OG100 Quarterly Economic Commentary – Dec 2022


Stéfane Marion, Chief Economist & Strategist
NBC Economics & Strategy Group

National Bank is one of the six systemically important banks in Canada. National Bank provides integrated financial services to consumers, small and medium-sized enterprises (SMEs) and large corporations in its domestic market while also offering specialized services internationally. It operates in four business segments—Personal and Commercial, Wealth Management, Financial Markets, and U.S. Specialty Finance and International—with total assets of $404 billion as at October 31, 2022. Learn more at NBC.CA

2023: A more difficult outlook

After a late start, the global monetary policy tightening cycle is well underway, with an increasing number of central banks adopting a tighter approach in an effort to curb inflation. While this policy reversal offers the prospect of greater price stability in the future, the impact on the economy will be significant, especially since it comes at a time when growth has already slowed considerably in many regions. Against a backdrop of elevated geopolitical risks, the global economy is expected to experience a sharp slowdown in 2023 as several countries enter recession.

In Canada, the maneuvering for the landing of the economy after a period of overheating continues. So far, things are moving in the right direction for the Bank of Canada (BoC), which suggests that we are probably at the terminal rate in this extremely aggressive tightening cycle. Following all prior rate increases this year, the BoC made clear it expected the policy rate “to rise further”. Critically, you won’t find that same guidance in this most recent statement. Rather, the Bank has now highlighted that it will be “considering whether the policy interest rate needs to rise further”. While that clearly doesn’t close the door to further rate increases, we don’t think the Bank’s “considerations” will lead to them to raise rates any further. Nor do we think that would be the prudent approach.

Indeed, the labour market is showing signs of moderation. Meanwhile, declining hiring intentions do not suggest near-term momentum. Third quarter GDP growth was still solid, but due to a massive contribution from international trade, while final domestic demand recorded its weakest quarter since the start of the pandemic, with an annualized decline of 0.6%.

For their part, inflationary pressures are much less acute and diffused than earlier this year. Momentum has waned considerably since the spring, with three-month annualized rates of core inflation running just above 3% in October. In our view, this measure does a much better job of capturing actual, underlying price pressures at this juncture. Making policy decisions on the basis of annual inflation is a recipe for a policy mistake in today’s rapidly changing economic/inflation environment.

This is especially true as soaring mortgage rates negatively impact residential investment and home prices. According to the Teranet-National Bank Composite Home Price Index – the only measure directly comparable to the S&P/Case Shiller National Home Price Index in the U.S. – residential property values are already down more than 7 percent from their recent peak. Expect further declines in the coming months at current mortgage rates, with a 15% decline from peak to trough on both sides of the border.

The country’s strong demographics will limit the negative impact on Canadian home prices. On November 1, Ottawa announced that it was increasing its immigration target to 500,000 per year by 2025. Since most of these newcomers will be economic immigrants, the impact on potential GDP growth and household formation is notable. Canada is the only G7 economy expected to experience significant growth in its prime-aged population over the next decade. 

This development should provide our country a strong advantage over competing jurisdictions in attracting capital at a time when skill shortages are common and continue to worsen. Ontario, as a major recipient of economic immigrants, is uniquely positioned to position itself for the global supply chain transition.   

The strong growth in Ontario’s available labour pool also means that the province is able to increase its tax base to give potential investors visibility into the sustainability of public finances. Given evident fiscal traction, the province is generally further ahead against its key fiscal sustainability targets, net debt-to-GDP ratio down 3%-pts vs. budget to a 10-year low of 38.4% for 2022-23. Some $22 billion has been erased from the 3-year long-term borrowing program, the current fiscal year’s need downsized to $33.2 billion (inclusive of some $3 billion in pre-funding towards next fiscal year). from a fiscal perspective, Ontario has much to show for the past couple of years of sturdy growth, with little here to unsettle investors.

We expect 2023 to be a challenging year for the global economy, but we believe Ontario is in a position to avoid the worst with real GDP growth of 0.6% (compared to 3.2% in 2022).