Proceed With Caution: Your Economic Forecast For 2024

With the war between Israel and Hamas and the ongoing conflict in Ukraine threatening to tip the world global economy into recession, 2024 will likely be a year of great financial challenges. How will these forces play out in Canada, and how will they affect your spending and investment decisions? For anwers, we asked two experts: Benjamin Tal, Toronto-based deputy chief economist of CIBC World Markets; and Bryan Yu, chief economist at Central 1 Credit Union in Vancouver. Of course, a prolonged conflict in the Middle East could change this forecast, particularly for oil prices and the stock market.

 

Growth

 

Forecast: Heading into the new year, Canada’s current economic growth rate is very low, Tal notes. “In fact, we are in, if you wish, a per capita recession,” he says, with GDP growth per person in the red, even though the economy is still expanding. “The only reason why we are not in negative territory for the overall economy is because of the huge increase in population, especially immigration.” 

The country has also lost a major economic buffer now that consumers have spent the $165 billion they stockpiled during the pandemic, Tal explains. “Getting into 2024, the weakness will continue, especially in the first half of the year, because the Bank of Canada (BoC) is not going to cut interest rates any time soon.”

Real GDP growth next year will be just 0.7 per cent, CIBC forecasts, down from 1.2 per cent in 2023. CIBC sees the BoC’s benchmark interest rate holding steady at five per cent through the first quarter of 2024, when it will start to fall, finishing the year at 3.5 per cent.

 Key takeaway: Expect the job market and consumption to slow in 2024. Central 1 calls for national unemployment to rise from 5.9 per cent in Q4 of 2023 to as high as 6.3 per cent in 2024. But, as Yu points out, rapid population growth, not large-scale layoffs, is driving the jobless rate. “We are growing the labour supply more than we can actually absorb it.”

 

Inflation

 

Forecast: For the Canadian economy, the key issue is how much inflation will slow, Tal says. With its rate hikes, the BoC is targeting two per cent inflation, but CIBC forecasts roughly 3.4 per cent over the next year. Willing to take a recession over inflation any day, Tal says, the central bank prefers to overshoot on rate increases. In other words, it’s willing to raise interest rates more than might be necessary to tame inflation. “Interest rates will remain elevated for a while. If we see them start going down, that would be good news, but it will be a slow process.” 

Key takeaway: The year ahead is probably a good time to hold off on major purchases. “For a lot of consumers, they’ll still be grappling with the fact that there is a high cost of living right now,” Yu says. “Wages are rising, but that is also going to slow as the overall economic trends dampen some of the wage growth.”

At some point, Tal predicts that Canadians’ spending habits will put an end to retailers’ price hikes. “The consumer will say, ‘OK, we’re not buying this. We’re not going on this vacation. We’re not going to the movie. We’re cutting restaurants … whatever it is.”

 

The Stock Market

 

Forecast: In an August Reuters poll of Canadian portfolio managers and strategists, respondents’ median projection was that the S&P/TSX Composite Index would climb 3.5 per cent by the end of 2023, to 20,479. That’s short of the 21,000 forecasted in a May survey. The index would finish 2024 at 21,800, respondents said, below its record closing high of 22,087 in March 2022. As of early October, the Toronto Stock Exchange had given up all its gains for the
year amid worries about a looming global slowdown. 

High interest rates could help drive down the stock market by pushing investors toward bonds and away from stocks. That said, late 2023 saw a feverish bond selloff as investors sought to ditch older, lower-return bonds for new ones with higher yields. And short-term bonds are now offering better returns than their long-term counterparts – a reliable warning sign of recession. 

“Nobody knows,” Tal says, when asked where Canadian stocks are headed in 2024. “It’s reasonable to assume that when interest rates start going down at one point, that will benefit the stock market,” he adds. “But predictions regarding the stock market? Good luck.”

Key takeaway: Given bonds’ relatively high returns, 2024 could be an opportunity for investors to add more fixed income to their portfolios.

 

Oil Prices

 

Forecast: This past August, the International Energy Agency said that although supply cuts might push up oil prices for the rest of the year, global demand could plunge in 2024. Driving that reversal: poor economic conditions, the end of the post-pandemic recovery and rising electric vehicle use. The Chinese and U.S. economies are slowing dramatically, Tal notes. “This means that the demand for oil will go down,” he says. “So I buy the argument that oil prices will not continue to go up.”

Key takeaway: Canadians floored by high gas prices can expect some relief at the pump. “I think in 2024, the price will be a bit lower than it is now,” Tal says. “But don’t expect it to be extremely cheap.” Don’t look for the coming price drop to end the current boom in oil-rich Alberta, either. “Even a decline in prices that we might see in 2024 will not be enough to slow it down, because we’re not looking at a significant decline,” Tal says. “We’re not talking about a situation in which oil will be negative the way it was during COVID.”

 

Real Estate

 

Forecast: Tal’s outlook for real estate in 2024: “For the next few quarters, the housing market will go sideways or even lower.” With the average Canadian home price sitting at $655,507 last September – up 2.5 per cent year over year – high interest rates are making it tough for many people to refinance their mortgages. For home prices in 2024, Yu flags some regional differences. “I think they’re likely to fall in B.C.,” he says. “It’s a little bit different than some other provinces like Alberta, where the numbers are clearly still quite strong and actually increasing.” 

There’s also a nationwide supply crunch that will only worsen as homeowners opt not to sell and developers shelve projects because no one is buying presales, Tal explains. And with Canada now welcoming some 500,000 immigrants a year, this could spell trouble. “The lack of supply means that prices still remain elevated, but the demand is relatively weak,” Tal says. “When interest rates start going down, I think you will see a little bit of demand going back to the market, and the supply will not be there.”

Key takeaway: Lack of housing supply will keep pushing up rents, Tal says, noting that the vacancy rate is almost zero. As of last September, the average national rent was a record $2,149, up 11.1 per cent year over year, according to Rentals.ca and research firm Urbanation. When the federal cabinet held a retreat in Charlottetown last August, Tal was asked to share his views on dealing with housing affordability. He warned that if Canada doesn’t tackle the problem – especially in the rental market – “we’re going to see rent spikes, we’re going to see pockets of civil unrest, we’re going to see
anti-immigrant sentiment,” he recalls. “This is a crisis that we have to deal with.” 

A version of this article appeared in the Dec 2023/Jan 2024 issue with the headline ‘Proceed With Caution’, p. 32.

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