While in Davos for the World Economic Forum summit, RBC CEO David McKay said that Canadians should expect a recession this year following another likely negative quarter of GDP growth.
While talking to Bloomberg, McKay mentioned that regular people are feeling the effects of the central bank raising interest rates mainly via spikes in monthly payments on mortgages.
“There has been a payment shock to Canadians and the difference between Canada and the US is we don’t have a 30-year fixed mortgage. We usually have 4 [or] 5-year terms, so we have a lot of variable rate mortgages at the same time, 20% of our book roughly is variable rate mortgage,” said McKay.
“So you’ve seen a payment shock to about 30% of Canadians right now in the tune of 20% to 25% increase a month. That’s been challenging for Canadians.”
According to McKay, even though people are handling the higher costs okay for now, the economy is slowing down a lot faster than the US economy.
“Canadians are handling that payment shock well, so you’re not seeing that migrate to default but you’re seeing the Canadian economy slow much more quickly to the point that we already have a quarter of negative GDP under our belt,” said McKay.
“We’re looking at probably another negative quarter of GDP which we will technically be in a soft landing recession early this year.”
According to the latest Statistics Canada numbers, inflation reached 3.4% in December, largely driven by the price of gasoline, air travel and rent.
The latest numbers from Statistics Canada confirm that the economy is not performing well. In the third quarter of 2023, the GDP went down by 1.1% – worse than what economists expected, who thought the economy would grow during that time. Data also showed that people aren’t spending as much as predicted.
Prime Minister Justin Trudeau defended his government’s actions in November, saying they’ve invested in things like housing and dental care, going on to claim that other figures showed a more positive trend in the economy.
When Finance Minister and Deputy Prime Minister Chrystia Freeland presented her fiscal update last fall, she claimed that the economy would grow in the third quarter – contrary to the actual trends.
“Unless we get rates down, there’s more payment shock coming but consumers are handling it,” said McKay.
Freeland also spoke at the World Economic Forum on Thursday, after being suddenly added to the conference’s agenda.
The Bank of Canada is set to give a rate announcement later this month on Jan. 24.