Six BoC rate cuts, lower home prices, sticky wage growth: What TD’s chief economist sees for 2024

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We’re experiencing a macro-driven market, with the timing and magnitude of future rate cuts the main focus for investors. In the final two months of 2023, expectations of rate cuts by central banks in 2024 sent equity markets surging. At the start of the new year, the market was pricing in five cuts this year by the Bank of Canada, totalling roughly 1.25 percentage points.

To gain a sense of where economic conditions and rates are headed, The Globe and Mail recently spoke with Toronto-Dominion Bank’s TD-T chief economist, Beata Caranci.

You are calling for 150 basis points of interest-rate cuts by the Bank of Canada this year, starting in April – more specifically, 50 basis points of cuts for three consecutive quarters beginning in the second quarter. How did you arrive at this forecast?

By the second quarter, we expect the unemployment rate to reach about 6.4 per cent. We think that’s enough of a signal to the central bank that slack is building at an accelerated rate in the economy, in combination with our inflation forecasts edging below 3 per cent on their preferred metrics of CPI-median and trimmed. We also expect consumer spending to grow in the first half of the year at less than 1 per cent. It’s the combination of those three things that allowed us to think the Bank of Canada would feel comfortable pulling the trigger on rate cuts by April.

Then, the final factor to consider is a policy rate that has a starting point of 5 per cent. As the Bank of Canada Governor Tiff Macklem has said, it’s restrictive. As inflation comes down, it becomes even more restrictive because the real rate that people are transacting at is getting larger.

We figure they will do measured cuts of 25 basis points each meeting, equating to 50 basis points per quarter because there’s two meetings per quarter.

Going back to the forecast, we don’t have an economy that’s going over a cliff. If we start to see negative prints on GDP and job losses of 20,000, 30,000 a month, then they would consider a faster rate-cut cycle, and we could even get some 50-basis-point cuts at a single meeting. We don’t anticipate that to occur, but we would pivot our view if the economy deteriorates more than expected.

Spring is typically a strong period for the housing market, and this spring, rate cuts may occur. Meanwhile, housing supply is limited. This seems to provide a positive backdrop for the housing market. Yet, when I looked at TD’s forecast, home prices are forecast to decline 8.5 per cent year-over-year in the second quarter and fall 4 per cent year-over-year in the third quarter. Why the negative outlook for home prices?

That’s up against gains that occurred in 2023 in both of those quarters. That’s when we saw that pop in the market as yields were falling in the first half of 2023.

But ultimately, we do have a situation where we don’t have affordability and we do have some of these price declines related to that. And we also have measured supply increases occurring through that period.

One thing we’ve learned about the Canadian housing market, every time pressure comes off mortgage rates, we see people take advantage of it and come back into the market, which is exactly what happened in the second quarter of 2023. So that is a risk – that we may be too bearish on the housing price forecast.

Last year, you said that for inflation to move towards 2 per cent this typically reflects a wage growth environment that is around 3 per cent. In November, average hourly wages increased 4.8 per cent year-over-year. What are your thoughts on wage growth?

I don’t think we’re going to be seeing 3-per-cent wage growth in 2024. I think it’ll probably be closer to 4 per cent.

If you look at what union wage contracts have been doing, they’re averaging, I think, 6 per cent on the first year of the wage negotiation and then, on the remaining years – often union wage contracts extend another three to four years after that – they’re averaging 4 per cent. It’s higher than what you saw prior to the pandemic, when they were anchored very closely to 2 to 3 per cent. That’s telling us that it’s going to take a while for wage growth to come down. Unions make up about 30 per cent of the Canadian job market, which is more than two times what you see in the U.S., so it’s more likely we’ll see faster improvement on the U.S. side than we’re going to see on the Canadian side.

When does wage growth get to 3 per cent? That may be a 2025 story. Wage growth is the last of the metrics to slow down.

There’s two dynamics happening. You have the deceleration, which is what we’re hoping to see continue in 2024. But then they’ve got to hold inflation at 2 per cent, and that’s where that wage growth of 3 per cent comes into play. If it doesn’t hold at 3 per cent, then you do run the risk that you end up with wage push inflation coming through to consumer prices.

What are your inflation expectations for Canada?

Our forecast is we move back to 2 per cent in 2025 but we break below 3 per cent in 2024.

What do you see as the greater risk – is it economic weakness being greater than expected as rate hikes continue to work their way through the economy, or is it inflation reigniting?

I think in the first half of 2024, before we have them cutting, I think the risk is to the downside on the economy.

Then, as they cut interest rates, do we get too much exuberance coming back into the market? That’s where their communication becomes really key on setting people’s expectations about the speed of rate cuts and why they’re doing them. And that’s why we don’t have them normalizing interest rates in 2024 – that final step occurs in 2025.

From a global perspective, what countries have the strongest economic outlooks for 2024?

U.S. for sure. We still have the U.S. as an outperformer. I would be surprised if they disappoint us because they don’t have the leverage, the household debt, of Canada and they also have a more dynamic economy relative to Europe. There are a number of factors that keep them in a bit of a lead position.

Mexico continues to benefit from the strength of the U.S. on the trade side.

China should do a little bit better because they’re doing a bit of fiscal stimulus and that comes through in 2024.

If you want to focus on advanced economies, the rank order would be the U.S. first. Canada and Europe would look very similar, and then probably the U.K.

We hear about the high costs of basic necessities such as food and shelter. In the third quarter, food inflation increased 4.7 per cent year-over-year. Why is it still so elevated?

It’s a good question. It should be coming down as we go forward. We’ve seen gasoline and diesel costs come down, so the shipping costs should be coming down.

In the categories of food, it really does vary. Some of them are flat to negative in growth, and others are really strong – like cereals, for example. There is some logic. There have been droughts – olive oil is a good example of that. So there are things like that, but I don’t have a clean, silver bullet explanation. It’s quite varied.

With respect to shelter costs, the five-year fixed-rate mortgage is a common type and term for Canadian homeowners. Pre-pandemic this rate was below 3 per cent. Where do you think it may eventually settle?

Our yield forecast continues to come down into 2025 because we don’t have the Bank of Canada finishing their rate cut cycle until then. The five-year yield at 2.6 per cent, that’s where we think that will settle at. And then it’s a matter of how much banks put a spread on top of it. But it would suggest that you’re probably looking at at least a 3.5-per-cent mortgage rate or higher.

Do you believe trade disruptions in the Red Sea could elevate inflation?

I think that risk element is real, and we could see some risk pricing come through on commodities as a result of it, and to your point that would feed into headline inflation really quickly.

You monitor and examine economic news, but do you also gauge economic conditions from corporate announcements?

We think about announcements when they are announcing staff cuts in terms of cost control. Often when you have a few large corporations starting to do it, it tends to filter through more broadly. We have to be a little bit careful on paying too much attention there because companies don’t disclose when they’re going to hire 10,000 people but they do tell you when they’re going to let go of 10,000 people. So it’s asymmetric information.

And the other one that we pay attention to is if we’re hearing a lot about business investment plans getting scaled back.

Can the economy sustain such high immigration?

There’s the immigration, and then there’s non-permanent resident flow. I think having half a million people come into the country probably could be absorbed. The challenge is the non-permanent residents when they’re hitting 600,000 or more. Whether they’re students or workers, they still need housing and medical care.

We’ve recently seen Australia pivot. They also identify that they’re having too much of an inflow and they can’t sustain it through their social fabric and their economic ability to take in this many people and house them. So they’ve already made a pivot in lowering their numbers.

I would suspect our numbers are going to be coming down on the non-permanent resident side.

Also, when the job market weakens, what’s the impetus to come to Canada if you can’t find a job? So, there’s a natural cyclical flow that should come in 2024.

Why are we not seeing productivity gains?

There’s a lot of theories.

One is the energy sector used to be a huge catalyst for investment for Canada and that is now less so the case. You’re not getting any more greenfields happening in oil and gas exploration, so that’s one factor that’s affecting our investment numbers 100 per cent.

And then we are a country with a disproportionate amount of small businesses relative to the U.S. and others, and small businesses don’t have the scale to be export-oriented as much as other businesses. They generally are slower adopters of innovation and may be more insulated from competitive forces if you’re not competing on the international front.

A third factor is we don’t have the industry composition of, say, the U.S. in sectors that are highly innovative. For example, we don’t have the Googles and the Amazons. Even the defence industry in the U.S. is large, and that’s been known to be quite capital intensive and innovative. We don’t have that same composition, types of industries that tend to be more on the forefront of investment both in the creation and then the adoption of innovation.

The fourth factor, which has been documented – and I think there’s a lot of agreement around but very little movement – is the interprovincial barriers in trading, even amongst provinces, and labelling and content requirements.

And then some people are now citing, and I think there’s a merit to it is because we have such accommodating immigration laws, that companies are more apt to hire because of the availability of labour rather than feel a bit of tension on their production lines and look for innovative ideas for revenue.

So five big factors there, none of them with an easy solution.

What do you believe will be the greatest wildcard in 2024?

Anything on the geopolitical side – for example, China, Taiwan coming to blows would be a really big deal on supply chains and inflation.

And then the U.S. elections. That’s a risk factor if we get a Congress that wants to go back to punitive tariffs, tax measures, things like that against trade with their allies, like we saw under the Trump administration.

This interview has been edited and condensed.