The City of Moose Jaw’s investment portfolio manager is predicting that the Canadian economy will see a “mild contraction” during the first half of this year and inflation will continue declining.
In its report to the investment committee, RBC Dominion Securities said while Canada avoided a recession in late 2023, the economy will slow through the first six months of 2024 before recovering later in the year. It pointed out that citizens are depleting their pandemic-related savings, government spending is slowing and geopolitical frictions “are intense.”
The main headwind affecting the global economy, however, is that interest rates surged to their highest levels in 16 years by mid-2023 and caused higher borrowing costs, which can discourage business and consumer spending while making debt-servicing more difficult, the report continued.
Higher interest rates have also caused global trade to contract, business expectations to soften, housing activity to plummet and the labour market to lose momentum.
“Although pathways to an economic soft landing are evident and the odds of such an outcome are improving as inflation moderates, we continue to look for (a) mild contraction in the U.S., Canada, the U.K. and eurozone during the first half of 2024,” RBC added.
Inflation to moderate
While inflation has fallen sharply from its multi-decade peak in the middle of 2022, RBC expects to see that decline even further since the four original drivers of the inflation spike — commodity shock, supply-chain bottlenecks, central-bank spending and fiscal stimulus increases — have all “turned meaningfully.”
Furthermore, goods inflation has vanished, and while service-sector inflation remains high, it’s also past its peak, which means a weaker economy should provide further relief to Canadians, the report said. Also, shelter costs are likely to soften because home prices are forecast to decline and because the shelter component of the Consumer Price Index (CPI) is expected to lag in the coming months.
RBC added that inflation should continue moving back toward the central bank’s two per cent target, although it may not reach that level by the end of 2024.
Tailwinds fading for U.S. dollar
The U.S. dollar has remained elevated longer than RBC had expected, but the elements that have supported the greenback are starting to fade and there are signs that fiscal concerns and a slowing economy have started weighing on the currency, which sits more than 20-per-cent above fair value, the report said.
As this process unfolds, RBC is forecasting that the dollar will weaken against major currencies such as the Euro and Japanese yen. It is also “relatively more cautious” on emerging-market currencies in the short term, although as a group, those currencies are likely to benefit over the longer term from a persistent decline in the U.S. dollar.
