Jimmy Jean is Desjardins's new chief economist. He's stepping into the role just as the global economy is starting to pick up speed after countries hit the brakes on their economies during the pandemic. So, what does he see on the horizon for the recovery?
"The worst of the crisis is behind us and the skies are starting to clear. In countries where vaccination campaigns are going well, like the United States, Israel and the United Kingdom, economic sectors are gradually reopening. A return to pre-pandemic normal is the biggest economic stimulus we could ask for."
For 2021, Jean is forecasting GDP growth of 6.3% in Canada and almost 7% in the US, a welcome rebound that should make up for some of the losses in 2020.
Jean is watching for a few indicators that will give him a sense of the next economic cycle. Here's what he'll be keeping an eye on.
1. Inflation: Short-term spike
Even though inflation jumped to 2.2% in Canada in March, Jean doesn't think Canadians should be worried. "Higher inflation is normal after a drop in prices like the one we saw at the start of the pandemic. The price of oil is a good example. Today, a barrel of oil is trading at $65, which is almost three times what it was a year ago. The more governments relax the restrictions they have in place, the more inflation levels will even out."
Though the current situation may be temporary, there's still some inflationary pressure in certain sectors, including in the production of goods and in global supply chains, both of which have an impact on costs for businesses. "What we don't know is how fast those costs will get passed on to consumers."
Increased demand has also put upward pressure on certain goods, like construction materials. The demand for lumber, for example, has skyrocketed across North America as people renovate and build homes. It's led to a sharp increase in prices and it's hard to predict when they'll come back down to earth.
But we're far from the runaway inflation that we've seen before. "Today's economy is fundamentally different from that of the 70s, when inflation was very high. We also have more of a service-based economy, where technology plays a larger role. Another thing to remember is that central banks have mechanisms in place today to keep inflation rates relatively low and stable."
2. Interest rates: Expect hikes
The rise in inflation hasn't influenced the US Federal Reserve, which maintained its key interest rate in March. "The Fed has said it doesn't plan on increasing interest rates before 2024 at the earliest, which was somewhat controversial among economists. We think the Fed will need to raise rates before then. And we also anticipate that the Bank of Canada will raise its key interest rate in the fall of 2022, then continue with gradual increases, as we've seen in previous cycles."
3. Overheated housing market
Rising prices, low inventory and bidding wars: One by-product of the pandemic has been an overheated housing market. People working from home have left their apartments and small houses for larger spaces outside of city centres or in smaller cities altogether, where housing is more affordable. "Desjardins's position gives us a broad view of the market, and prices are increasing all over Quebec," says Jean. "In some regions, they're up as much as 20% or 30%. Some buyers have simply been priced out of the market, and we're seeing tighter rules to try and cool things off. The Office of the Superintendent of Financial Institutions has decided to increase the minimum qualifying rate (stress test) by 46 basis points beginning in June. It should have an impact on the market, primarily by decreasing the maximum that buyers can borrow by 4.5%."
And Jean does expect demand to die down. "As restrictions and lockdowns ease up, people will gradually return to the office. Full-time work from home might have made it easy to move outside of the city and away from the office, but some people might reconsider when they have to go into work for a few days a week. And the big jump in costs for new builds outside of city centres will also slow things down," says Jean.