A lot can change in a year. In January 2023, Canada’s inflation rate stood at 5.9%, the Bank of Canada increased its overnight lending rate to 4.25%, and the TSX closed out 2022 down 1.25%. Fast forward to January 2024, and the inflation rate is down, but still too high at 3.1%, the overnight lending rate is 5%, and the TSX finished 2023 up an impressive 8%.
According to the most recent data, Canada’s inflation rate cooled to 3.1% in November 2023, but that figure is still well above the Bank of Canada’s 2% target rate. Despite being more than 50% above where the central bank wants it to be, its unlikely it will raise interest rates any further.
How Will the Canadian Economy Do in 2024?
If interest rates rise too high, too fast, it could tip the economy into a deep recession. And the Canadian economy has slowed significantly, down for five consecutive quarters, most recently, it contracted 1.1% in the third quarter. The fourth quarter will probably make it six straight months of declines. In October, real gross domestic product (GDP) was, according to Statistics Canada, “essentially unchanged” for the third consecutive month.
Most economists don’t expect the country’s GDP to improve at all in either the fourth quarter of 2023 or the first half of 2024. It usually takes about 18 months for the effects of higher interest rates to impact the economy. The central bank announced its first rate hike in March 2022 and last increase in July 2023. As a result, we could feel the fallout from rate hikes until early 2025.
With more pain for consumers and the economy expected, the Canadian economy could experience a technical recession, which is two or more quarters of negative GDP growth. Because the economy has simply stagnated, it’s not expected to experience a deep decline and soaring unemployment that typically accompanies a so-called true recession.
Instead, to combat high interest rates and inflation, its believed that the Bank of Canada will most likely begin cutting interest rates this spring. The big question is how much and how quickly. One thing we shouldn’t expect is for interest rates to fall to their 2019 pre-pandemic levels of 1.75%.
Instead, economists think the Bank of Canada will cut its key lending rate by around 100 basis points (or one percent) by the end of 2024. That would put interest rates at around 4%. Additional rate hikes are expected in 2025 but the new norm for interest rates could be closer to 3%.
How Will This Impact the TSX?
Inflation is coming down and rate cuts are on the way, which should create strong tailwinds for many several key sectors. Canada’s TSX underperformed its U.S. peers in 2023 because it’s more cyclical in nature. The three biggest sectors, financial, oil and gas, and materials, all had a weak year.
But a lower interest rate environment should help result in better returns, especially for interest rate-sensitive sectors trading at lower valuations. This includes banks, utilities, and real estate.
These projections only factor in the current economic and political environment. Everything could change if a Black Swan event surprises the stock market in 2024. That could change the best sectors to invest in too.
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Canada’s economy has stagnated, but it looks like it will avoid a deep, long recession. On top of that, inflation is cooling and the Bank of Canada is expected to start cutting interest rates this spring. If you’re an investor, the trading experts at Learn-To-Trade.com can tell you how this will affect Canadian and American stocks.
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