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Canada headed for 'very light recession': Desjardins economist

Jimmy Jean says immigration, population growth will mitigate economic slowdown

Desjardins vice-president and chief economist Jimmy Jean. (Courtesy Desjardins)

Canada is heading for a soft recession, but its effects should be slight thanks to the country’s “explosive” immigration-fuelled growth an economist told this week’s Montreal Real Estate Forum.

“It will be a very light recession, one of the smallest we’ve known,” Jimmy Jean, vice-president and chief economist at Desjardins, told attendees at the June 13 forum.

The impact of a recession will be blunted due to the more than one million new arrivals in Canada in 2022 (437,000 permanent and about 600,000 temporary residents), he said.

Jean said while there has been plenty of talk about the resilience of the global economy this year – a normalizing supply chain, fast reopening in China, significant drop in semi-conductor prices and strong labour markets in Canada and the U.S. – cracks are beginning to appear.

For example, the eurozone has slipped into a technical recession with two consecutive quarters of falling output, he said, noting this is not a reason to panic.

In addition, credit conditions are tightening – particularly for small businesses – and household and business insolvency are on the rise.

Layoffs are also increasing in the U.S. and new hires are down, all of which are indications of the beginning of a recession.

Effects of immigration and rising interest rates

In early June, the Bank of Canada raised the key interest rate 25 basis points to 4.75 per cent — the highest level since 2001. 

Jean said Desjardins believes there will be another interest rate hike in July, to five per cent, and he doesn’t exclude the possibility of an additional hike in the fall.

The effects of a higher interest rate will be more apparent in the second half of the year, he said.

In Quebec, Jean added, job creation has been neutral since the beginning of the year.

He sees the province's unemployment rate rising from its current four per cent to six per cent in 2024, which will affect the demand for real estate.

After the arrival of more than a million immigrants in 2022, Canada will grow by “at least another Newfoundland (& Labrador) in 2023,” Matthieu Arseneau, deputy chief economist at the National Bank of Canada, said.

Arseneau said Canada's rental housing vacancy rate is at a 21st-century low and Canada’s four largest cities (Toronto, Montreal, Vancouver and Calgary) saw that number decline in 2022.

Strong immigration is pushing rental rates up “and that may explain why the resale market has rebounded,” he said, despite the fact it takes a while for most immigrants to access the real estate market.

Arsenaeau said the rise in interest rates will hit some households hard, but it’s important to put things in perspective when it comes to debt.

He noted delinquencies in mortgage payments remain very low in Canada despite higher interest rates.

How the real estate sector will weather the storm

At another session during the Forum, attendees were polled as to where they thought the Bank of Canada key interest rate is heading.

Sixty-two per cent thought it will rise another 25 basis points to reach five per cent and 24 per cent felt it will increase another 50 points to reach 5.25 per cent.

Attendees were also asked what type of asset they favour to weather the economic situation over the next 18 months. Multiresidential led the way with 66 per cent, followed by industrial at 24 per cent, then commercial, office and seniors housing.

At a session on financing, Lyne Roy Payette, vice-president of Desjardins, said her company has not tightened its financing conditions. Rather, “we’ve adjusted them so that the mathematics works.”

Desjardins continues to lend with the same conditions and to the same asset classes, she said: “We haven’t closed the taps on any assets.”

However, Jeffrey Soliman, president of mortgage brokerage VA Capital, said, “without being too negative, I believe we’re approaching a liquidity crisis among developers.”

Montreal home-buyers in 'wait-and-see mode'

Prével president Laurence Vincent. (Courtesy Prével)

The shock of high interest rates is not as highly felt in Quebec as it is elsewhere, given the high number of households that rent, Marc-André Louiseize, executive director, mortgage investments at KingSett Capital, said.

Laurence Vincent, president of developer Prével, said consumer confidence is lower in Montreal than it is in Toronto and Vancouver, and this lack of confidence is having a bigger effect than higher interest rates on home buying decisions. 

She said many potential buyers in Montreal feel that house prices will drop by 20 to 25 per cent. As a result, “people are in a wait-and-see mode, rather than acting.”

Although the situation is difficult in the short term, Vincent is hopeful that “in 10 years, we’ll surely look back and say, I hope, ‘That was a little bump in the market, but it wasn’t catastrophic.’ ”

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