Web Conference Q&A

Last Tuesday we held our fall web conference. (The playback is available here External link., in French only.) As always, participants had many questions. This week we're dedicating our Weekly Commentary to answering some of the most frequently asked.

 

1.    What are the biggest risks posed by the conflict in the Middle East?

The main risk is war engulfing the Middle East. The likelihood of that has grown in recent weeks. A direct confrontation would impact financial markets, especially as the threat to supply would raise the risk premium on oil. Stock market indexes are hitting record highs, which suggests that so far the markets have been complacent about the risks in the region. As a result, if there's a major military offensive, risk assets look particularly vulnerable. Soaring energy prices would fuel inflation, but central banks may not necessarily feel the need to respond. The root causes of these price gains wouldn't be solved by tighter monetary policy, and history has shown that they tend not to last. Central banks would also be well aware of how a wider conflict could shatter confidence and potentially disrupt supply chains, which would have serious implications for the economy.

 

2.    We're seeing many new measures to stimulate residential construction. Can we hope for housing to become affordable again?

Governments have put a lot of measures into place, some of which were aligned with our recommendations for Canada External link.. Yet despite their good intentions, we've shown External link. that constraints on labour in the construction industry will continue to be a major challenge. Furthermore, our analyses demonstrate that in an optimistic scenario, housing starts would reach at most slightly more than 300,000 units annually, with labour costs rising substantially due to the shortage of workers. Population growth must therefore be restrained. Other barriers limiting supply—such as local infrastructure financing for real estate developments—also need to come down. In addition, the construction industry needs to boost its productivity, which currently trails the average across all sectors.

 

3.    The policy interest rate has already been cut several times. Why aren't mortgage rates falling faster?

The Bank of Canada's rate cuts were widely expected and had already been priced into fixed mortgage rates. Markets would have to expect even more aggressive rate cuts for fixed rates to fall significantly. But deeper cuts would only happen in response to a downside scenario for economic growth. As we explained in a recent note External link., Bank of Canada rate cuts only have an immediate impact on variable rates. The policy rate is still high, as the 75 basis points trimmed so far only partly reverse the 475-point increase over 2022 and 2023. Variable rates are expected to slide further and even fall below five-year fixed rates in about a year. But we need to have realistic expectations, as our forecasts see interest rates stabilizing in 2025 at higher levels than the pre-pandemic norm. 

 

4.    What's next for the Canadian dollar?

Right now, the Canadian dollar is being heavily influenced by the trajectory of the US dollar index. The Fed is determined to prevent the economy from cooling too quickly, which is weighing on the greenback and therefore offering support to the loonie. Although we expect the Canadian dollar to keep trending upward until the end of 2025, its rise should be very gradual. The loonie will probably spend the next few months hovering around recent levels. Our latest currency forecasts are available here External link..

 

5.    What are the biggest challenges to housing supply? The construction industry seems unable to boost productivity even though there's been some innovation.

There are numerous constraints, some of which we touched on in our answer to question 2. These challenges include a shortage of labour and materials, permit delays, development costs, NIMBY opposition to high-density initiatives and the construction industry's slow adoption of new technology. It would be hard to single out any of these challenges as the primary culprit. A note External link. we published in January looked at productivity issues in construction. Prefabricated and modular homes hold a lot of promise as a way to deliver housing more quickly and affordably. Earlier this year, the federal government announced that it would launch an innovation fund to encourage this kind of construction. That said, the details are still a little fuzzy on where this money will come from. 

 

6.    As more and more workers retire over the next few years, how can employers keep doing business—much less expand—if they hire fewer people?

Businesses aren't hiring as much these days, but the fact that they also haven't been laying many people off shows they understand how hard recruiting can be with an aging population. That's also why it would be a serious mistake to completely shut the door on immigration when there are persistent structural labour shortages in critical sectors like health, education and construction. But beyond that, businesses will have to invest in automation and technology, which will improve productivity by reducing dependence on workers to complete certain tasks. This includes adopting artificial intelligence External link. for customer service and using robots in warehouses. This will also mean changes in working conditions. Skills development and continuing education will be key to meeting this challenge.

 

7.     It seems counterintuitive that despite the thousands of jobs available, many people are having trouble finding work right now. Can you shed some light on this situation?

Canada is currently not at full employment. Job vacancies are at their lowest since early 2019, while the unemployment rate has climbed to 6.6%. This is hitting first-time job seekers especially hard, particularly youth and immigrants in larger metropolitan areas. That said, there will always be individuals who have trouble finding work that suits their skills, aspirations or location. The jobs available aren't always the right fit for a job seekers' qualifications or expectations, resulting in mismatched supply and demand in the labour market.