to cut rates.

And once again, when you're looking at the inflation, you know the ex shelter is still going down. Yeah, so I will admit to the fact that I know you're asking me that. Can I just look at employment? No, the BoC actually targets inflation, not the level of employment or the unemployment rate. And when you look at overall inflation at 2.7%, you could argue while it's still well above the 2% target, however, it's really is a shelter component that's driving the show. Excluding shelter 1.2%, yeah, the bank account was justified to cut rates. And who knows they and I do believe this is going to happen with rate cuts. You might entice property builders to bring us more supply of housing, which is desperately needed in Canada at this point in time.

That's quite interesting because lowering rates sometimes doesn't mean that you know the inflation will go down. Now it's the case because you're going to build more houses and probably that component will go down and it will help.

Permit and process the need because it's the first time that the Bank of Canada faces an environment where shelter is decelerating, where our shelter is accelerating. You never see this. But we've never seen this type of demographic growth or population growth. We've been speaking about that in 2024, it's going to be a very big year in terms of population growth. So yeah, it's an experiment in process. So I think you can think that those rate cuts, but it might entice more supplies. So let's see what happens in the coming months. And to add to all of this, economic data are not that good. No, not on the other side of the border in the US. So you you can see the Canadian side was decelerating. And in US as our main training partners still to this day, economic surprises have turned more negative in recent weeks. So clearly the impact of restrictive monetary policy is now being noticed in the US. And at the same time, US full time employment is going down. Yeah, so total employment was above expectation in May, but guess what full time jobs were down for the, I think the fifth time in six months and then you were down 1% year over year. It's a decline that's never been observed in the US outside the recession. So I think this is where corporations are also trying to protect the profit margins. They're hiring, but they're no only hiring part time, which doesn't speak to superb economic growth for the second-half of the year for the US. And with all of those good news that should bring rates down in the United States. Inflation is still high. Yeah. No, the Fed is handcuffed right now because we've had 4 consecutive months where the monthly change in inflation on an annualized basis is well above the 2% target, you know that the Fed would like to see. So no, you can't cut rates aggressively right now. So even though the job market is slowing down, the Fed is handcuffed. It's unable to provide fiscal or monetary stimulus as quickly as Canada. This is where we're seeing a big difference between the inflation in Canada and the inflation in the US. You know, the, let's say the data are different, the components are totally different, The source of inflation is different. In Canada, 70% of inflation is driven by supply issues, mostly because of the shelter component of CPI. In US it's only 30%. So 70% is driven by demand factors, which has been stimulated by this fiscal policy in the US. This is the US election year. So they've deployed the most aggressive fiscal stimulus in U.S. history with the unemployment below 4%. That generates inflation. Yeah, for sure. And at the same time, you know, to make things even worse or more difficult to predict, we see the shipping costs going up once again. So, you know, we've said before you have to manage your portfolio risk, but you have to have to manage uncertainty because of politicians. And while with all these fights between countries about, you know, tariffs, protectionism, etcetera, shipping costs are up 400% since the start of 2024. So that makes your inflation outlook slightly more uncertain as these politicians come in with more tariffs. So that's why the Fed can't act quickly. There's some resilience in inflation coming that from these policy maker. And that will affect all country no matter what. I absolutely believe so. So, yes. OK. And now if we talk about performance and return, assets did quite well, except bonds. Yeah, so, so far so good. 2024 has been the first half anyway, has been a good vintage. Every asset classes are up except the bond market. So for Canadian investors, we, we, we've done great this year considering all the challenges, but there's a lot of good news embedded in these, in these, in these evaluations. So I can't promise that we're going to get the same type of return in the second-half this year. Note Denis that what frustrates me on this is that the stock market has done well... Canada, not so good. It's still a positive return, don't get me wrong. But we are trailing the rest of the world when it comes to the performance of our stock market. And we tought just at our last Economic Impact, you know, and this time, once again, we see the gap going wider. Yeah. So the reason we're not performing as well as the other stock market is because the S&P/TSX is not seeing multiple expansion as aggressive as what we see elsewhere, so much so that we're trading in the second quarter of this year right now, where we are now at a nearest direct discount to the US. So yeah, hopefully we'll do better in 2025. Clearly, this is abnormal and reflects some unease about the Canadian economy. And with that data and that statistic, you know, we can translate that with investor demand in Canada and we see that the investors are not buying canadian asset. Yeah. So, yeah, there's a discount, no multiple expansion is because we're facing continued outflows from foreign investors. So if you look at net foreign purchases of Canadian equities, they've been on a trend decline since 2023. So 18 months, Denis. Hopefully the worst is behind. We're getting rate cuts in Canada that should stimulate profits and hopefully 2015 will show a better year in terms of economic policies. It's an election year. We're going to get fiscal stimulus. So hopefully we do better because clearly this is a trend that has never been observed outside the Canadian recession. So surely things are better than that in Canada. We'll see for 2025. OK, We start with rate cuts. We have to finish with rate cuts. How many rate cuts and where's the floor? So, I would think that maybe we can go, two to three times more by the end of this year. Monetary policy will still be restrictive. Now you're asking me how low can we go? I don't think we can go much lower than 3% Denis and again, the geopolitical backdrop argues for maybe stick your inflation globally. And as I said before, the reason why we see maybe less rate cuts in 2025 or the pace of rate cuts is more uncertain because we're going to get this fiscal stimulus in 2025 in Canada. So, ... good news, Denis, yes, more rate cuts coming this year and let's not be greedy on how many we're going to see though. OK, well on that, thank you, Stefane. Thank you everyone for being with us. Hopefully we'll see you next time in July. See you.

Hello everyone and welcome to Economic Impact. Today is May 14, 2024 an I am with our Chief Economist, Stéfane Marion allows the fan.

Good morning, Denis. How are you today? I'm good.

Good, once again. we are going to talk about performance on the stock market.

Yes, it wasn't a very good month in April. As you recall, we spoke to that last month. But so far this month we've regained some of the loss ground. Then global equities are slightly up on the quarter, Denis. Still comfortably up year to date, but on the quarter, we've regained the ground lost in April. Note that Canada is actually outperforming by a little bit the global index, so that's a bit of a change.

Is this widespread in Canada or is it only very few sectors?

No, it's quite narrow, Denis. It's, it's, it's mostly a reflection of what's happening in materials, gold prices, mining stocks and also the energy sector, up 3.7% in the quarter. Note that, year-to-date materials up almost 18%, almost 16% for energy. Were it not for these two sectors, we wouldn't have a positive return year to date on the S&P TSX. So, it's still narrow.

But, because of expectation on rates and rates seem to be reaching a plateau right now.

Well, I think the reason the market has been expected, you know, has done well year-to-date as a reflection of expectations that you know central banks are done with monetary tightening. You can see that in emerging markets, I mean some countries that I actually slightly lowered interest rates. As for the advanced economies, we saw Sweden coming down with rates. Europe's about to start, but the big question is what will happen in you as the second-half this year. This is what the stock market is looking at right now.

Yeah, but when we're talking about rates in North America, we're talking about inflation. But inflation has to come down to see rates coming down.

But it's not right now. Not collaborating. Not so far. This is CPI week this year. But if this week is CPI week - if you look at the PCE deflator, which is the Fed's preferred measure of inflation, we have 3 consecutive months where the monthly change in inflation annualizes well above the 2% Fed target the last reading. We had was close to 4%, so clearly this is not a Fed friendly number. An you know it's all due because of labour market once again. Well, I mean if inflation is not collaborating then you got to look at what's happening in wages and clearly that's not helping either. And labour compensation is actually accelerating on the quarter. This is what's happening when you deploy massive fiscal stimulus would on an unemployment rate below 4%. So at 4.8% , Denis, it's just not Fed friendly. And, so I'm not saying that the Fed won't be cutting rates this year, but I think it's going to be at the very end of this year. So right, cuts are coming, but maybe not as aggressively as we thought. So hands from the stock market perspective, you might limit somebody upside.

Yeah, and if we're coming back in Canada. So we just had the employment numbers, still a good number.

90,000 jobs created in April. That is almost five times above expectations. But you know what, Denis, the unemployment rate did not come down, so the door is still open for bank account or rate cuts. And the reason the unemployment rate did not come down is that, unlike expectations, population growth is actually accelerating so far in 2024. So note that historically over the first four months of the year normally population rose 110 thousand, last year was 280,000 on the first four months, which was an all time record high, but you know, new record this year. Up 47% above the all-time high recorded last year. More than 400,000 individuals, Denis, that is a new record, all time record, this is unprecedented.

Are you predicting a new record this year in terms of population growth once again. Well, to be honest, it's been 2 years in a row now.

Yeah, I know to be honest I thought that we might decelerate this year but based on these numbers you're likely to accelerate. And the reason for that, Denis, is Ottawa has warned people that starting in 2025, there will be some limits on foreign students and temporary workers. So, some people have probably front loaded their decisions to come to Canada. So, it's likely to be a new record in terms of population growth again this year.

And when we're talking about inflation, rent inflation also big part of that huge number that we have.

Remember when we said in the passage you quote David Foot, the most famous Canadian demographer, he once said demographics explain two thirds of everything. So would you have this type of demographic shock, you shouldn't be surprised to see rent inflation moving higher. So, Canada wide, where at 8.5%, which is the highest level since 1980. In provinces such as Alberta where population growth is the fastest in the world. We're talking about rent inflation at 14%. So, at 8.5% you have limited downside. So what that means it keeps inflation slightly elevated versus expectations. So, it means it doesn't mean that the Bank and I won't be able to cut rates. I think they will be able to cut rates, but it won't be as aggressive as what we've seen in the past. So, you have to be prepared for rate cuts, but not massive rate cuts.

Yeah, Thank you. Last month you started talking about electricity consumption in the US. If we do the same thing in Canada, how does it look?

Big surprise here too. So, in the US we know electricity demand is surging on the basis of manufacturing reshoring. From a Canadian perspective, it's not the case is not manufacturing reshoring. Again, it goes back to demographics explain two thirds of everything, and with surging population we've had it 4 million people over the past four years. We're on track to add four million people in the past 4 years, but that's what we normally do in 10 years, right? So yeah, I don't think Ottawa was ready for this type of growth or this change in trend in terms of electricity demand. So, after 15 years where we outsource manufacturing production to China or the rest of Asia manufacturing, electricity demand was quite stable and we're now at an inflection point. This is surprising. Everyone, every country is being surprised by this right now, this surge in demand for electricity. It's population growth, but also massive demand from AI, right?

For sure. But at the same time, because of that, it's the first time that we're seeing deficit in electricity production in Canada.

Well, you want to see how surprised you can be when you don't plan for that, do you? And, when there's less hydroelectricity available from BC or Quebec, because the water reservoirs are a little bit depleted, you end up having the first Canadian electricity deficit on records. So last winter we were forced to import electricity from the US. Which is produced from natural gas and coal. So that's a big surprise. I don't think anybody expected this and that's a big deal. So, you have to be prepared for rising demand that might lead to that. So, we need to add capacity here too.

Yeah, I'm talking about natural gas because now Ontario needs more electricity. They need more natural gas to produce that electricity. Well, which is a big change.

Again, demographics explain two thirds of everything. So from an Ontario perspective, think about the GTA. The Greater Toronto Area saw its population growth accelerating 66% above last year's level, which was in all-time high. So, on the GTA alone, you've added 100,000 people in the first four months, which is unprecedented. That means there's more demand for electricity, and the electricity capacity at Ontario has at this point in time comes from natural gas. Hence the reason why the natural gas electricity production, well the electricity production from natural gas actually more than doubled over the previous year. And it's likely to remain on an uptrend, Denis, because we have even yet to start producing all these electrical vehicles that will demand a high proportion of electricity. And what population growth so strong. I think what it does the need it argues for probably the need to probably push back those decarbonization objectives that have been put forward from a Canadian perspective again, we never thought we would get this type of demographic surge, so we need to adjust to this situation.

Thank you, Stéfane probably more question marks that we have in our head now than we had previously, but very interesting and thank you all for being with us. Above all, don't miss the next meeting early June until then, thank you.

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