July 11, 2024
...
By Atul Oka, Senior Director of Strategy and Business Development, DUKE Heights BIA
...
With the period of high interest rates on the wane, and an expected improvement in consumer spending as a result, it may be time for businesses to think about how they can better position themselves for an improvement in economic activity.
It may however be worthwhile to understand short-term vs long-term economic forecasts to time the expansion of business marketing and sales activities.
According to the TD Provincial Economic Forecast, Real GDP growth is forecasted to be just 0.8% in Ontario for 2024, improving to 1.5% in 2025. This can be attributed to two main factors.
- The increased debt load faced by households as mortgage renewals at higher rates bite into disposable income for this growing percentage of the population. Also, while credit card debt has been fairly stable, increased interest rates have resulted in higher servicing costs.
- A higher trending unemployment rate. From the relatively low rate of 5.1% in March 2021, the unemployment rate in Ontario has continued to rise steadily to 5.7% last year, 6.7% in May 2024, and 7% in June 2024.
Interest rate as a monetary policy tool often works with a lag, and the impact of the fast increase in interest rates to tackle inflation from March 2022 to August 2023 is now having maximum impact.
The same is also true for cuts in interest rates, though any cuts are expected to be staggered, more cautious, over a longer timeframe and of smaller increments. It is also widely expected that interest rates will not go down to the levels seen over the last decade.
The bond market, often seen as a predictor of interest rates reflects three potential interest rate cuts of 25 basis points each (0.25%), before May 2025 where the BoC prime rate is expected to be 4% from the current 4.75%.
According to the 2024, Ontario Economic Report by the Ontario Chamber of Commerce, the Jobless rate in Toronto will reach 7.4% in 2024. However, as Marc Ercolao, an Economist at TD indicates, the higher drifting unemployment rate is primarily as a consequence of a growing labour supply, and not a net loss of jobs.
The bottom line therefore is that while growth may be subdued in 2024, gradual improvement in the macroeconomic climate will start in 2025 encouraging higher levels of business investment as businesses plan ahead, and greater consumer spending as lower interest rates enable more real disposable income. Higher employment growth and the broadening of consumer spending in 2025 therefore is expected to have a positive cyclical benefit to the economy, and businesses aiming to capture more business or market share should plan to expand marketing and sales activities as signs of improvement become more visible.
