Deloitte Canada expects economic growth to pick up next year as it forecasts the Bank of Canada to cut its key interest rate below three per cent by mid-2025.
In the company鈥檚 fall economic outlook released Thursday, it forecasts the central bank鈥檚 interest rate will fall to 3.75 per cent by the end of this year and a neutral rate of 2.75 per cent by mid next year.
Meanwhile, it expects the economy to grow moderately as softer labour market conditions persist, especially as many homeowners have yet to face higher rates when they refinance their loans.
鈥淲e do think that we're going to be in for a decent year next year,鈥� said Dawn Desjardins, chief economist at Deloitte Canada.
It appears Canada will successfully skirt a recession despite the impact of higher borrowing costs on the economy, said Desjardins.
鈥淚t鈥檚 hard to argue that the economy is just skating through this period of higher interest rates. But having said that, the overall numbers themselves continue to show the economy is expanding,鈥� she said.
鈥淵es, the labour market has softened, but I don鈥檛 think we鈥檙e in any kind of crisis in the labour market at this time.鈥�
The Bank of Canada has cut its benchmark rate three times so far this year as inflation has eased, and signalled more cuts are coming.
Inflation in Canada hit the central bank鈥檚 two per cent target in August, falling from 2.5 in July to reach its lowest level since February 2021.
However, higher rates have weighed on economic growth and the labour market.
Deloitte鈥檚 predicted 2.75 per cent neutral rate 鈥� the rate at which the central bank鈥檚 monetary policy is neither stimulating nor holding back the economy 鈥� is higher than where interest rates were hovering in the years before the COVID-19 pandemic.
Desjardins said the forecast aligns with the central bank鈥檚 own projections. There are a number of factors on the horizon that may pose increased risk to inflation, she said, such as climate change.
鈥淭hese are costly things that we鈥檙e going to have to deal with and will be embedded in prices. So that鈥檚 sort of how we get to this 2.75 (per cent).鈥�
The report says the global backdrop continues to be challenging, with no clear ends to the wars in Ukraine and the Middle East, growing trade frictions and an uncertain impact of the U.S. election on policy.
Consumers and businesses alike are still facing a lot of uncertainty, said Desjardins.
The heightened uncertainty, including from the looming U.S. election in November, makes businesses reticent to invest, she said, but added more clarity should come in the new year.
鈥淲e鈥檒l see inflation coming down and interest rates coming down. So those are two powerful factors that will support an improvement in confidence both from the consumer side as well as the business side as we go through next year,鈥� she said.
In its report, Deloitte said it鈥檚 still optimistic about Canada鈥檚 economy next year.
鈥淟ower rates will ease the burden on the highly indebted household sector sufficiently to support a pickup in spending and a housing market recovery,鈥� it said in the report. 鈥淎fter two years of subpar growth, we look for the economy to hit its stride in 2025.鈥�
Deloitte said despite the easing of overall inflation, shelter prices 鈥� especially rent 鈥� "remain too high for comfort." However, it also said interest rate cuts are expected to "rejuvenate construction activity," with home-building activity set to rise throughout 2025.
While rate cuts should help stimulate the housing market, Deloitte said it expects the recovery to be modest amid poor affordability.
Desjardins said without a significant boost to housing supply, the affordability issue is unlikely to subside.
鈥淲e know that Canada has a pretty significant supply deficit on the housing side,鈥� she said.
鈥淭he housing cannot be created overnight.鈥�
However, she also doesn鈥檛 see house prices significantly increasing.
鈥淚 think we鈥檙e going to see some easing up on demand from new Canadians as we move forward. So that might give a little bit of a relief,鈥� she said.
This report by The Canadian Press was first published Sept. 26, 2024.
Rosa Saba, The Canadian Press
