On Wednesday, the Bank of Canada is expected to raise its overnight interest rate again to try to contain the rising cost of living — a.k.a. inflation.
The logic is that prices are increasing because demand for goods and services is exceeding supply. So a hike in interest rates makes money more expensive and then people will borrow less in order to buy things and thereby reduce demand. A spillover impact, that the government is not opposed to, is a drop in real estate prices.
The tricky part for the Bank of Canada — and other banking agencies around the world — is to get the rate hikes right, keeping in mind it is a very blunt economic tool.
Go too slow, and inflation gets out of hand. Go too fast and the sudden drop in demand leads to a recession.
Even Jeff Bezos — one of the world’s richest men — is warning people right now to “batten down the hatches.”
Here are five economic indicators to keep an eye on in B.C. over the next few months.
INTEREST RATES
According to Coast Capital Savings Credit Union, central banks around the world have been raising interest rates over the past six months — though the rate hikes have been faster and more frequent in the U.S. and Canada.
In September, the Bank of Canada raised its overnight interest rate for the fifth time since March (growing from 0.5 per cent to 3.25 per cent.)
The September hike was 0.75 per cent, with economists predicting Wednesday’s hike to also be 0.75 per cent.
Each year, about 20 per cent of mortgages mature. This means that over the next year tens of thousand of B.C. homeowners will need to remortgage at rates likely to be higher than when they signed on. So monthly payments will rise, and if the homeowner is on a fixed income then something has to give.
Coast Capital predicts interest rates will keep rising over the next 16 months. The Bank of Canada’s statements can be seen here. Following Wednesday’s interest rate announcement the Bank of Canada’s next set date to adjust interest rates is Dec. 7.
STATS B.C. DATA
Statistics B.C. is continuously publishing data related to B.C.’s economic strength, including gross domestic product, inflation and housing starts.
According to Chartered Professional Accountants Canada a recession is defined as two three month periods of a decline in economic activity, and the association believes Canada could slip into a recession in 2023 (however this will not come with high unemployment that usually accompanies a recession.)
The C.D. Howe Institute’s Business Cycle Council meets when economic conditions dictate the possibility Canada is going into a recession. It has issued nine reports since October 2012. The council’s most recent report was issued in August 2021 during the grip of COVID-19 when Canada’s economy had dipped into a short recession. In that report, the council declared the recession over.
The council is expected to meet shortly in order to determine whether Canada is slipping back into recession and that is a report to keep an eye out for.
UBC economics professor Giovanni Gallipoli said that determining whether an economy is in recession entails more than simply looking at GDP growth over consecutive quarters.
“Using information about employment and unemployment is a good way to refine that information,” he said. “In addition one could use info about asset prices and the evolution of financial and non financial wealth/debt of households.”
Gallipoli said Canadian economists “fully expect some recession in the new year.”
RATE OF INFLATION
B.C. released its latest inflation figures on Oct. 19 showing it was 7.7 per cent higher than in September 2021, and 0.5 per cent higher than in Aug. 2022. Excluding the cost of gas and food, inflation was at 6.5 per cent.
The cost of food has gone up almost 10 per cent in B.C. since this time last year — with store-bought food prices rising higher than meals purchased from restaurants. The price of coffee and tea jumped 20 per cent.
Canada’s unadjusted inflation rate in September was 6.9 per cent, so B.C.’s inflation position is slightly worse.
Tiff Macklen, governor of the Bank of Canada, gave a speech to the Halifax Chamber of Commerce on Oct. 6 dubbed “What’s happening to inflation and why it matters.”
He said that the rate of inflation is considered manageable at between two and three per cent – that is where it was before the COVID-19 pandemic.
In the first six months of 2020, Canada experienced a few months with no inflation, but it then started to surge. The rate of inflation in July 2021 was 3.5 per cent, by mid 2021 it was 4.5 per cent.
Inflation peaked in Canada at 8.1 per cent in June and has declined since.
Macklen said that the nature of inflation has changed over the past year, shifting from global to domestic and from goods to services.
“We need to slow spending in the economy so supply can catch up with demand,” he said.
THE PRICE OF GAS
This is something that is mostly out of Canada’s control but plays a huge role in inflation. For example, from September 2021 to September 2022 the price of energy for consumers in B.C. rose 40 per cent.
So the cost of operating a car rises, while the cost of transportation (road, rail and air) also jumps and this gets passed on to the buyers of goods.
When the COVID-19 pandemic hit B.C. in March of 2020 the economy entered a short and sharp recession and suddenly a litre of gas cost 88 cents. As central banks lowered the costs of money, people started spending a lot more, real estate soared and sure enough the price of gas did also — peaking two weeks ago at $2.39 a litre in Vancouver.
Gas prices are now falling and this could be an indicator of lower demand.
THE VALUE AND SALES OF REAL ESTATE
Each month the Real Estate Board of Greater Vancouver releases a market report. The September report showed sales were down almost half compared to the same time last year — and 36 per cent lower than the 10-year September average. The number of homes for sale was also down almost 20 per cent over the same period in 2021.
Prices are also starting to fall. The average home price (across all categories) was down 8.5 per cent over the past six months.
UBC real estate expert Tsur Somerville said that local real estate board’s monthly reports are a good resource in order to see changes in volumes and prices, but they do not reflect how long properties are sitting on the market. He said the B.C. Real Estate Association monthly market reports are also very informative.
He said that his concern with reduced gross domestic product in B.C. would be if it comes with low employment growth.
“Recession undermines the real estate market,” Somerville said.
