Bank of Canada interest rate forecast July 2020

Finder surveyed 16 economists who all correctly predicted the Bank of Canada would hold the overnight rate at .25% on July 15, 2020.

Key findings

• Nearly two-thirds of economists believe the rate will hold until 2022 or 2023
• Above 62.5% of the panellists think Canada’s 2020 GDP will fall by 6-8%
• More than half of economists (roughly 54%) think the stock market is overvalued
• Over a quarter (27%) of panellists see Canada’s borders staying closed into 2021
• Economists believe Canadian housing will hold its value by end of year

Expert forecasts ahead of the July 15 decision

• Brett House
• Carl Gomez
• Moshe Lander
• Lars Osberg
• Tony Stillo
• Murshed Chowdhury
• Derek Holt

Brett House

Deputy Chief Economist, Scotiabank

Hold

“Travel between Canada and the US is likely to remain restricted until the US brings its COVID-19 first wave under control – and this now looks unlikely until the autumn.”

Carl Gomez

Professional Economist and Real Estate Strategist

Hold

“Pandemic-related shutdowns in various sectors have been substantial and are not likely to be recouped in the near term largely due to fundamental imbalances in several important areas of the Canadian economy.”

Moshe Lander

Professor, Concordia University

Hold

“The economy is opening up based on positive news regarding coronavirus infections, recoveries, etc., but the economy has done very little to prepare itself if/when a second wave returns in the fall. Those safeguards should be put in place now while there is time rather than in haste and haphazardly when it strikes to limit the economic damage.”

Lars Osberg

Professor of Economics, Dalhousie University

Hold

“Selective openings (of borders) will be politically irresistible.”

Tony Stillo

Director of Economics for Canada, Oxford Economics

Hold

“StatsCan’s latest GDP figures have GDP down 18.2% from February to April. With much of the economy beginning a phased reopening, StatsCan’s preliminary estimate suggests GDP rebounded 3% m/m in May. We expect an even stronger pick up in June due to further easing of lockdown restrictions, but it will likely be followed by slower growth with a return to pre-virus levels of GDP late next year.”

Murshed Chowdhury

Associate Professor, University of New Brunswick

Hold

“With the gradual reopening of the economy and maintaining the public health measures by most of the people, I am assuming that the ‘wave 2’ won’t be too hard on Canada. However, the damage to the Canadian economy also depends on what’s happening in the US. If the surge in COVID-19 cases continues in the US, we might get into further dampening effect on the economy.”

Derek Holt

Vice President & Head of Capital Markets Economics at Scotiabank

Hold

“The Canadian economy is expected to contract at a sharper rate this year than the US, its dominant trading partner, as Canada also grapples with more mature housing and consumer cycles, the sharper effect of the drop in oil prices and a generally more cautious approach to reopening.”

• Sebastien Lavoie
• Craig Alexander
• Sherry Cooper
• Angelo Melino
• Atif Kubursi
• Gregory Mason

Sebastien Lavoie

Chief Economist, Laurentian Bank Securities

Hold

“The pullback in real GDP this year in on track to be in the high single-digits. The strength of the recovery is the key, particularly in 2021, depending on the virus characteristics, macro and health policies, confidence effects and the net effect of creation and destruction.”

Craig Alexander

Chief Economist, Deloitte

Hold

“Reopening of the economy will be gradual in Canada. The US will have a more difficult time addressing the health risks, which is negative for the Canadian economy.”

Sherry Cooper

Chief Economist, Dominion Lending Centres

Hold

“Until there is reliable, rapid testing and/or a vaccine, the economy will continue to close its borders to non-essential foreigners and remain open only for goods transported in and out. The last few weeks have shown that numbers can bounce back even faster than the numbers went down and a second wave is a very real possibility in the fall. Little can be gained by admitting thousands, if not millions, of people into the country without the ability to test, quarantine and/or track them and the people they contact.”

Angelo Melino

Professor of Economics, University of Toronto

Hold

“It will depend on the pandemic, but we’ve seen a decline of about 18% (GDP) through April. The flash estimate is for May to see an increase of 3%. I expect June and July GDP to be even stronger as the lockdown restrictions are relaxed, followed by a more modest recovery after that.”

Atif Kubursi

President, Econometric Research

Hold

“The effects of this pandemic is proving to be more entrenched and is spawning more difficulties. There is now a new impact called “reallocation shock,” which means that the effects are irreversible and the negative effects are likely to escalate.”

Gregory Mason

Associate Professor at the University of Manitoba

Hold

“The severity of the second surge (of the virus), especially in the US, is key to Canada’s economic prospects.”

The July 15 decision

The Bank of Canada has made it clear it currently has no appetite for negative rates. Due to the bank’s consistent position that rates will stay at .25%, Finder’s panel of 16 economists also agrees the rate will hold on July 15.

Canada is experiencing an unprecedented recession as a result of the viral pandemic. So the real question right now is not whether the rate will change in the near-term, but how long the Bank of Canada will hold the rate at what is effectively zero. And most of the economists on our panel think it will hold for a very long time.

In fact, 81% of economists believe the rate will hold at .25% for longer than a year, compared to 87% in our June BoC report. However, the biggest difference this time around is that now roughly 63% of economists don’t see the rate moving until some point in 2022 or 2023, compared to only 40% in the last report of this kind.

The general sentiment is that we are in for a potentially long road to recovery and that there is still a lot of uncertainty about what this road will look like and what twists and turns we can expect along the way.

Atif Kubursi, president of Econometric Research, points out the economic shocks, like record-high unemployment or pandemic-induced behavioural changes, will have serious long-term consequences even after the public health crisis resolves.

The effects of this pandemic are proving to be more entrenched and it is spawning more difficulties. There is now a new impact called “reallocation shock,” which means that the effects are irreversible and the negative effects are likely to escalate.

Canada can luckily count itself as one of the countries that have (so far) managed to flatten the curve of its COVID-19 epidemic. However, the most immediate concern is that a second wave would severely limit our economic recovery. This fear is coupled with the knowledge that we aren’t immune to the economic impact resulting from a far less successful response to the pandemic on a global level.

Moshe Lander, professor at Concordia University, highlights how Canada’s economic recovery and the public health crisis will continue to be closely linked as we look beyond the summer and to full reopening.

“The economy is opening up based on positive news regarding coronavirus infections, recoveries, etc., but the economy has done very little to prepare itself for if/when a second wave returns in the fall. Those safeguards should be put in place now while there is time rather than in haste and haphazardly when it strikes to limit the economic damage.”

Economic growth

Canada’s economic shutdown has persisted for nearly four months so there is no doubt that Canada’s GDP for 2020 will naturally fall. In fact, the International Monetary Fund (IMF) recently shared its revised estimates for how far Canada’s GDP would fall in 2020. The IMF’s revised estimates are for Canada’s 2020 GDP to fall by 8.4%, which is 2.2% points lower than its April estimates.

We asked our panellists if the IMF has it right or if it is off the mark. Turns out, our panellists were, on average, a little more optimistic about Canada’s economy, with more than half of them (62.5%) seeing Canada’s GDP going down by 6-8% in 2020, slightly less of the drop the IMF is calling for.

Sebastien Lavoie, chief economist for Laurentian Bank, succinctly sums up how dependent Canada’s recovery is on public health outcomes.

The pullback in real GDP this year is on track to be in the high single-digits. The strength of the recovery is the key, particularly in 2021, depending on the virus characteristics, macro and health policies, confidence effects and the net effect of creation and destruction.

Angelo Melino, professor at the University of Toronto is in the optimistic majority. He believes Canada’s reopening is generally on track and most of the 2020 GDP dip will be due to the actual months where lockdown restrictions were in full effect.

“It will depend on the pandemic, but we’ve seen a decline of about 18% through April. The flash estimate is for May to see an increase of 3%. I expect June and July GDP to be even stronger as the lockdown restrictions are relaxed, followed by a more modest recovery after that.”

Tony Stillo, director of economics for Canada at Oxford Economics agrees with Melino and Lavoie that the brunt of the damage happened during the pandemic, and while he agrees with modest growth coming out of lockdown restrictions, he predicts “slower growth with a return to pre-virus levels of GDP late next year (2021).”

Derek Holt, vice president and head of capital markets at Scotiabank, is quick to point out the differences between Canada and our neighbours to the south.

“The Canadian economy is expected to contract at a sharper rate this year than the US, its dominant trading partner, as Canada also grapples with more mature housing and consumer cycles, the sharper effect of the drop in oil prices and a generally more cautious approach to reopening.”

And while Holt points out Canada may uniquely struggle, in part because we have prioritized public health over the economy to a greater extent than the US, others point to how our economy is still heavily dependent on what happens in the US

Craig Alexander, chief economist at Deloitte points out the “reopening of the economy will be gradual in Canada. The US will have a more difficult time addressing the health risks, which is negative for the Canadian economy.”

Outside of the majority, one-quarter (25%) of our panellists agree with the IMF’s prediction, stating they believe GDP will fall by 8-10%, while 12.5% believe it will fall more than 10%, much worse than the IMF’s prediction.

Gregory Mason, associate professor at the University of Manitoba, believes the IMF prediction is accurate and highlights that Canada’s GDP is particularly dependent on commodity sales like grains and oil and “will remain soft as China throws its weight around.”

Lars Osberg, professor at Dalhousie University, along with Lander, believes GDP will fall more than 10%, mainly due to a second wave of infections in the fall that could threaten Canada’s economic recovery.

Stock market valuation

While millions of Canadians have been struggling with unemployment, it also seems millions of others, particularly millennials who are lucky enough to still have job stability, have been taking the opportunity to invest their savings on the stock market.

While there were originally great opportunities to “buy the dip,” the stock market has now recovered most of its losses from the initial shocks in March leaving many experts wondering if the market is disconnected from what is actually happening in the economy, with its record-high unemployment and the risk of countless small businesses facing permanent closure.

We asked our panellists and more than half (about 54%) believed the stock market is currently overvalued, or worse, in a bubble-type scenario. Of that percentage, the majority (38.5%) say it is “likely” overvalued with the remaining 15.4% saying it is “very likely” overvalued. Nearly one-third (30.8%) take the opposite view and think it is “unlikely” to be overvalued. The remaining 15.4% are unsure.

Murshed Chowdhury, associate professor at the University of New Brunswick summarizes the current disconnect between the economic reality in Canada and high stock-market valuation.

“While the economic activity is at its historic low, what factors are keeping the stock market so high? As soon as the wage subsidy, emergency (relief) aid to the citizens, and other support programs by the government stop, the market would definitely adjust that bubble unless we get a vaccine and the economy goes back to full employment or more.”

Carl Gomez, chief economist and real estate strategist at C.G. Economic Partners explains, “There appears to be a significant disconnect between underlying potential earnings and current valuations. In short, the market appears to be overly optimistic about future growth.”

Kubursi agrees with Gomez, calling this optimism “unjustified” as it isn’t based on fundamentals. Alexander also sees the market as overly optimistic about recovery but he says, “I do not see it as a bubble.”

Sherry Cooper, chief economist for Dominion Lending Centres takes the opposite view and feels it is unlikely the market is overvalued.

“I think the stock market might be somewhat overvalued, but not irrationally. During the dot.com bubble, stocks with no earnings and little revenue were booming. This is not so today.”

Non-essential travel restrictions

The sentiment around border closures has changed quite drastically since the last Bank of Canada panel about six weeks ago. It’s no surprise that more of our panellists focused on the need for longer international border closures when the virus continues to take hold in new countries or ramp up again just south of us.

The fact is the US is our closest neighbour and the fate of the virus in their country will have strong impacts on both the Canadian economy and on the ability to reinstate non-essential travel in any meaningful way.

In the last BoC report in June, nearly three-quarters of Canadian economists believed Canada would open its international borders to non-essential travel by September. This time around about 60% believe it will be at least October until non-essential travel resumes in and out of Canada and more than a quarter (27%) believe it won’t be until 2021 when borders reopen.

Panellists who believed borders would open in the next two to three months mostly cited pressure from the US. Kubursi believes the EU’s decision to permit Canadian but not US visitors will put added pressure on Canada to be more accommodating.

“There will be strong pressures on Canada to relax these restrictions. The decision of Europe not to admit US visitors will play both ways putting more pressures on Canada to accommodate their neighbours to the South.”

Osberg also predicts a quicker timeline because “selective openings will be politically irresistible.”

Even for those who believe non-essential travel won’t resume for three to six months, the US handling of the pandemic is cited as the main reason for any delay. Brett House, deputy chief economist at Scotiabank thinks “travel between Canada and the US is likely to remain restricted until the US brings its COVID-19 first wave under control – and this now looks unlikely until the autumn.”

Stillo agrees, stating “Canada’s borders will likely remain closed until the pandemic is effectively contained in the US.”

Alexander sees the closures persisting into 2021, again, largely because he believes “the health risks in the US will persist and Canada will be slow to reopen the border.”

Holt mentions not just the US but Latin America as a new hot spot for the disease, highlighting how Canada may take a regional approach similar to the EU.

“Canada’s borders may be closed to nonessential travel to and from the US and LatAm longer than elsewhere so it partly depends upon the region.”

Lander also believes closures will persist until 2021 and summarizes the public health risks to Canada if they open too soon.

“Until there is reliable, rapid testing and/or a vaccine, the economy will continue to close its borders to non-essential foreigners and remain open only for goods transported in and out. The last few weeks have shown that numbers can bounce back even faster than the numbers went down and a second wave is a very real possibility in the fall. Little can be gained by admitting thousands, if not millions, of people into the country without the ability to test, quarantine and/or track them and the people they contact.”

Six-month economic outlook

We asked our panellists about their six-month economic outlook for wage growth, employment, underemployment, cost of living, household debt and housing affordability. In the time of COVID-19, it is unsurprising that our panellists are mostly negative or neutral about most of these indicators.

The most positive outlooks are reserved for employment, with 75% of our panellists viewing employment positively. Our panellists viewed “underemployment” mostly positively at 68.75%, illustrating most experts aren’t concerned about employees returning to work in the coming months.

In the last report, the panel mostly viewed cost of living as neutral, but this time around, it is evenly split at 37.5% for both neutral and negative. In January’s BoC, only 9% of our panellists saw housing affordability as positive; now 43.75% of panellists view housing affordability positively, down about 3 percentage points from the last BoC survey in June.

The panel was incredibly pessimistic in June about household debt and wage growth, with nearly three-quarters of them holding a negative view. That view has tempered somewhat now with just over half (56.25%) viewing it negatively.

Real estate outlook

Real-estate predictions for Canada have been all over the map since this pandemic began, with initially many experts fearing a housing collapse or at the very least losses in values similar to the last recession. Our panel is taking a more moderate view this time around in general and appears to think if there is a larger correction in the cards, it likely won’t be by the end of 2020.

Virtual work trend and real estate demand

Many big tech companies like Twitter, Shopify and OpenText told their Canadian employees early on in the lockdown that they could work from home indefinitely if they preferred to. This permissiveness to a more permanent “work from home” arrangement signals a potential societal shift post-pandemic toward more traditional office employees working from home. This societal change could have a serious impact on real estate values in large cities where people pay a premium to live closer to a downtown core and other cultural amenities.

We asked our panellists if they believed housing demand would increase in the suburbs and rural areas while decreasing in cities as a result of this trend. Just over one-third of them (36%) believe it will.

Lavoie is a believer that this trend will hold beyond the pandemic.

“40% of occupations are suitable with work from home. Surveys indicate a non-negligible share of employees want to telework after the pandemic. Both employers and employees save costs. Overall, the rapid adoption of teleworking implies a lower premium for downtown proximity and a willingness from households to pay more to have more square footage in the suburbs. The definition of urbanization is evolving.”

Only 21% don’t believe the current work from home trend will persist long enough or have enough pull to draw people away from wanting to live in big cities. House believes “even with increasingly flexible working arrangements, proximity to urban centres will continue to be important for a wide range of sectors.”

While Lander believes it is now time to re-imagine urban life for the better as cities have been deprioritized for too long.

“If cities want to maintain property tax revenues and other municipal taxes as a source of revenue, they need to encourage a complete redesign of how we use city centres and to create almost ‘self-contained’ urban space where we can work, live and play. If they move quickly, liberalise antiquated zoning laws and building code restrictions, the pandemic can be a game-changer in drawing people into urban centres rather than pushing them away as they have done for the last 60+ years.”

The high level of uncertainty was the most cited reason the remaining 43% were “unsure” whether this trend would persist.

Holt maintains a level of skepticism “toward forecasts about how a present shock will permanently alter behaviour as we’ve heard that before. Relative affordability, commute times, demand for living areas driven by incomes/wealth and broader forces like demographics and technology will probably remain the more dominant longer run drivers of where to buy.”

Hubert Marleau of Palos Capital says it is simply “too early to know” and Mason agrees we need more time to watch this trend.

For now, it remains to be seen whether Canada will see a statistically significant exodus from city life for the lower prices and more land to be had in suburbs or rural areas due to the flexibility afforded to many workers. This is something we will revisit in future reports.

Housing values to hold steady across Canada

Finder asked our panellists to assign a percentage value for any anticipated price increases or decreases in 10 of Canada’s major markets. We averaged out the responses and ranked them from most anticipated decreases in value to least.

From the last BoC report in June to this one, our panel has become much more moderate on any potential effects the pandemic will have on real estate by the end of 2020. While in our last BoC report, Canada’s largest cities were forecast to see more than 10% drops in value, in this report, Vancouver and Calgary were slated to see 4% drops, the highest estimates in all of Canada.

Edmonton and Toronto followed with an estimated 3% decrease each by year end, followed by Montreal, Quebec City and Hamilton at 2% and Ottawa at 1%. Winnipeg and Halifax were predicted to be flat at 0% average decreases in property value. So overall, this time around, there is a bit more of an optimistic outlook for real estate values across Canada.