The Bank of Canada is likely to hike its key overnight rate by half a percentage point on Wednesday, the Conference Board of Canada’s chief economist says, as the think tank’s economic forecast predicts home prices could start to drop next year.
Pedro Antunes tells Global News he expects the central bank to double its key overnight rate to one per cent at its announcement on Wednesday with an “oversized” increase of 50 basis points.
He joins the growing chorus of economists and market forecasters who are now widely expecting an interest rate hike of half a percentage point, the first since May 2000.
Back then, the nominal neutral rate — the level of interest that allows full productivity and keeps inflation on target — was around five per cent. Today, the Bank of Canada estimates the nominal neutral rate to be between 1.75 per cent and 2.75 per cent.
“A 50 (basis point) hike will do a lot more to cool the economy down today than it did back then,” said Desjardins’ head of macro strategy, Royce Mendes, in a note.
Mendes also says that the Bank of Canada will likely slow the pace of its monetary policy tightening after April and expects “further rate hikes to come in measured steps.”
“That would leave the overnight rate at 2.00 per cent at the end of the year,” he said.
Meanwhile, TD’s chief Canada strategist, Andrew Kelvin, expects the central bank to lift the overnight rate to 2.50 per cent by the end of the year.
Antunes says the move would follow similar rumblings from the U.S. Federal Reserve about a 50-basis-point hike as central banks around the world attempt to get global inflation under control.
Antunes spoke to Global News Tuesday following the release of the Conference Board of Canada’s latest economic forecast in a report titled “Normalcy Out the Window.”
The combination of the war in Ukraine, COVID-19 uncertainty, rising interest rates and rampant inflation has made the latest board’s latest forecasts the most complex Antunes has seen in his career.
“As Yogi Berra once said, the future ain’t what it used to be,” he says.
“I’ve been in this business of forecasting for many years now and I can’t think of another time when there’s been just so much chaos going on, really, to try and get a handle on where we think the economy is going.”
Economic growth could slow in 2023
For instance, the Conference Board report notes there’s “considerable risk” around Russia’s invasion of Ukraine, which “destabilizes a world that had been hoping for an improvement in the COVID-19 story.”
But despite the war putting inflationary pressures on food and gasoline prices, Canada’s economy stands to gain from the ongoing war as sharp rises in commodity markets will be a “massive boon” for the country’s agricultural and energy producers, Antunes says.
6:05 How war in Ukraine is threatening the global food crisis
How war in Ukraine is threatening the global food crisis – Apr 5, 2022
Overall, the Conference Board expects Canada’s gross domestic product to grow by four per cent in 2022 before falling off slightly with a 3.3 per cent increase in 2023.
Though the board notes that many Canadians racked up significant savings over the past two years of the COVID-19 pandemic, surging gasoline prices could dampen some of the fervent spending this summer.
Demand for road trips, for example, appears to have “abated,” Antunes says, as motorists feel the pinch at the pumps.
While it could take up to 18 months before higher interest rates have a material impact on prices and Canada’s economy, Antunes says the central bank will need to deliver a higher rate hike on Wednesday to help get consumer and business expectations back under control.
When inflation expectations become unmoored, the risk is that wages will spike in response, putting pressure on businesses to then hike prices. That endless cycle of inflation and wage growth is what the bank is trying to avoid, Antunes says, by sending a message to the public that it will act to tamp down on inflation.
“It’s really trying to maintain its credibility that inflation will be contained and the bank has the tools and the wherewithal to do that,” he says.
“It’s a real challenge for the bank just to make sure that people continue to believe that we are going to see inflation return back to that two per cent target.”
But the Conference Board report also warns that Canadians with high debt levels could start to feel the pinch if the central bank enters a more aggressive monetary tightening cycle. Antunes notes many Canadians took their pandemic higher savings and put them into the housing market, making these new mortgage holders vulnerable to rate hikes.
“With the nominal household debt-to-disposable income ratio reaching a record level in the fourth quarter of 2021, higher interest rates could spell trouble for heavily indebted Canadians,” the report reads.
“We still expect the consumer to lead the way for the Canadian economy, but the combination of rising inflation and higher interest rates could make it a bumpy ride.”
How will the housing market react to rising rates?
The Conference Board report also suggests that Canada’s hot housing market could be cooling, and potentially heading for a correction.
The think tank points to rising interest rates, policy adjustments from the feds and other levels of government and changes in consumer attitudes as taking some of the gas out of the housing market.
4:17 Will interest rate changes temper the housing market?
Will interest rate changes temper the housing market? – Apr 4, 2022
“Following years of outsized gains, we think this could finally be the year when Canada’s housing markets slow,” the report reads.
Following 22.5 per cent growth in the aggregate resale home price last year, the Conference Board is projecting eight per cent growth in resale prices in 2022 as cooling takes effect in the second half of the year.
The board goes on to project a six per cent price drop in 2023, with the risk of a “sharper correction” if real estate investors sell their units into an easing market.
BMO senior economist Robert Kavcic told Global News in late March that a series of rate hikes, combined with government measures aimed at cooling the housing market, could see home prices could drop as much as 10 per cent over the next couple years.
He called rising interest rates “the single biggest measure we can take here to cool down the pace of home price growth and inflation more broadly.”
One of the biggest factors that could play into housing affordability is the anticipation of more supply coming onto the market, Antunes says.
The report calls builders’ efforts to ramp up the supply of housing starts a “Herculean effort” with a record number of housing starts recorded in November 2021 as the industry grappled with supply chain constraints and labour shortages.
The federal government also stated its ambitions to double the annual number of new units in Canada to 400,000 per year over the next decade.
“A lot of that has been held up. It’s been difficult to get the person power in the construction industry to finish a lot of those projects. But it is coming,” he says.
The Conference Board report’s title notwithstanding, Antunes does think there are signs of the housing market rebalancing after two years of rampant growth.
“With interest rates coming up, with normalcy coming back to the economy, perhaps demand easing up as well and helping the market kind of rebalance to something more normal,” he says.
“We just think it’s been way too frothy over the last two years.”
— with files from the Canadian Press
2:16 Federal housing money may not cool red-hot market
TOKYO (AP) — Japanese technology group SoftBank swung back to profitability in the July-September quarter, boosted by positive results in its Vision Fund investments.
Tokyo-based SoftBank Group Corp. reported Tuesday a fiscal second quarter profit of nearly 1.18 trillion yen ($7.7 billion), compared with a 931 billion yen loss in the year-earlier period.
Quarterly sales edged up about 6% to nearly 1.77 trillion yen ($11.5 billion).
SoftBank credited income from royalties and licensing related to its holdings in Arm, a computer chip-designing company, whose business spans smartphones, data centers, networking equipment, automotive, consumer electronic devices, and AI applications.
The results were also helped by the absence of losses related to SoftBank’s investment in office-space sharing venture WeWork, which hit the previous fiscal year.
WeWork, which filed for Chapter 11 bankruptcy protection in 2023, emerged from Chapter 11 in June.
SoftBank has benefitted in recent months from rising share prices in some investment, such as U.S.-based e-commerce company Coupang, Chinese mobility provider DiDi Global and Bytedance, the Chinese developer of TikTok.
SoftBank’s financial results tend to swing wildly, partly because of its sprawling investment portfolio that includes search engine Yahoo, Chinese retailer Alibaba, and artificial intelligence company Nvidia.
SoftBank makes investments in a variety of companies that it groups together in a series of Vision Funds.
The company’s founder, Masayoshi Son, is a pioneer in technology investment in Japan. SoftBank Group does not give earnings forecasts.
Shopify Inc. executives brushed off concerns that incoming U.S. President Donald Trump will be a major detriment to many of the company’s merchants.
“There’s nothing in what we’ve heard from Trump, nor would there have been anything from (Democratic candidate) Kamala (Harris), which we think impacts the overall state of new business formation and entrepreneurship,” Shopify’s chief financial officer Jeff Hoffmeister told analysts on a call Tuesday.
“We still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses and that’s obviously not going to change with the administration.”
Hoffmeister’s comments come a week after Trump, a Republican businessman, trounced Harris in an election that will soon return him to the Oval Office.
On the campaign trail, he threatened to impose tariffs of 60 per cent on imports from China and roughly 10 per cent to 20 per cent on goods from all other countries.
If the president-elect makes good on the promise, many worry the cost of operating will soar for companies, including customers of Shopify, which sells e-commerce software to small businesses but also brands as big as Kylie Cosmetics and Victoria’s Secret.
These merchants may feel they have no choice but to pass on the increases to customers, perhaps sparking more inflation.
If Trump’s tariffs do come to fruition, Shopify’s president Harley Finkelstein pointed out China is “not a huge area” for Shopify.
However, “we can’t anticipate what every presidential administration is going to do,” he cautioned.
He likened the uncertainty facing the business community to the COVID-19 pandemic where Shopify had to help companies migrate online.
“Our job is no matter what comes the way of our merchants, we provide them with tools and service and support for them to navigate it really well,” he said.
Finkelstein was questioned about the forthcoming U.S. leadership change on a call meant to delve into Shopify’s latest earnings, which sent shares soaring 27 per cent to $158.63 shortly after Tuesday’s market open.
The Ottawa-based company, which keeps its books in U.S. dollars, reported US$828 million in net income for its third quarter, up from US$718 million in the same quarter last year, as its revenue rose 26 per cent.
Revenue for the period ended Sept. 30 totalled US$2.16 billion, up from US$1.71 billion a year earlier.
Subscription solutions revenue reached US$610 million, up from US$486 million in the same quarter last year.
Merchant solutions revenue amounted to US$1.55 billion, up from US$1.23 billion.
Shopify’s net income excluding the impact of equity investments totalled US$344 million for the quarter, up from US$173 million in the same quarter last year.
Daniel Chan, a TD Cowen analyst, said the results show Shopify has a leadership position in the e-commerce world and “a continued ability to gain market share.”
In its outlook for its fourth quarter of 2024, the company said it expects revenue to grow at a mid-to-high-twenties percentage rate on a year-over-year basis.
“Q4 guidance suggests Shopify will finish the year strong, with better-than-expected revenue growth and operating margin,” Chan pointed out in a note to investors.
This report by The Canadian Press was first published Nov. 12, 2024.
TORONTO – RioCan Real Estate Investment Trust says it has cut almost 10 per cent of its staff as it deals with a slowdown in the condo market and overall pushes for greater efficiency.
The company says the cuts, which amount to around 60 employees based on its last annual filing, will mean about $9 million in restructuring charges and should translate to about $8 million in annualized cash savings.
The job cuts come as RioCan and others scale back condo development plans as the market softens, but chief executive Jonathan Gitlin says the reductions were from a companywide efficiency effort.
RioCan says it doesn’t plan to start any new construction of mixed-use properties this year and well into 2025 as it adjusts to the shifting market demand.
The company reported a net income of $96.9 million in the third quarter, up from a loss of $73.5 million last year, as it saw a $159 million boost from a favourable change in the fair value of investment properties.
RioCan reported what it says is a record-breaking 97.8 per cent occupancy rate in the quarter including retail committed occupancy of 98.6 per cent.
This report by The Canadian Press was first published Nov. 12, 2024.
