A snapshot of where our economy is headed

​After talking for two years about getting back to normal, normal continues to elude us.
 
It’s now the seventh wave of a gradually subsiding pandemic, inflation is at 7.7%, and the Bank of Canada just hiked its rates by a whopping 100 basis points.
 
Economists have been busy analysing our current situation and putting together some forecasts for where we’re headed.
 
The Business Development Bank of Canada (BDC) is figuring inflation will peak soon, breaking new records over the summer, followed by a period of decline as it’s expected to fall below 5% in early 2023 and returning to the Bank of Canada’s target range of 1% to 3% in spring.
 
One factor BDC highlights that will keep prices higher for a while is that supply chain issues have prompted businesses to move from "just-in-time" inventory management to "just-in-case." Increasing inventory is also adding to current goods transportation challenges. On the plus side, it’s getting easier for customers to find the products they want.
 
Many Canadians are still spending, even with costs going up. A survey by BDC showed that 25% of Canadians have not changed their spending habits because of inflation and the rest say they’re more likely to search for bargains than to restrict their purchases.
 
The Bank of Canada’s 100 basis point rate hike came in higher than predicted, citing that inflation has been higher and more persistent than it had expected. The overnight rate now sits at 2.5%, well above the 0.25% that was with us for most of the pandemic.
 
BDC is predicting that Bank of Canada rates should peak at 3% to 4%, likely hitting 3% by the end of the year. They also note that in a historical context these rates are still considered low, but we’ve become accustomed to low rates since the 2008 financial crisis.
 
Interest rate hikes, along with other factors, seem to be having some effect in cooling the housing market. According to Peterborough and the Kawarthas Association of Realtors, the average selling price of a home in Peterborough in June was $751,522, an increase of only 3.4% over June of last year. This is well below the peak of $885,153 in February, dropping the year-to-date average home price to $830,193. Rather than rushing to buy before they’re priced out of the market, some home buyers are now holding off to see how much lower prices will fall.
 
One of the other big factors driving inflation is the price of oil. It’s not just the price at the pumps hitting consumers, but the whole supply chain is largely passing fuel costs on to consumers. This includes the large amounts of fuel consumed by farming, mining, shipping, and construction. It’s even hitting tax bills with City staff recently citing an expected $2 million increase in fuel cost next year as one of the reasons for hiking property taxes by 3% to 4%.
 
The U.S. Energy Information Administration is predicting a decline in the price of crude oil, though likely not to where it was a few months ago. The price of crude oil increased from $87/barrel in January to $123/barrel in June. They’re expecting that price to drop through the second half of this year, eventually hitting $97/barrel by the fourth quarter of this year. That said, the rise and fall of crude oil prices influence but aren’t necessarily mirrored in the price at the pumps.
 
Another cause for concern is the possibility of an upcoming recession. Rising interest rates, soaring inflation, the pandemic and the ongoing war in the Ukraine are all contributing factors that have economists warning that Canada could slip into a recession in 2023 and maybe into 2024. Statistics Canada reported that our Gross Domestic Product declined by 0.2% in May, however BDC notes Statistics Canada’s preliminary estimates tend to underestimate the final results.
 
Of course, all of these predictions are based on a snapshot of the world as it is today. We’re only one geopolitical crisis, catastrophic weather event, or virus variant away from another game changer.
 
If nothing else, our business community have proven themselves to be resilient and adaptable. There is a path emerging in terms of an economic “normal” and overall there’s a greater sense of certainty in what lies ahead.