Everyone is hoping for a soft landing, with the economy slowing down just enough to rein in inflation without falling into a severe slowdown or recession. But as the Bank of Canada and the Federal Reserve started their respective campaigns from behind the curve, the priority of the day is to throttle inflation back toward their target range of 2%. In other words, the more likely forecast is for more uncertainty and difficulty as inflation works its way through the markets.
“Ultimately, I think they’re willing to accept softness and growth to achieve that end, which makes the hard landing scenario with recessions, far more likely,” Aul says. “The question is just really, how deep and how much will it have to affect the labour market, which is the one part of the economy that’s showing the most strength.”
In an environment of rising rates, housing – which represents an estimated 10% of the total economy, Aul says – is likely to show the most sensitivity. Canadians also hold much of their net assets in their residential properties, which means a weakening of housing prices can trigger a negative wealth effect that could hamstring consumption.
Based on the leading indicators SLGI Asset Management Inc. is monitoring, the housing market is well on its way to weakening. While there have yet to be signs of considerable weakness in manufacturing, it’s also a fairly rate-sensitive component of the economy; if that domino falls – which Aul says is likely at this point – it’s liable to bleed into corporate profits and earnings.
“Job cuts typically come later in the recessionary phase of a normal economic cycle,” Aul says. “Since we’re starting with such a tight labour market today, we can expect even more of a lag in this case.
