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Revised forecasts | Inflation recedes, recession draws closer



Europe avoided catastrophe and China got back on track. The fight against inflation is slowly starting to bear fruit, but the bankruptcy of Silicon Valley Bank increases the risks of a recession in the United States. The economic landscape has changed considerably since the start of the year, forcing economists to revise their forecasts.

Three of them set the record straight on Tuesday, at the invitation of the Cercle finance du Québec.

It was to be the most anticipated recession of all time, recalled Sébastien McMahon, chief economist of IA, who led the discussion with two guests, Matthieu Arseneau, of the National Bank, and Jimmy Jean, of Desjardins.

It is clear that the economy has proven to be more resilient than expected in the face of rapidly rising interest rates, he noted.

The bankruptcy of Silicon Valley Bank (SVB), which is a consequence of this rapid monetary tightening, is confusing the cards and making the task of the Federal Reserve (Fed) even more delicate, according to him.

A necessary increase

Inflation slowed in February in the United States, from 6.4% to 6.0% on an annual basis, which is still too high for the American central bank, which has already announced its intention to raise its rate further energetic manager. Will the shock wave caused by the bankruptcy of SVB on the financial markets make the Fed back down?

It should not, says Jimmy Jean, chief economist of Desjardins.

If the Federal Reserve decides not to raise its key rate as expected next week, it could send the wrong signal and make the markets even more worried.

This is also the opinion of Matthieu Arseneau, Deputy Chief Economist of the National Bank, who points out that the measures taken by the American government following the collapse of SVB have been “very robust and very credible”, and should be sufficient limit the damage to the economy as a whole.

The Federal Reserve could play it safe, however, and raise its rate by just 25 basis points, and not 50 points as was discussed just a few days ago.

Inflation comes back to earth

In Canada, the signs of slowing inflation are more evident. According to Jimmy Jean, the inflation rate should be back within the Bank of Canada’s target range of 1 to 3% by the end of this year.

The cost of international shipping is steadily falling, which should affect the price of most goods. According to the Freightos Container Shipping Index, the cost of shipping between Asia and the US East Coast has fallen 88% over the past year.

Even the rise in food prices will soon come to an end, says the Desjardins economist, since the price of fertilizers, which has contributed a lot to food inflation, is down sharply.

“We have turned the page,” he said, although it will take a few months before we see the impact at the grocery store.

The inflation rate is already below the Bank of Canada’s target, underlines Matthieu Arseneau. “Without food, energy and mortgage costs, inflation is 1.8%,” he observes.

A delayed recession

The Canadian and Quebec economies are holding up so far, but maybe not for long.

The National Bank’s economic scenario has been revised downwards and now forecasts a few negative quarters, and that of Desjardins, which already incorporated a slight recession, shifts it towards the end of 2023 and perhaps into 2024.

The Canadian economy is even more vulnerable to rising interest rates than the US economy, says Matthieu Arseneau.

Current interest rates are at the same level as in 2007, when households were 45% less indebted, he said.

The construction and real estate sector, very sensitive to interest rate increases, occupies a larger place in the economy as a whole and there are more variable rate and short-term mortgages than in the United States, where 30-year terms are common, also notes Jimmy Jean.

Even though the Canadian economy started the year off on the right foot, particularly in the job market, the drop in corporate profits and weak investment will eventually have an upward impact on the unemployment and the downturn in the economy.

So far, the number of overdue loans has remained stable, both for households and businesses, but that can change quickly, say the two guest economists.

Neither, however, believes in the apocalyptic scenario put forward recently by renowned strategist François Trahan, who believes that the worst is yet to come in terms of inflation and the economic slowdown. “I don’t see how inflation can start accelerating again in a moribund global economy,” says Matthieu Arseneau.

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