Economic Predictions for 2023? I shouldn't...but here goes...

The Year That Was

2022 was some kind of year, wasn't it? It roared in like a lion hopped up on Starbucks...and then limped out like a lamb...that had been mortally wounded by said over-caffeinated-lion. The lion - who is nowhere to be found - took a vow of silence and lives in isolation off the grid while contemplating it's life decisions. But don't worry, the lamb will make a full recovery. Probably.

​

We know the economic story of 2022: A pivotal and seismic shift from Central Banks across the globe. Forecasting and policy errors combined with the invasion of a sovereign Nation along with severely strained or damaged supply chains triggered inflation levels that haven't been seen for 40 years. And the response in Canada? Seven rate increases over nine months taking the policy rate from 0.25% to 4.25%. Housing prices and activity fell off their peak levels as affordability and consumer confidence eroded.

​

The Year Ahead

As we turn the calendar into 2023 for a fresh, well-intentioned start, questions abound about what the year has in store for us. And though Economic predictions these days are making Meteorologists look infallible by comparison, I shall bravely (read: naively) offer up a take on what to expect in the coming year. 

Inflation and the Bank of Canada

Inflation looks to have peaked and it will continue heading in the right (downwards) direction. It will just do it much slower than any of us want it to. This will take significant pressure off the BoC to increase the rates much further. The dialogue shift in the December announcement indicates they are looking to limit/pause rate hikes going forward. The concern of over-tightening is becoming ever more real as previous rate hikes filter their way through the system and show up in real data. From here forward, we're looking at fine-tuning adjustments rather than the larger increases that were the hallmark of 2022. Experts are predicting anything from 0% - +0.5% changes to the BoC's policy rate. 

Interest Rate Trends for 2023

To start 2022, variable rates were all the rage. But by the end of the year, the cool kid on the block were short term (1-3 year) fixed rates. 5 year fixed rates - once all the rage - have largely been forgotten. The takeaway here is that the market and consumers are betting on interest rate cuts in the not too distant future. And by taking a shorter term fixed rate, borrowers will be in a position to renew into lower rates in the future rather than being stuck in a longer term fixed rate (which are almost certainly at their peak).

Make no mistake - the BoC will want to hold rates up for as long as they can to reign in inflation and regain the credibility that they lost from their 2021 prognostications. But, we are well into restrictive territory and rates at some point will have to ease off. Over the course of the year, it is expected fixed rates will gradually ease off in anticipation of late 2023/early 2024 policy rate cuts by the BoC. 

Consumers and Housing Market Activity

It is to no one's surprise that home buyers took a back seat as 2022 wore on. There were plenty of good reasons to take a wait-and-see approach:

• Rate increases just about every month provided a source of stress and fear
• Affordability eroded as qualifying rates and payments jumped significantly
• Activity levels inevitably had to decline off unsustainable peaks
• Consumer confidence had dropped to levels only exceeded in 2008 (sub-prime crash) and 2020 (onset of COVID)

In the back end of 2022, it felt like there was very little stability for the average home buyer. And so demand was pushed to the sideline. The most common phrase I heard from Pre-Approval clients was: "We're just going to wait to see how this plays out." And as we move forward, we're making our way to that conclusion. Rate increases will stop. Inflation will drop. Sure-footing will be found and activity will pick up in the housing market. By no means should we expect a return to 2021/early 2022, but, a return to a balanced market is far from out of the question. After all, Canada is experiencing record immigration numbers which serve to put a more stable floor under housing prices. And developers have slowed their starts which will bear out down the road in 2024 and beyond potentially putting us into another supply crunch for homes. 

Barring any catastrophic events that alter the landscape dramatically, the likely outcome for 2023 is an increasing level of comfort of the Canadian consumer and a return to something that resembles balance in market. Though if you struggle to remember what that looks like, you're not alone. We've gone from fearing the Pandemic to a low-rate fuelled fever-pitch to a gut-punching rate hike cycle. It's the roller coaster ride that nobody asked for. And though there will still yet be pain felt, I do expect peace of mind to be restored as 2023 unfolds.

​

And please, if you find this content helpful, pass it on to a friend. We're always looking to help people and your support is sincerely appreciated. As always, if you have any questions or need any guidance from our end, please don't hesitate to reach out!

Important Note:  no real animals (lions or lambs) were harmed in the creation or delivery of this post.