Among the truisms for economists is 鈥淪tein鈥檚 Law,鈥 credited to the late U.S. economist Herbert Stein. The law says, 鈥淚f something cannot go on forever, it will stop.鈥
So it was with the Great Recession, and now with 91原创鈥檚 disagreeable economic conditions.
The anomalies of pandemic, decades-high inflation and interest rates, and a cost-of-living crisis cannot go on forever.
So, they will stop. The only question is when. And the answer is, probably sooner than most think.
This week, the Bank of 91原创 (BoC) released its most recent surveys of business and consumer sentiment.
The surveys showed greater economic optimism based on population growth, expectations of lower borrowing costs and other encouraging factors.
Improved economic conditions by end of 2024
That renewed optimism, an important turning point, follows two years of deterioration in the BoC surveys. The recent upturn is based in part on a widely predicted recession that has not occurred and seems less likely to with each passing month.
To the contrary, in its latest forecast, , at 1.4 per cent, trailing only the U.S. (2.1 per cent) and Spain (1.5 per cent).听
And the IMF expects 91原创 to outpace all advanced economies in economic growth in 2025, at 2.3 per cent, while the U.S. posts a 1.7 per cent gain.
To be sure, Canadian lenders are continuing to build their reserves against loan losses, especially in the vulnerable SME sector (small and medium-sized enterprises).
But bank CEOs anticipate improved economic conditions in the second half of 2024.
鈥淲e expect North American economic growth to remain subdued in the first half of this year,鈥 BMO chief executive Darryl White said in February, 鈥渂efore recovering towards the end of the year.鈥
But decision-makers in business, who plan for the long term, are looking beyond the likely tepid growth of the first half.
A growing commitment to long-term investments
In the BoC business survey respondents expressed a growing commitment to long-term investments to expand their businesses into new products and geographic markets.
Along with lower interest rates expected this year, SMEs stand to benefit from declines in wage growth.
Wage growth peaked in February 2021 at 8.4 per cent. By January of this year, it had dropped to 3.9 per cent.
The Canadian Federation of Independent Business (CFIB) has reported that in its latest survey of members, who account for the largest number of Canadian employers, SMEs expect to raise their wages by just 2.5 per cent over the next 12 months.
And the CFIB鈥檚 SME members plan to raise prices by 2.8 per cent in that period. That鈥檚 down from SME pricing expectations that peaked at 4.9 per cent in May 2022.
Those lower wage and price increases will help spur a recovery in an SME sector that has been battered by high labour costs and weak consumer spending.
Expected relief in lower mortgage rates
The wage and price declines also give the BoC more reason to feel safe in beginning to cut interest rates without a resurgence in inflation.
Estimates of the size of the interest rate cuts expected this year, down from the bank鈥檚 current policy rate of 5.0 per cent, range from 0.5 per cent to a full per cent.
, with a BoC policy rate averaging just 2.75 per cent in 2025.
That near-halving in borrowing costs will accelerate business investment, notably in the key residential construction sector.
And the relief it provides in lower mortgage rates will increase disposable income available for a rebound in consumer spending.
Without question, economic doomsayers have much to work with.
Underwhelming export trade in recent months has been a drag on economic stimulus. Consumer and business insolvencies have spiked, though they remain below 2019 levels.
‘Not only a great place to live, it is also getting better’
And at least for now, high amounts of household debt and the unaffordability of shelter continue to restrain consumer spending.
鈥淭he Canadian economy is still slowing as the lagged impact of earlier interest rate increases materializes,鈥 warns RBC Economics, citing the upward surge in mortgage payments and rents.
But the many Canadian reports of a Canadian economy in distress .听
91原创 has a housing crisis, Cowen acknowledged in a recent Bloomberg column. And like most advanced economies it trails the U.S. on some important measures.
But 91原创 has a deep talent pool, Cowen noted. It has 鈥渕ore egalitarian policies鈥 than the U.S. And contrary to the frequent assertions of local pundits, .听
鈥91原创,鈥 Cowen concluded, 鈥渋s not only a great place to live, it is also getting better.鈥
As we struggle with a cost-of-living crisis, the country can seem broken. That鈥檚 when outside perspectives can be helpful.
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