Economic Outlook: Hard or Soft Landing
- Keywords:
Are the Canadian and U.S. economies in for a hard or soft landing? That’s the question on everyone’s minds as both countries continue to try to bring core inflation under control.
Michael Gregory, BMO’s Deputy Chief Economist, offered his perspective on the current economic conditions that impact the Canadian and U.S. tech industries, including why the “last mile” for reducing inflation will be a bumpy ride, trends in the labor market, and recent legislation that will support significant tech investments in semiconductor manufacturing and clean energy.
You can watch Michael’s full presentation above, or listen to the Markets Plus podcast:
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and Spotify.
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Hello everyone and welcome to be most tech talk.
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I'm a merman, sir, and along with me
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is my colleague Oksana. Hello
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everyone, and together we have the pleasure of being your host.
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The subject of a tactile is 2024
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economic forecast and it'll be presented by
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Michael Gregory, EMOS Deputy
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eputy Chief Economist and head of US Economics.
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Michael is attending economist who has
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covered and worked in US and Canada.
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Without further ado, I'll pass it over to Michael for him to
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discuss the economic forecast. Over to you, Michael.
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Thank you, Mayor, and hello everyone. This is one of the
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biggest questions I get when I'm speaking to
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customers and in groups is whether or
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not we're going to get a hard or a soft landing we
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e all know what a hard landing is. It's a kin to
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o a recession where inflation falls quite sharply back
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to where it's supposed to be, maybe even a little bit lower it's supposed
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to be in a soft landing is a is a is a situation and
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where we get very low or maybe no growth or
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r inflation still comes down.
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But not as abruptly as it would say in A
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a recession scenario. So, and ideally, we'd
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like to be in that soft lining because it means that the economy doesn't have
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as much damage to it as it
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t otherwise would. Whether or not we get a hard or soft landing will largely depend
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n what the central banks decide to do with interest rates and
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nd in turn, what they do with interest rates will be largely determined
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that what happens to the path of disinflation, how much inflation falls in the
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months ahead, and how much more they feel they have to.
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Raise rates. So a good place to start here is where
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is inflation right now? Just a quick administrative note and all
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the charts I'm about to show you. I have information for both Canada and the
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United States and since most of you watching
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g today are situated in the US, I'm just going to focus my
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comments on the US side. I'll just point out where
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were some interesting sort of changes to that
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narrative exist for Canada. But on both sides of the board it's been the
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same story. Inflation peaked last summer and in the
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in the case of the US.
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We are above 9%, the highest we've seen in 40 years, Put
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that another perspective.
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Half the US population that would be
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the fastest who by the way are under 40, that would be the
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he fastest inflation rates they've ever experienced in their entire lifetimes
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s. Well, you know, part of that was because of the spike we had in commodity prices. We'll talk
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little bit why that happened, but those commodity prices have
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since fallen and it's kind of interesting that over the last couple months
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s or so we began to see maybe just the crude oil prices and petroleum
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prices broadly beginning to sort of a perk back up again
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which does suggest that maybe.
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This last mile back to 2% is going to be a bit of a
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bumpy ride the other side of the
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e inflation story is the fact that we had a situation where demand was
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very strong coming out of the pandemic and supply chains were constrained because
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of the pandemic and other factors and slowly but
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t surely we've dealt with global supply chains and for the most part they've
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improved. In fact, most are back to normal meanwhile all
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ll of that rate hikes that we've been living through have done its job to
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dampen demand a bit. So all of that is sort of.
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Getting in the right direction, but there's one little holdout in terms of the
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outlook for inflation and that is services inflation
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which continues to remain sticky because of wages and that
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t in turn is causing core inflation to be stubborn when you
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look at the underlying rates of inflation that they have
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e not fallen clearly as much as say headline inflation
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has fallen, when you kind of look at sort of the underlying inflation you've got
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t your core measures both for the piece, the price index
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for PC, but also the CPI. We're all familiar with that.
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The core, of course, excludes food and energy. The super core by
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y the way, is a new measure that the Fed has been following
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and what it does is it focuses on where the inflation problem is
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most acute. It simply looks at core services, strips out the
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housing side, which for technical reasons still has a little bit of inflation
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And that is the part of inflation that's mostly correlated
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with wages. So what they're looking at super core inflation
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is how much we're still seeing that pressure in the labor
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or market continuing to push up services.
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Prices and therefore continuing to push up overall
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inflation. So I'm going to go back to that original story we
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e were talking about global supply chains because they
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have improved quite markedly. This is a metric that's
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put together by the Federal Reserve Bank of New York and it kind of
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measures those pressures we are seeing in global supply change
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It measures things like backlogs of orders it
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t measures supplier delivery delays it
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it measures transportation costs and historically has done a really good job.
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Whenever we've had issues due to natural disasters
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or geopolitical issues, whenever we've had pressures in the global supply
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chain, but of course the pandemic was off the charts in terms
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of what it did to disrupting supply chains and slowly but
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surely we've been in sort of approving those particularly since
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ce that nasty outbreak of Omicron at the end of 2021
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and the beginning of 2022. And since then things have been improving, you know
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we had a little bit of a blip when Russia invaded Ukraine more
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n that later. And then subsequently things kind of slowed.
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Towards the end of last year as Chinas Onerous Covid
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id restrictions proved to be problematic not only for the Chinese economy, but
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for the global economy. But they eventually
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reopened and lo and behold, we now at least in the
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e global context, have the least amount of pressures and
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global supply chains that we've had in the 25 years the
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feds been constructing these data. So yes, there are still some issues
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It still takes way too long to get a vehicle delivered, but
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nevertheless, you know, global supply chains.
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Aren't the problem anymore and the same thing for the most
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t part with respect to commodity prices now I mentioned before about
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out the impact of Russia invading Ukraine back at the end of February
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y 2022. Well, even before then
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then commodity prices have peaked ads we were reopening the economy and
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nd there was slowly the rates of inflation were slowly beginning to slow but a
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a lot of key commodities had this a little bit of a blip
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at least a temporary one after that invasion. But
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invasion. But slowly but surely that too began to fade.
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And as you can see in across the board whether it's
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s energy, whether it's agriculture, whether it is industrial metals, all of
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them are for the most part in broad terms are undergoing sort
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of rates of deflation, prices are falling from the
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e very rapid increases we had earlier
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Of course crude oil prices now are beginning to drift back up again in the
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wake of the supply cuts that we've seen coming out of
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f Saudi Arabia, yes, even even Russia
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And so that and that is now beginning to filter.
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Through higher gasoline prices, which is one of the
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reasons why we're starting to see a headline
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inflation begin to drift back up again.
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Well, one of the reasons why we had that rapid fall
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off in a commodity prices even after
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the invasion, you know by the summer time
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and as we headed into September of 2020
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all of that worry we had kind of disappeared and
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d in fact the worry shifted. Recall that part of
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Europe, both Ukraine, Russia
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and Belarus are major global producers and
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exporters of key agricultural inputs he energy.
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Oil and natural gas, as well as some key metals. Therefore there was a
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big concern that the supply of global commodities
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would be threatened. It was more concerned would there be adequate supply but
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t that's kind of the year it was
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just in March that most central banks began to start
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t raising interest rates through the summer of 2022. They really began to
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pick up the pace of rate increases. Recall the Fed through through
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2022 raised interest rates 4 consecutive
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times by 75 basis points and all of a sudden.
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And the global commodity markets shouldn't shifted, but will there be
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you know from will there be adequate supply to will there
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be adequate demand because everyone knows you raise interest rates
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enough, you slow demand and then you begin to worry that
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t even though supply is constrained, do you have enough demand to absorb
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what supply there is and in fact you know the global growth
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th has slowed quite markedly Last year it was about almost
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half what it was in 2021 and it's slow further if we expected
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to slow further again this year.
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There's a couple things to mention in terms of the global
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outlook. China, we expect to grow only 5% this year only than that for
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most countries 5% is a pretty good number
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but clearly coming out, the lockdowns coming out
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of the onerous restrictions, China has this not
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t mustered the kind of momentum that many people thought they would
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have. In turn, the government is going through various stimulus measures to
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o try to ramp up growth and of course Russian
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sian growth remains quite lackluster. In fact, it was expected to be.
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Negative for this year, but they've managed to eke
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out some positive numbers for some reason all
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l of the commodities that no one else is buying other countries in the world, IE China and
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d India, seem to be buying it from them, keeping their
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economy afloat. But for the rest of the world, there are two key
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y reasons why growth has slowed. One of
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them, everybody has faced some degree of inflation except even for
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apan. Quite frankly, everybody has had some degree of inflation and
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And of course inflation is a drag on growth that erodes.
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Interesting Power inroads. Real spending. But
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the addition to that has been the policy response to higher inflation
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raising interest rates you apart from Japan
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m Japan which has yet to really move on tightening policy in a meaningful
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way and China which of course has been sort
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sort of cutting interest rates because of the weak growth most countries have raised
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interest rates quite considerably to try to deal with inflation then
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that of course has further weakened growth. Hence we have this pretty
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ty lackluster profile for global demand.
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Just help bring down inflation, at least on the commodity price
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front when you look at across the major central banks around
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d the world, they've all raised interest rates quite sharply
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Even today we had both Switzerland, UK, Norway
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and Sweden all announced policy decisions. Norway
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and Sweden raised their interest rates another 25 basis points in
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n the UK and Switzerland, they opted the whole path, just like the
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Fed did earlier this week, but as you
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can see here, the Fed.
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Has been at the top of the leaderboard in terms
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of how aggressive they've been raising rates and in fact
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that is caused the US dollar up until
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very recently or and I mean basically peaked
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last autumn, but it has remained quite firm we were looking
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g at record high levels and trade weighted terms for the US
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dollar as we headed towards the end of last year and then you
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ntually it's come off from those highs
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but still remains elevated historically.
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And that has been another linchpin to the whole
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inflation story globally because, you know, whereas in the United States
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and Canada and Europe and other countries, one of the reasons why they've
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all ended up with inflation problems apart from the supply issues
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we've all stimulated demand, the try and
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you know, and start the economy, which in fact then created a bit of an inflation
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problem. But for countries like Mexico or Brazil, they in fact didn't
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stimulate their economies, did very much during the pandemic days and then start the economy yet
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t they faced inflation too coming through the import.
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Channel as they're goods, they're reporting priced in US
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dollars, became more expensive in local currency terms and
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that forced them to raise rates to try to defend their
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r currency and therefore you ended up with a global
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inflation problem and a global response to it
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by raising interest rates.
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Now, as I said at the outset, one of the key reasons
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why we have a bit of a this a stubborn
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inflation problem is because of
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f wages, and that is feeding through mostly in the
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services sector, which are, and that's the part
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of the economy where wages tend to have the greatest influence in
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n terms of cost structures. And that, of course, is then feeding
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n through higher prices generally in the economy. Now it is
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the case that you look at the major wage measures, they've all kind of eased back
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a little bit.
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From the peaks we had, but if you were to draw a
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traight lines going across from where we are right now, they still
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are rather elevated historically we are still running with
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h wage inflation rates that are running around that
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4% range and not coincidentally
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y quite frankly that is where core inflation, it's super core
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inflation are running around that 4% range. So we
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still have some more work to do, although headline inflation seems to
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be performing quite well, those underlying themes still
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remain quite strong.
00:13:13.700 --> 00:13:16.980
And the Fed is hoping that the
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tightening they've done, the Bank of Canada is hoping that the tightening they've done is
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enough to continue that
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process of disinflation, weakening of the labor
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market, bringing down a wage inflation and
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then also eventually just broader inflation throughout the
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e economy. But one of the reasons why wages remain sticky
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is very much like we had inflation first place in the broad economy because
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you know, supply has been constrained.
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And demand has remained kind of strong. So this is imbalance between the
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demand and supply and it's more than just say the unemployment rate in
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n the US, the unemployment rate sits at the 3.8
00:13:54.880 --> 00:13:57.960
that's up from the lows we had 3.4% but
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that's still well below the kind of historic norms that
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we've had for the unemployment rate. But when you
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you look directly at what's been happening with demand and supply since
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that, before the pandemic is that we've had a sort
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f big run up in the demand for labor as the economy.
00:14:14.600 --> 00:14:18.170
Has reopened and yet supply has been slow to
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respond and particularly talking about in the US and
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it's really that gap that the Fed really points to a lot
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of excess demand and trying to bring balance into that market now the
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e key thing about demand why it has remained so strong.
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The other two components of labor demand, One is actual payrolls
00:14:36.060 --> 00:14:40.030
how many people you've hired. The second one are job openings. How
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many people you would like to hire, and the sum of those two
00:14:43.380 --> 00:14:46.740
is what labor demand is and as and in
00:14:46.740 --> 00:14:50.020
fact that demand only peaked about three months ago. So all
00:14:50.020 --> 00:14:53.580
of the rebalancing so far has been on the
00:14:53.580 --> 00:14:56.840
supply side as that has slowly been creeping higher
00:14:56.840 --> 00:15:00.290
now fortunately and this is why the Fed is particularly encouraged now is
00:15:00.290 --> 00:15:02.250
now is the fact for the last three months we've had.
00:15:02.460 --> 00:15:05.480
Actual labor demand falling relative to its
00:15:05.480 --> 00:15:08.970
pre pandemic level as supplies continue to increase
00:15:08.970 --> 00:15:12.060
So that gap continues to narrow and this is really
00:15:12.060 --> 00:15:15.790
what the Fed is hoping for, that it can bring balance
00:15:15.790 --> 00:15:19.460
in the labor market without creating a lot of layoffs, in other words
00:15:19.460 --> 00:15:22.570
it's a lot easier to eliminate a job opening than it
00:15:22.570 --> 00:15:26.360
is to fire somebody and so
00:15:26.360 --> 00:15:30.320
o far that does seem to be the case. We're still hiring net hiring people, but it's those
00:15:30.320 --> 00:15:32.490
ob openings are coming down and those job openings are important.
00:15:32.820 --> 00:15:36.520
They themselves are what are causing that
00:15:36.520 --> 00:15:39.670
extra demand for labor and then bidding up
00:15:39.670 --> 00:15:44.230
wages, A different dynamic happening in Canada, as you can see where supply has
00:15:44.230 --> 00:15:48.180
really caught off quite quickly where demand is presumably that's going to lead to
00:15:48.180 --> 00:15:51.240
o even more restrained wage growth in the
00:15:51.240 --> 00:15:54.930
he future. The narrative there is the fact that
00:15:54.930 --> 00:15:58.940
the Canadian government has opened up literally the floodgates with
00:15:58.940 --> 00:16:02.160
respect to immigration, both temporary
00:16:02.160 --> 00:16:03.110
and permanent immigration.
00:16:03.200 --> 00:16:06.480
In Canada, is currently undergoing as fast
00:16:06.480 --> 00:16:09.880
as population growth year on year since the late 19
00:16:09.880 --> 00:16:13.160
0s. So people are coming here, they're and they're adding
00:16:13.160 --> 00:16:16.510
to the labor force and they're also finding jobs. So that's a good thing
00:16:16.510 --> 00:16:19.840
bit of a growing pains because it's a bit of an issue with
00:16:19.840 --> 00:16:23.310
housing, where you gonna house all these folks? But hopefully
00:16:23.310 --> 00:16:26.520
we'll be dealing with that in the months and quarters ahead.
00:16:28.340 --> 00:16:31.610
So apart from a still very sturdy labor
00:16:31.610 --> 00:16:34.670
market and not a lot of labs, which by the way is supported for
00:16:34.670 --> 00:16:37.770
the economy, another support for demand is the
00:16:37.770 --> 00:16:42.800
fact that we still have some pent up demand unfolding particularly on
00:16:42.800 --> 00:16:46.020
the services side where you look at where the growth
00:16:46.020 --> 00:16:49.460
has been in real spending on services relative to the trend in
00:16:49.460 --> 00:16:53.760
in place before the pandemic. We still haven't really caught up yet. Yes, it's true
00:16:53.760 --> 00:16:56.770
spending on goods, real spending on goods has
00:16:56.770 --> 00:16:58.410
s gone far exceeding what it was.
00:16:58.520 --> 00:17:01.560
A relative to its trend
00:17:01.560 --> 00:17:05.290
and in fact, believe it or not, there was that one period in early 20
00:17:05.290 --> 00:17:08.530
021 in the wake of the American Rescue Plan Act in the third
00:17:08.530 --> 00:17:11.790
round of economic impact payments. When that demand
00:17:11.790 --> 00:17:15.150
d surged to a point where it was literally more than 20
00:17:15.150 --> 00:17:18.460
above where it was the year before
00:17:18.460 --> 00:17:21.520
And when you think about 20% growth in real
00:17:21.520 --> 00:17:21.780
pending means.
00:17:22.800 --> 00:17:25.910
A decent year for real
00:17:25.910 --> 00:17:29.120
consumer spending growth, particularly on the good side is
00:17:29.120 --> 00:17:32.500
around 3%. So basically you squeeze 6
00:17:32.500 --> 00:17:35.920
ix to seven years of decent growth in real consumer spending
00:17:35.920 --> 00:17:39.360
g into one year. Well, needless to say when you're the largest economy on the face
00:17:39.360 --> 00:17:42.950
e of the planet, that kind of ripple effect of extra demand
00:17:42.950 --> 00:17:47.280
not only causes pressures and domestic supply chains, it causes
00:17:47.280 --> 00:17:50.890
pressures in global supply chains. Now it's interesting
00:17:50.890 --> 00:17:52.750
in Canada both that the.
00:17:53.130 --> 00:17:56.380
Spending on goods and services has both
00:17:56.380 --> 00:17:59.730
fallen below their underlying trend race
00:17:59.730 --> 00:18:03.170
particularly since interest rates began rising in the early part of 2022
00:18:03.170 --> 00:18:06.860
And the story there is the fact, unlike US households
00:18:06.860 --> 00:18:07.590
s, which have very.
00:18:09.140 --> 00:18:12.780
Yeah, I'm stable debt to income ratios
00:18:12.780 --> 00:18:15.790
and far below the kind of onerous levels we
00:18:15.790 --> 00:18:18.880
had during the great Recession and global financial crisis Canadian
00:18:18.880 --> 00:18:22.460
n households now have record levels of household
00:18:22.460 --> 00:18:25.840
debt, so they become much more sensitive to interest rates
00:18:25.840 --> 00:18:29.040
you know, pull back on their spending accordingly as interest rates have
00:18:29.040 --> 00:18:29.330
00:18:30.420 --> 00:18:33.540
Yet a third support for the economy comes
00:18:33.540 --> 00:18:37.960
from excess savings. Now we governments
00:18:37.960 --> 00:18:41.880
provided a lot of support to households on both sides of the border, but particularly in
00:18:41.880 --> 00:18:45.210
the US, people couldn't spend as much money they want to spend as
00:18:45.210 --> 00:18:48.630
as much money. They pull back. But yet most Americans actually work
00:18:48.630 --> 00:18:51.790
during the pandemic and as a result, and not spending as much they
00:18:51.790 --> 00:18:54.890
y amassed a lot of excess settings. By the way, these are savings above
00:18:54.890 --> 00:18:58.270
nd beyond the amounts they normally would saving in their 401K and 5:20
00:18:58.270 --> 00:19:01.330
nines, wherever the case may be. And if you look at sort of.
00:19:01.400 --> 00:19:04.590
As a norm, what the average savings rate was
00:19:04.590 --> 00:19:08.030
before the pandemic? Roughly around 7 1/2% by the end, near
00:19:08.030 --> 00:19:11.040
the end of 2021, US households are the mass of two point
00:19:11.040 --> 00:19:14.200
llion and since then the savings rate has
00:19:14.200 --> 00:19:17.280
fallen below where it was before the pandemic and as a result
00:19:17.280 --> 00:19:20.950
they pulled down their excess savings by about half now
00:19:20.950 --> 00:19:24.300
ow there is some controversy out there, some debate about how much excess
00:19:24.300 --> 00:19:27.630
savings remains, and it largely has to do a what
00:19:27.630 --> 00:19:30.900
truly is the rate of excess savings or the rate of savings
00:19:30.900 --> 00:19:32.400
s norm that we should have?
00:19:32.500 --> 00:19:35.780
We've used the average of the five years before
00:19:35.780 --> 00:19:39.330
the pandemic, but it is the case that during times
00:19:39.330 --> 00:19:42.420
of economic uncertainty, which the pandemic and then worry
00:19:42.420 --> 00:19:46.330
about, recession clearly indicates we are in, the savings rate does
00:19:46.330 --> 00:19:50.050
tend to rise and also the savings rate is
00:19:50.050 --> 00:19:53.100
positively correlated with inflation, which of course we've been living
00:19:53.100 --> 00:19:56.410
g with. So if there is a chance that the numerator or the norm we should be using
00:19:56.410 --> 00:19:59.620
should be higher. So I mean you can
00:19:59.620 --> 00:20:02.650
be arbitrary here, but we did some experiment and if we
00:20:02.650 --> 00:20:03.100
use that savings.
00:20:03.180 --> 00:20:06.820
Closer to around 9 1/2%, which is pretty
00:20:06.820 --> 00:20:10.370
high then all of those excess savings actually quite
00:20:10.370 --> 00:20:13.580
te disappear. So we do think given what we're seeing the patterns of spending
00:20:13.580 --> 00:20:17.140
articularly with higher income households which by the way most
00:20:17.140 --> 00:20:20.350
of the excess savings will be skewed towards we do
00:20:20.350 --> 00:20:23.860
e do believe that there still is a positive contribution coming from excess savings
00:20:23.860 --> 00:20:27.520
n Canada. You know if you were say double that savings
00:20:27.520 --> 00:20:30.730
rate, you probably would cut that was excess savings in half
00:20:30.730 --> 00:20:33.760
But again on both sides of the border, we do think that's a positive.
00:20:33.830 --> 00:20:37.100
Contribution and while there's been fiscal support
00:20:37.100 --> 00:20:41.030
again as a fourth factor for the economy on both sides of the border in
00:20:41.030 --> 00:20:44.160
n the US it's been particularly pronounced in
00:20:44.160 --> 00:20:47.460
support for industrial policy through three
00:20:47.460 --> 00:20:49.980
key measures, the Infrastructure Investment and JOBS Act.
00:20:50.690 --> 00:20:54.260
The CHIPS and Science Act and of course the inflation reduction at which was
00:20:54.260 --> 00:20:57.600
as a pretty stupid name for a bill, but it did provide a lot
00:20:57.600 --> 00:21:01.690
f support for investment in energy, clean energy
00:21:01.690 --> 00:21:05.040
y and also climate change. And between these three bills by
00:21:05.040 --> 00:21:08.250
by the way, the first two were passing the bipartisan fashion. You're looking
00:21:08.250 --> 00:21:11.300
at more than $2 trillion of fiscal support
00:21:11.300 --> 00:21:14.620
or the economy now, the administration on and
00:21:14.620 --> 00:21:17.750
it's a great little website because it shows you every
00:21:17.750 --> 00:21:20.890
very announced project by state which is helpful and.
00:21:20.990 --> 00:21:24.110
And their tally says that so far these three
00:21:24.110 --> 00:21:27.230
bills are contributed to net new announcements of
00:21:27.230 --> 00:21:30.360
investment over $800 billion. So presumably
00:21:30.360 --> 00:21:34.110
to be a little bit more support for that coming and they used to say it's in
00:21:34.110 --> 00:21:37.480
n technology and construction, we are going to see this happen
00:21:37.480 --> 00:21:40.500
the most. So you're looking at
00:21:40.500 --> 00:21:43.550
several factors that are fueling the resiliency that people are talking about
00:21:43.550 --> 00:21:46.630
in the economy. Again, it is this
00:21:46.630 --> 00:21:50.030
fiscal support, it is excess savings, it is pent up demand and of course
00:21:50.030 --> 00:21:51.850
e it is still sturdy labor markets.
00:21:51.970 --> 00:21:55.580
As long as you have job growth, you are going to get consumers
00:21:55.580 --> 00:21:58.590
spending money and being confident that you
00:21:58.590 --> 00:22:01.930
y that they that they can, they can continue to
00:22:01.930 --> 00:22:05.160
spend going forward. But we do think that we are going
00:22:05.160 --> 00:22:08.650
to see some building headwinds and one of those of course is what the
00:22:08.650 --> 00:22:12.020
Fed's been doing now. Yesterday we had the Feds policy
00:22:12.020 --> 00:22:15.380
announcement, they basically kept rates
00:22:15.380 --> 00:22:18.840
constant. They still aren't indicating in their own projections that they plan
00:22:18.840 --> 00:22:22.650
on raising interest rates one more time this year. Our own view is we don't
00:22:22.650 --> 00:22:23.580
think they will.
00:22:23.760 --> 00:22:26.980
And they've indicated compared to
00:22:26.980 --> 00:22:30.140
where they were before. So they don't expect to be cutting interest rates
00:22:30.140 --> 00:22:33.230
as much next year as they said
00:22:33.230 --> 00:22:36.510
initially. Now we thought that was going to be the case anyway they had a
00:22:36.510 --> 00:22:39.820
100 basis points of rate cuts next year we had factored
00:22:39.820 --> 00:22:43.010
d in 75 basis points, but it looks like they they've shifted down to
00:22:43.010 --> 00:22:46.240
only 50 now and quite frankly
00:22:46.240 --> 00:22:49.320
we may shift down it as well because the
00:22:49.320 --> 00:22:52.540
story here now is not so much how high
00:22:52.540 --> 00:22:54.200
rates yet, it's how high do they.
00:22:54.270 --> 00:22:57.510
Remain at those levels how you
00:22:57.510 --> 00:23:00.570
it's a case of what people are referring to as higher
00:23:00.570 --> 00:23:03.700
for longer and in fact it's that worry about higher for longer
00:23:03.700 --> 00:23:06.960
that's been really behind the kind of the sell off we've seen
00:23:06.960 --> 00:23:10.350
in the bond market which of course contributing will you add to
00:23:10.350 --> 00:23:13.440
the fact that add to the fact the Fed continues to shrink its
00:23:13.440 --> 00:23:16.800
balance sheet quantitative tightening allowing it you
00:23:16.800 --> 00:23:20.900
now not reinvesting its proceeds from maturing treasuries and MBS that
00:23:20.900 --> 00:23:24.210
too is adding to the upward pressure on long term interest rates which is why we have
00:23:24.210 --> 00:23:24.910
e have mortgage rates.
00:23:25.060 --> 00:23:28.860
Yeah, at their highest level in several decades
00:23:28.860 --> 00:23:32.770
And then on top of all this pressure coming from interest rates this spring
00:23:32.770 --> 00:23:36.770
we saw some stresses emerge in the regional banking
00:23:36.770 --> 00:23:40.560
segment. And let's put it this the regional and smaller banks account for
00:23:40.560 --> 00:23:43.890
r about a third, 30% to about 1/3 of credit to the US
00:23:43.890 --> 00:23:47.340
economy. And so that that's
00:23:47.340 --> 00:23:50.420
a third that's somewhat more compromise or constrained
00:23:50.420 --> 00:23:53.900
than would otherwise be the case. But on top of that, for the commercial real
00:23:53.900 --> 00:23:55.210
estate sector specifically.
00:23:55.470 --> 00:23:58.580
Regional small banks provide about 2/3 of
00:23:58.580 --> 00:24:02.490
the credit, so and that's the sector that's already
00:24:02.490 --> 00:24:02.590
been being.
00:24:04.140 --> 00:24:07.400
A little more challenged by the whole work from home
00:24:07.400 --> 00:24:09.590
phenomena and lower vacancy rates.
00:24:10.290 --> 00:24:13.380
So now we're going to add up all we know. What all these
00:24:13.380 --> 00:24:16.860
factors are resiliency are. Now we're going to take a look at that list
00:24:16.860 --> 00:24:20.120
of the factors that are offsetting that we we've got all those rate hikes
00:24:20.120 --> 00:24:23.450
and by the way it takes time for rate hikes to work their way through
00:24:23.450 --> 00:24:26.940
the economy and they are still working their way through the economy. We're not quite sure
00:24:26.940 --> 00:24:30.320
exactly what the net effect will be. There's uncertainty also we've
00:24:30.320 --> 00:24:33.520
e got continued quantitative tightening. We've got the stress in the
00:24:33.520 --> 00:24:37.030
banking system in the real estate sector as well couple of other
00:24:37.030 --> 00:24:40.340
special factors. We have student loan payments resuming
00:24:40.340 --> 00:24:40.640
ng next month.
00:24:40.720 --> 00:24:43.900
Which is gonna take a lot of consumer spending out of the economy we've
00:24:43.900 --> 00:24:47.300
e got a UAW strike which is threatening
00:24:47.300 --> 00:24:50.740
g to widen to more than just a handful of
00:24:50.740 --> 00:24:54.660
assembly plants. And finally, potentially come October 1st, we
00:24:54.660 --> 00:24:57.850
may have a government shutdown, which of course will weigh more on
00:24:57.850 --> 00:25:01.230
the economy. So all of these factors I think are going to
00:25:01.230 --> 00:25:04.530
offset and basically grind growth to a halt we aren't looking for
00:25:04.530 --> 00:25:07.540
a session, but we think growth will slow basically
00:25:07.540 --> 00:25:10.960
to about nothing in the early part of next year and then rebound
00:25:10.960 --> 00:25:11.040
und again that.
00:25:11.110 --> 00:25:14.280
This is a soft landing. We think we'll get it. Canada is going
00:25:14.280 --> 00:25:17.550
to underperform again because of the impact of record high levels of
00:25:17.550 --> 00:25:21.040
debt and finally, you know ultimately when you get this weakness
00:25:21.040 --> 00:25:24.440
s in the growth is going to allow the unemployment rate to drift up just a little bit
00:25:24.440 --> 00:25:28.120
and we do think that is going to help contribute
00:25:28.120 --> 00:25:31.680
to even lower or slower wage gains which of course
00:25:31.680 --> 00:25:34.780
e will help the process of disinflation we think by the
00:25:34.780 --> 00:25:38.370
he end of next year we will get inflation running
00:25:38.370 --> 00:25:41.620
n the low 2% range and heading even lower and we
00:25:41.620 --> 00:25:43.290
lower and we do think come 2025.
00:25:43.360 --> 00:25:45.500
The Fed may be more.
00:25:46.170 --> 00:25:49.700
Willing to start cutting rates at a faster pace to get
00:25:49.700 --> 00:25:53.750
him back to normal. And normal folks ain't zero where they
00:25:53.750 --> 00:25:56.910
were before. Normal is about 2 1/2 percent
00:25:56.910 --> 00:26:00.410
ht, so that is unwrap things up now and I want to thank you very
00:26:00.410 --> 00:26:03.650
much for your attention and I will turn things back to
00:26:03.650 --> 00:26:05.380
ack to my colleague Oksana.
00:26:06.990 --> 00:26:10.160
Amazing analysis, Michael. Thank you
00:26:10.160 --> 00:26:13.170
and we look forward to do this
00:26:13.170 --> 00:26:16.780
again hopefully in the next few months we decided
00:26:16.780 --> 00:26:20.040
d to keep this broadcast
00:26:20.040 --> 00:26:23.480
short, however, if you have any questions
00:26:23.480 --> 00:26:27.410
on today's materials
00:26:27.410 --> 00:26:32.000
or if you have any suggestions as to the future events, I
00:26:32.000 --> 00:26:35.670
invite you to please get in touch with your bank of
00:26:35.670 --> 00:26:37.320
k of Montreal relationship contact and.
00:26:37.390 --> 00:26:41.150
We'll make sure we'll respond to
00:26:41.150 --> 00:26:44.560
you. Have the rest of the day, everyone
00:26:44.560 --> 00:26:45.120
Bye, bye.
Devon Dayton
Head, Technology Banking, Growth & Innovation
Devon Dayton has over 15 years of experience in Corporate & Commercial banking and is currently Head, Technology Banking, Growth & Innocation at BMO. …(..)
View Full Profile >Are the Canadian and U.S. economies in for a hard or soft landing? That’s the question on everyone’s minds as both countries continue to try to bring core inflation under control.
Michael Gregory, BMO’s Deputy Chief Economist, offered his perspective on the current economic conditions that impact the Canadian and U.S. tech industries, including why the “last mile” for reducing inflation will be a bumpy ride, trends in the labor market, and recent legislation that will support significant tech investments in semiconductor manufacturing and clean energy.
You can watch Michael’s full presentation above, or listen to the Markets Plus podcast:
Markets Plus is live on all major channels including Apple and Spotify.
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