Big orange

Buy anything meaningful in the last few months?

No? Shame on you. Be a patriot. Get a new couch on credit.

The economy was supposed to grow about 1.5% (annual rate) in the third quarter. Alas, no cigar. It stalled out in August, maybe increased a titch in September (no stats yet) and it looks like we may hit 1% growth for the three-month period.

As you know, about two-thirds of the whole economy depends on consumer spending. And about a tenth of Canada’s GDP is, gulp, residential real estate. These days everything is slowing – no shock there. That’s what ten interest rate increases were supposed to do.

But at 1% the economy is hanging on by its fingernails and could slide when the snow hits. “The Canadian economy continues to grind along in a modest growth channel of around 1%-to-1.5%, holding below potential and opening up more slack,” says BMO. And this means the Bank of Canada is going to work harder at undoing what it already did.

The writing’s on the wall, say the econs over at CIBC: “Today’s figures suggest that the economy continued to grow at a pace below its long-run potential in Q3, which is consistent with the slight rise in unemployment rate seen during the quarter. With growth once again appearing to fall short of their already downgraded forecast, we continue to forecast that policymakers will deliver another 50bp cut at the December meeting.”

So another half-point looms. That will make five rate cuts while the US Fed has done just one. The Bank of Canada will again be the most aggressive rate-slasher in the world, with its policy marker descending to 3.25% – almost 2% below its peak of just months ago.

The chartered bank prime will end the year at 5.45% (down from more than 7%) with VRMs dropping a full half-point – while fixed-rate mortgages may end up being stickier.

What will Rate Cut #5 do to residential real estate? The spring market that we never got in 2024? Or 2023?

Maybe a lot. Recall we now have 30-year mortgages available to the newbies. The price cap for CMHC is soaring to $1.5 million, seriously reducing downpayments. The FHSA is in full swing. Inventory has exploded giving more choice to buyers and increased competition among sellers. Finally, you can bet the desperate federal Libs will be unveiling even more buyer-friendly, demand-goosing measures in the pre-election April budget.

But wait. Trump.

What if the guy wins on Tuesday? Could this rate-plopping party be pooped?

Hmm. There are risks. A Canadian economy barely breathing – now facing a 20% chop in immigration (newcomer spending has been critical to staving off recession) – could be suffocated by a protectionist president who thinks tariffs are beautiful.

Slapping big duties on imports will add about $4,000 a year in overhead to the average US family, feed inflation, reduce the GDP and freak out the Fed – says the consensus of economists. Combined with the cost and shock of mass deportations,reducing the labour force, plus broad personal and corporate tax cuts, hiking government deficits and debt (and borrowing needs), our biggest trading partner could drift into its own recession.

This week, Scotiabank economists repeated what they think a Trump presidency would do to us. Canadians, they say, stand to pay a significant price. You’d forget about dropping mortgage rates and look forward to (potentially) the biggest real estate plunge since 1981.

‘The economic stakes of the upcoming U.S. presidential elections are high,” says the bank. “Given their unilateral nature, former President Trump’s proposed 10% across-the-board increase in tariffs, with a special 60% carve-out for China, would effectively be the launch of a trade war, with damaging impacts on the United  States and the rest of the world.”

• “Assuming other countries respond to higher U.S. tariffs with equivalent tariffs of their own, we would expect substantial negative impacts on U.S. economic activity, including a peak decline of over 2.2% in GDP relative to current forecasts, a peak inflation impact of 1.5% relative to the current view, and a 200 bp rise in policy rates relative to the current expected path for U.S. rates.
• “Given Canada’s greater reliance on trade, the imposition of tariffs on all exports to the United States would lead to even greater economic harm north of the border, with a forecast peak decline of over 3.6% in the level of economic activity relative to current forecasts, inflation that is 1.7% higher than currently expected, and policy rates that are 190 bp above the current expected path for the Bank of Canada.”

Did you get that? Trump-induced inflation here in the land of oversized rodents like beavers and Drake would double from current levels. All five rate cuts (assuming we get one next month) would be erased. People taking variable mortgages would be squished like bugs. Our exports and GDP would be spanked and it’s more than probable we’d endure a nasty recession with spiking unemployment.

There are not my predictions. They’re the result of academic research by the best economists in the nation.

This is why we talk about Trump so much. And why no sane Canadian would support him.

About the picture: “Southwestern Ontario sheep,” writes Donna, “enjoying their daily serving of fall pumpkins.  Appreciate your daily insights and financial advice, words of sanity much needed.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/10/31/big-orange/