CITT conference launches with economic outlook

CITT’s 2022 Canada Logistics Conference launched today in Montreal with an economic update from Royce Mendes, managing director and head of macro strategy at Desjardins.

Mendes painted a grim picture in the near term. He said that inflation is not just high, it’s widespread. Prices are rising across the economy. Businesses are now planning for at least three percent inflation.

Inflation is being driven by the swiftly recovering post-pandemic economy. We are at above pre-pandemic levels of work being performed in terms of hours. “That’s great news, but as with anything in economics it’s all supply and demand,” he said.

And the catch is there is a significant supply constraint – labour shortages are widespread in Canada. Many people who left the labour market during the pandemic are not coming back.

While Mendes expects the Eurozone to go into a recession because of the effects of the Russian war in Ukraine, he doesn’t expect Canada to enter a recession in the near term. “But 2023 is much more of a wild card than most people believe,” he said.

Exposure

That’s because this country is exposed thanks to the massive number of low rate mortgages that home buyers entered into when rates were at record lows. Every interest rate hike is more painful in Canada than in the U.S. because housing holds a larger share of the economy. Interest rate hikes thus propagate through the whole economy much more quickly.

Because American have higher savings rates, the U.S. economy is more resilient against interest rates, but inflation more of a problem. Mendes believes that the Canadian dollar will weaken over the next year as investors flock across the border to higher US interest rates.

High notes

Mendes said the Canadian housing market has strong tailwind in the form of popuation growth. The federal government’s pledge to bring in 400,000 new immigrants a year will create a continuing baseline of support for the housing market.

In terms of global trade, Canada is a trading nation, and could see a deceleration, in trade as headwinds to the global economy – such as the war in Ukraine – take hold. Our trading exposure to the U.K. and Eurozone could have a dampening effect if they enter recession.

However, because we trade primarily with the U.S. we have lower exposure to the direct effects of the Russia-Ukraine conflict. The U.S. economy is largely driven by domestic factors, and it is on solid footing. U.S. consumers have savings, so there’s a cushion through to the end of this year, Mendes believes.

Our policy makers are trying to deal with the overheated domestic economy, and are raising interest rates to control it. The trick is to find the balance between control and pushing the economy into recessions, Mendes said.

Although the outlook is uncertain, history tells us that when interest rates rise they stay there for a year or so, then they cone back down. “It’s a cycle.” Mendes said. “We are in a period of adjustment.”

The conference runs Thursday, June 9 and Friday, June 10, online and in person in Montreal. Sessions are covering topics from e-commerce and supply chain resilience to digitization and updates on all modes of transport.