Intelligent Investment

When Bad News Is Good News

Canada Monthly Mortgage Commentary

August 31, 2023 2 Minute Read

Nearly 18 months since the Bank of Canada started to hike its policy interest rate, tighter monetary policy appears to be showing more of the central bank’s desired effects on the Canadian economy. A recent series of economic indicators reveal a resilient economy that seems to be losing momentum. Following the stronger than expected result in the first quarter, overall GDP growth is expected to drop in Q2 2023 as preliminary estimates show the economy recorded a minor contraction in June. The labour market, which has been resilient so far, has seen the unemployment rate rise for a third consecutive month in July. A similar story is playing out in the U.S., but with the added concern of weakening credit quality among some U.S. banks as rating agencies start to downgrade lenders. Elsewhere in the world, the economic slowdown in China presents another ripple effect.

While such economic headwinds would typically translate into growing levels of concern, instead, these recent developments have been interpreted as good news for the outlook on interest rates. Slowing economic momentum is exactly what central banks have been trying to engineer and last month both the Bank of Canada and Federal Reserve adopted a data dependent approach for interest rates. Given this latest run of softer economic data, expectations are for the central banks to pause their interest rate hikes once again in September. In fact, market-implied odds largely suggest interest rates are expected to remain at current levels through to the middle of next year before beginning to drop.

While a slowing economy can create headwinds for the commercial real estate market in the form of reduced demand for space, current forecasts are for the slowdown to be short and shallow in nature. A “soft landing” remains the economist consensus for Canada, with some growth expected in 2023. Looking ahead, strong market fundamentals have Canada’s economy forecast to lead the G7 over the next five year period.

Economic Highlights

  • Headline inflation rose to 3.3% in July 2023 with mortgage interest costs as the largest contributor to overall inflation.
  • Employment fell by 6,400 jobs in July 2023 and the unemployment rate rose for the third consecutive month to 5.5%.
  • Retail sales rose by 0.1% in June 2023 with an advance estimate of a 0.4% increase in July.



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