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episode # 37

What’s next for the Canadian Economy with Doug Porter

As Canada and the world continues to battle with Omicron, supply chains are challenged and the Bank of Canada surprisingly holds rates, what does all this mean for the rest of 2022 and the Canadian economy? This week Cory and Adam welcome Doug Porter Chief Economist and Managing Director, BMO Financial Group and with his 25 years of experience analyzing global economies he shares his thoughts on what is next for the economy, the Canadian real estate market, inflation and his prediction for interest rates. As inflation trends upwards and interest rates hover around historic low levels Doug provides BMO’s outlook moving forward and what 2022 might have in store. This is a must listen to episode for anyone who has an investment in Canadian real estate.

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Episode Summary


Who is Doug Porter?

I work in Toronto at the Bank of Montreal as the Chief Economist and Managing Director. I started my career in the 90’s on Bay Street. My team covers the global economy and we have a lot of specialists in our group. 

Were you surprised by the residential and commercial real estate markets throughout the pandemic?

I don’t think anyone could have predicted the strength we saw in the residential real estate market at the beginning of the pandemic. We assumed there would be a correction – which we did have, for about two weeks – but then it went to heights that no one could have imagined. 

We’ve had low interest rates for a long time, incomes supported by government policy and few other spending options for people. We were more optimistic about housing than others but even we couldn’t have predicted the strength of the residential real estate market.

On the commercial real estate side, things held up better than expected. But it depends what asset class you’re talking about. Overall, the sector did relatively well. Again, the market was supported by low interest rates and government financing. 

Is Canada in a good place economically?

It depends on what sector we look at in Canada. Some sectors bounced back immediately, like real estate, while others have been struggling throughout the pandemic, like hospitality. 

But overall, Canada has a few feathers in its cap. We are rich in resources and our government finances, while they have taken a hit, are in a good place. Even when it comes to inflation, our inflation rates are lower than those in the US or Europe. 

I think we’re still looking at above average growth in Canada over the next few years, mostly making up for the hole that 2020 put us in. But even if and when the pandemic is behind us, I think we’re looking at more economic growth for the country.

Where is inflation going in Canada?

That’s the overwhelming question for financial markets and policy makers. The latest inflation number in Canada is just under 5% and we haven’t seen that since 1991. A lot of people working in finance and policy haven’t worked in inflationary times like this before. 

We’re surprised by how high inflation has risen in the past year. I’m concerned it will stick with us longer than is comfortable. But we do think it will moderate in the next 6-12 months. However, that’s assuming that oil prices stabilize and the supply chain issues ease. But those are not a given. 

We can’t take it for granted that inflation will subside. Even if the supply chain and oil price issues do right themselves, we still think inflation will be 2.5-3.5%, which is much higher than the sub 2% we saw pre-pandemic. Inflation could surprise us on the low side but I think the risks are more on the high side. 

What factors into the inflation rate? 

Supply chain and oil prices have been the two main reasons that forecasters have been dead wrong about inflation over the last few months. Looking ahead, I’m watching what happens to wages. Wages have started to stir in Canada but they’re running well below inflation. I think we’ll see serious wage pressure over the next year, which may make inflation last longer.

The strength we’ve seen in home prices across Canada and the US has just begun to show up in the inflation rate. We’ve had a 25-30% increase in home prices in some areas, which is only now showing up in the CPI (Consumer Price Index). 

Will the pandemic force countries to become more self-sufficient?

There was a lot of talk about countries becoming more self-sufficient early in the pandemic. I’m skeptical that we’ll see a big change on this in the years ahead. It’s expensive to build in redundancies. I do think firms will want to hold onto more inventory to guard against disruptions, but I don’t think we’ll move to full self-sufficiency. 

I do think countries are trying to be more self-sufficient when it comes to medical equipment. We’ve all learned a tough lesson on that front. I believe that will be a lasting legacy of the pandemic. 

How will the truck convoy protests in Canada affect the supply chain issues we’re already dealing with? 

Even before these intense protests, the supply chain was very fragile and there was a lot of pressure on food prices. We import a lot of our fresh produce in the winter. I think these protests will be more of an irritant than something that tips over the supply chain. 

But anything that adds to the inflationary pressure we’re experiencing, especially with food, is really unfortunate. I think these protests will aggravate an already-fraught situation. 

What will the Bank of Canada do to interest rates in 2022?

Let’s start by looking at the US. We’ve heard that US employment did very well in January, despite Omicron. Since the economy is growing, the US Federal Reserve has to respond. Their next meeting is in March and I fully expect them to raise rates by 0.25%. In fact, some think they may raise by 0.50%. If inflation doesn’t start to calm by the spring, I think we could see some aggressive rate increases by the US Federal Reserve. 

We’re expecting a 1.25% increase in the rates by both the Bank of Canada and the US Federal Reserve over 2022. We think they’ll do it in five 0.25% increases, but they could do more. 

The Bank of England raised their rate by 0.25% just recently. Interestingly, almost half the committee members voted for a 0.5% increase. If they had done that, it would have set the stage for other banks to raise their rates quickly.

There are no guarantees in life but I think it’s almost guaranteed that both the central banks of Canada and the US will be raising their rates in March, and that they will be relatively speedy with their moves. 

How do rising interest rates affect the real estate market?

My rough rule is it would take 100 basis points of increases to really slow the real estate market. I could see the Bank of Canada raising by 100 points quickly, and then taking a step back to assess. But they won’t stop raising rates just because some buyers will feel a bit of pain. The housing market can’t dictate overall policy. 

This should be a warning for the housing sector: If the economy as a whole needs higher interest rates, the Bank of Canada will press on as needed, even if it hurts housing.

What will the return to office look like in Canada?

Conventional wisdom is that we’re heading towards some sort of hybrid model of work, but we don’t know what that will look like exactly. For my department, I suspect most of us will be in the office most of the time once the pandemic has faded. 

I think employers will tolerate more working from home than they would have allowed pre-pandemic. A lot of companies are looking to modestly reduce their footprints and I don’t think that chapter is closed. I think companies will want to reduce their footprint by 10-15%. 

In many cities pre-pandemic, like Toronto, Montreal and Vancouver, we were dealing with extremely tight office markets. In a way, this hybrid/remote work model has offered some relief to those markets. In cities like Calgary with a lot of office space, we could see some repurposing of that office space down the line. 

What is the future of the downtown core? 

I believe the downtown cores will revive and thrive in the future. Human history has been towards greater concentrations where the city centres drive the ship. I think downtown cores in the biggest cities will completely recover. It may take a while, but it will happen.

How has commercial real estate fared throughout the pandemic?

We’ve had the industrial and multi-family markets thrive while the retail and office markets really struggled. Retail was struggling even before the pandemic and it’s fair to say it will struggle after this.

What does the Canadian housing market look like in 2022?

We’re starting from one of the most extremely imbalanced housing markets we’ve ever seen across the entire country. We need to see a cooling off before we even talk about a stabilization or correction. 

Our view is that things will simmer down this year. Some markets may even have a small correction by the end of 2022. My old hometown of London, Ontario has seen house prices double in the last two years. But it’s not commutable to Toronto. Cities like that with outrageously large gains are susceptible to reversal. 

But for big cities like Toronto, Montreal and Vancouver, I think they will hang onto their gains. We won’t see 20-30% increases but we won’t see a big correction either. You may see a dip in pricing at the very high end, but I think it will be more of a calming across the market. 

Will the trend for tertiary markets and small towns continue to grow post-pandemic or will we all go back to the big cities?

I tend towards the latter view – that we will return to the big cities – but there is a caveat. Now that folks have tried out smaller cities, there is a possibility that some of that population flow could have a life of its own. A lot of Baby Boomers will be retiring soon and may be heading out to these smaller towns, as long as they have the healthcare resources they need.

Almost every asset you can think of has been helped by government support and the exceptionally easy monetary policies we’ve had over the last few years. So every asset class is at risk if there’s a tightening. 

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