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The economic data from the first half of 2020 was never going to be pretty. But amid the bad news there are some encouraging signs heading into the second half of the year.
The latest official GDP figures for Q2 2020 confirm that the Canadian economy fell by 37.7% on an annualized basis in the second quarter of the year.
Let’s take a closer look at what that means, and what the rest of the year could have in store.
The Initial Drop
The decline was clear across most components of the country’s GDP and marks the largest quarterly drop in Canada’s recorded history.
A longer lockdown than the U.S.’s and a hit to our country’s energy sector were largely to blame for the dip.
However, there are signs that Canada’s near-term recovery may be stronger than that of other countries, because of our initial handling of the pandemic.
The Role of Central Banks
Central banks will continue to play a key role in the global economic recovery. Early in the pandemic they cut interest rates to zero and launched major stimulus programs.
At the same time, they have been reviewing their mandates and strategies. After years of undershooting on inflation targets, there seems to be a shift in global monetary policy underway.
The Federal Reserve has unveiled a major policy shift, allowing inflation and employment to run moderately hotter before taking action. While in the past the Fed would have raised interest rates during a recovery to pre-empt rising inflation, now the central bank is prepared to let inflation run higher, averaging 2.0% over time.
This move signals that interest rates will remain low well into and after a global recovery. The Bank of Canada is currently reviewing its strategy, but it is largely expected to match the Fed’s approach.
The Months Ahead
The moves made by the central banks will have short and long-term implications for commercial real estate.
Lower interest rates could result in further cap rate compression for sectors with strong fundamentals, including multifamily and industrial.
Over the long run, hotter inflation could lift bond yields and result in a higher cost of debt. But the overall impact is expected to be net positive, as commercial real estate becomes an even more attractive inflation-hedge investment.