Economic update: 5 key insights from our Chief Economist

After two years of relentless interest rate hikes, the Bank of Canada has delivered two rate cuts so far this year, lowering the policy rate to 4.5%. This move marks a potential shift towards economic relief for both individual borrowers and businesses, which could spur economic growth. While these initial rate cuts are a positive step, Shenfeld says more significant cuts will be necessary to make borrowing more affordable and encourage spending and investment. "The reality is that interest rates are still quite elevated,” Shenfeld says.

Rising mortgage costs have prompted Canadians to tighten their budgets and increase savings. Shenfeld highlights the difference between Canadian and American spending behaviors: "Americans benefit from the fact that their mortgages are locked in for 30 years, so they don't have to renew them as rates rise. And what we've seen is a dramatic difference in spending and savings behavior across the two countries." As interest rates decline, Shenfeld expects a resurgence in spending, particularly in sectors tied to housing, such as furniture and appliances.

The key to reaching the Bank of Canada's 2% inflation target lies in rent and mortgage interest costs, Shenfeld says.

He notes that rent inflation has been driven by rapid population growth. He expects that by 2025, changes in government policies on student and non-permanent resident visas will reduce immigration from these groups and should help ease rent inflation.

As for mortgage interest costs, Shenfeld says that as Canadians have been renewing mortgages at higher interest rates, that component of inflation is running at over 20 per cent year over year. “It's the one item, then, when the Bank of Canada cuts interest rates, that they can start to actually use those rate cuts to reduce that part of inflation,” Shenfeld says.

The second half of 2024 is expected to remain sluggish, with still sluggish activity in the housing market and a slowing U.S. economy. “It's not a dramatic slowdown, but the overall temperature of the global economy is not likely to be that vigorous in the balance of this year. Where our hopes lie is really for 2025, after a sequence of interest rate cuts, not just in Canada, but in Europe, and eventually in the U.S. as well.”

“We've had a pretty good run for equities, more so in the U.S. than Canada. And I'm a bit concerned that maybe equities are now pretty fully-valued for these interest rate cuts to come,” Shenfeld says. “Maybe the technology side has done a lot of what it can do in the near term. So I'd be a bit cautious there.”

However, he sees some opportunities in the bond market that could help offset a slowdown in equity growth. Shenfeld believes there’s room for bond yields to come down and improve the performance of fixed-income investments. “At this point, that traditional balanced portfolio offers the kind of shelter from market volatility, in a way that maybe it didn't when interest rates were climbing sharply back a year or two ago,” Shenfeld says.

For more information on how these economic trends could impact your financial strategies, speak to your advisor for personalized advice.