Economist Michael Gregory had a message for commercial real estate professionals at Thursday’s RealREIT conference in Toronto which likely left them feeling better about Canada’s economic future than when they’d entered the room.
“We’re going to skirt recession, that’s the important thing,” said Gregory, the deputy chief economist and head of U.S. economics at BMO Capital Markets.
There were several “buts” factoring into his conclusion, but Gregory said despite global trade tensions, “dismal” low productivity, high personal debt and worries about consumer confidence, on balance he does not see Canada slipping into a recession.
He does expect growth to continue slowing, however, in part due to the ongoing global trade battles.
“It’s a little bit more difficult these days thinking about the forecast for the Canadian economy, and the global economy, because of something called the Fog of Trade War,” he explained. “It could be what precipitates the next recession.”
Worst effects of trade war still to come
However, he doesn’t expect the increase in protectionist policies, precipitated mainly due to moves by Donald Trump’s U.S. administration, to continue to escalate. At least, not at this point.
Part of the reason is that the worst effects from new tariffs imposed by the U.S. on some important goods and commodities have yet to actually hit global economies — or American consumers.
“We do think the worst effects of this trade war will probably be felt around the turn of the year,” Gregory said, adding, “we don’t look for further escalation.
“We don’t think this is going to happen, in which case we’ll get a little bit of easing (in the economy), but that’s it.”
Canada’s growing population
In Canada, one factor contributing to growth is a steadily growing population, which is fueling residential construction and spilling over to CRE sectors. It also offers hope for at least a moderate increase in both investment activity and productivity.
“We do have a little boomlet going on in Canada via immigration. That is creating fundamental demand for housing,” Gregory said.
On the flip side, however, are record high levels of consumer debt in Canada while the U.S. is experiencing the opposite. This would make us more susceptible to any negative turn in the economy.
Canadian personal debt levels did decline while fears of interest rate hikes were on the minds of consumers, but are again back on the rise.
“Are we going to see things stabilize at all in the housing market and consumer spending? Or are we going to get continued weakness down the road?” are the questions Gregory posed.
Canada’s government debt “pretty benign”
Gregory doesn’t believe Canada’s growing federal deficit is a major concern. He was less complimentary about the U.S. situation.
“The bottom line is that Canada’s deficit situation is pretty benign,” he said. “We see debt to GDP is quite stable at around that 30 per cent mark for some time.
“We do have a capacity here to do something in the event the economy weakens more than what we expect . . . particularly at the provincial level where six of 10 provinces currently have a budget surplus.”
He said the feds can currently borrow fixed, long-term money at about 1.5 per cent interest: “You can do a lot on infrastructure, you can do a lot on other programs with that kind of money.”
Canada’s government debt is “pale in comparison” to the U.S., where a trillion-dollar deficit is about 4.5 per cent of GDP. Canada’s annual deficit is about 6/10ths of one per cent of GDP.
Rate cuts to help head off recession
After about a year of rising interest rates, these and other factors led the U.S. federal bank to cut interest rates at the end of July. Although the Bank of Canada has yet to follow that lead, staying last week with the status quo, Gregory thinks it will.
He called the fed’s cut “a little insurance,” against the looming impact of the trade war. While the BoC did not cut Canada’s rate, Gregory acknowledged caution in its forecast.
“It did sound a little bit more worried about the global economy, talking about escalating trade conflicts were already having an impact on the Canadian and global economies,” he noted. “We do think in fact they will cut rates, probably in October. That is still our call, again as an insurance policy against even weaker outcomes.”
The final wild card in all economic forecasts, and perhaps the most powerful, is consumer confidence. Gregory said the way consumers respond to local and global events will be the ultimate decider.
“Are we going to get hit by confidence?” he asked. “That’s ultimately the No. 1 risk for us, the fact that consumers and businesses simply react to the news of the day. They react to an escalating global trade war and begin to pull back. In that kind of environment, it would be very hard to skirt a recession.
“But ,we still don’t think that’s going to happen. We think we are going to grow and interest rates are going to be low forever.”