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In the face of shifting geopolitical dynamics, this blog dives into the Canadian and U.S. economic landscapes focusing on the current challenges including the housing supply crisis, high interest rates, lagging Canadian manufacturing and productivity levels, and what this means for the following months. As Economist Dr. Peter Andersen stated, “The secret of economic forecasting is to get today right before you start talking about the future.” It is worth noting that bias can cloud judgment, especially when those making predictions have a vested interest in the outcomes. Therefore, objective, data-driven forecasting is what we will be discussing.
Entering a New Business Cycle
Contrary to the recession fears that blurred our vision last year, we now anticipate a phase of growth. This shift in perspective stems from a misinterpretation of the yield curve, which gave a false signal due to the long-term rates being lower than they should have been. This led us astray and made us too pessimistic, but we are now ready to navigate a different kind of business cycle—one characterized by above-average interest rates and higher than expected inflation.
Economic Challenges and Crises
One of the critical issues Canada is facing is the housing supply crisis. Cutting interest rates won’t solve our housing supply crisis. While rate cuts may boost demand, they won’t address the underlying supply problem. The example that Andersen used for our supply issue when comparing to the U.S., was the following: “Time is money. 18 months vs. 10 years. What do I mean by that? In Houston, Texas, it takes 18 months to get a home or housing development approved. In the GTA, it can take up to 10 years. Another number to throw in there is that it takes 145 days for a home to be built in the GTA. What if we can change that to 110 days?”. With some ingenuity and applied technology, we can improve the logistics to decrease the building time. In addition, the government is looking at a huge backlog of approvals for construction which is further exacerbating the housing supply crisis. Reducing the time to approve and build homes could significantly alleviate this problem.
Which brings us to our next challenge – our productivity and manufacturing crises.
Flying at a high altitude
The U.S. economy – the 800-pound gorilla as far as the Canadian economy is concerned –is currently operating at what can be called “cruise altitude.” This metaphor implies stability without any signs of a landing. On the other hand, Canada’s economy, while stable, is limping compared to the U.S., particularly in manufacturing and productivity. Unfortunately, Canada’s manufacturing sector is bordering on a recession. Also, business productivity has not seen any improvement since 2016. The bright side to this is that the U.S. is Canada’s major trading partner. Consequently, this close economic relationship will benefit our nation.
Based on the economic numbers that we have as of today according to the Federal Reserve Bank of Atlanta, the growth, quarter-to-quarter in the U.S., price and volume growth adjusted at annualized rates, will be up in the 3% range for Q2. This can be interpreted as the economy not being in danger of stalling out. It is believed that the economy is able to grow by just under 2% annually based on supply capability, the availability of workers and their productivity. Therefore, this growth is in line with our supply potential.
Introducing “reshoring” into your vocabulary
As Zeifmans Partner, Jason Price asks Andersen the question that we are all wondering, “Why does Canada have it so wrong?” Andersen responds with the following: “Well, I am a big believer in incentives, and I think that the government can either be your partner or your adversary. The CHIPS and Science Act is causing a revolution in U.S. manufacturing.” There are several sectors in the U.S. manufacturing complex that are looking at growth rates of 10-20% on a 12-month basis. This is reshoring, the opposite of offshoring.
Reshoring, has led to a surge in U.S. manufacturing construction investment, increasing from $80 billion to $220 billion. This growth, driven by the CHIPS and Science Act, has made it a record year for U.S. suppliers in the semiconductor and high-tech industries. The U.S. government’s stimulus efforts are modernizing the economy and revitalizing the supply chain, contributing to robust economic growth and job insecurity.
In contrast, Canada has not matched this investment pace and is experiencing a near-recession in its manufacturing sector. The U.S. approach to reshoring and economic modernization highlights the benefits of scale and technological adoption, offering a potential model for Canada to follow.
Interest Rates and Inflation
In 2024, we’ve seen significant increases in factors beyond our immediate control including in rent prices, labor costs, and interest rates. This has led some to retire earlier, posing a challenge to the labor market. While the Bank of Canada is cautious about prematurely cutting interest rates, it decided on June 5th that the 3-month momentum in core inflation was low enough for a pivot, and a rate cut of 25 basis points. Typically, the Bank of Canada follows the U.S. federal announcement, but not this time. Three months have passed with core U.S. inflation running at around 3.0%, so they don’t feel comfortable with cuts yet, not until we see inflation around 2-2.5%). With the Presidential election coming up on November 5th, cuts may be delayed until December. This will have an effect on Canadian interest rate differentials with the U.S. and push the CAD lower. One U.S. dollar is currently worth about $1.37 Canadian. Moreover, an even cheaper CAD would make USD exports worth even more CAD. Canadian companies doing business in the U.S., and getting paid in USD, would be happy.
Moving Forward
Looking ahead, the key to navigating these economic complexities lies in strategic investments and policy adjustments. Canada must focus on accelerating housing approvals, enhancing productivity and manufacturing, and leveraging small and medium-sized enterprises to drive technological advancements. By adopting a forward-looking approach and learning from the successes of our neighbour, we can steer the economy toward sustained growth and stability. The punch line is that we will see higher interest rates and higher inflation than we are used to.
While challenges remain, there is a path forward marked by opportunities for innovation and improvement. With careful planning and a commitment to addressing today’s issues, we can lay the groundwork for a prosperous future.
If you have any questions about what was previously discussed, feel free to contact Zeifmans Partner, Jason R. Price at jrp@zeifmans.ca or 647.256.7659.
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