Canadian mortgage renewals will weigh on economic growth: Deloitte

A new forecast from Deloitte Canada calls for the pace of interest rate cuts to pick up in 2025, but not enough for many Canadian homeowners to avoid feeling the pinch of upcoming mortgage renewals.

Deloitte Canada released a new economic outlook on Wednesday that calls for overall real gross domestic product (GDP) growth of 1.2 per cent in 2024. That’s slightly higher than the 1.0 per cent growth called for in the consultancy’s previous forecast from April.

Chief economist Dawn Desjardins tells Global News the “stronger than anticipated” start to the year has lifted Deloitte’s forecast for 2024. But in turn, the firm is scaling back expectations in 2025, now calling for 2.6 per cent growth, down from 2.9 per cent previously.

That comes despite expectations for interest rates to drop more rapidly next year than in the remainder of 2024.

The Bank of Canada delivered its first interest rate cut in more than four years earlier this month, dropping its policy rate by a quarter of a percentage point to 4.75 per cent.

Deloitte’s forecast calls for another two rate cuts this year. But the firm expects the pace of cuts to pick up in 2025, bringing the Bank of Canada’s benchmark rate down to 2.75 per cent by year’s end.

Mortgage renewals to sap economic growth

That’s going to benefit Canadians who are renewing their mortgages next year, Desjardins explains, but it won’t be enough for most to avoid the pinch.

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The Bank of Canada expects that around half of outstanding mortgages have renewed their terms already in the higher interest rate environment, with another half to go in the coming years.

Desjardins explains those yet to renew are largely the households who benefited the most from rock-bottom interest rates in the COVID-19 pandemic, a period that saw a flurry of housing activity drive prices higher in many Canadian markets.

When these Canadians renegotiate their terms, they’ll typically face much higher payments on their mortgages and be forced to rein in their spending to cope — a phenomenon that will put a damper on economic growth in the year ahead.

“Yes, interest rates are going to go down, but we still have a big hump for these households that are going to be renegotiating,” Desjardins says.

As part of the rate forecast, Deloitte sees inflation returning to the Bank of Canada’s two per cent target by the second quarter of 2025. Fresh data released Tuesday showed inflation ticked up to 2.9 per cent in May, surprising most economists.

Deloitte Canada meanwhile expects that the country will avoid a recession during the current economic downturn. Bank of Canada governor Tiff Macklem echoed those expectations in a speech to the Winnipeg Chamber of Commerce on Monday, saying it looked like the economy was so far on track for the so-called “soft landing.”

The Deloitte forecast calls for a slight uptick in the unemployment rate to an average of 6.3 per cent in the latter half of 2024, up from May’s levels of 6.2 per cent.

But Desjardins says the rise in unemployment likely doesn’t include “massive job cuts.” The “modest” rise in unemployment so far in the correction has largely been driven by a growing population and slowdown in hiring without employers necessarily shedding positions.

“It really is an underpinning of this view that, yeah, it will be this elusive soft landing for Canada’s economy because we’re not going to see the labour market deteriorate significantly,” Desjardins says.

Productivity ‘tide is going to turn,’ Deloitte expects

But while Canada has avoided a series of outright declines in real GDP, the country’s economic engine is nonetheless flashing some warning signs.

Real GDP per capita has declined in six of the last seven quarters, Desjardins notes, as a growing population masks gaps in productivity.

Since 2014, productivity growth has been “essentially flat,” according to Deloitte Canada. At the same time, it’s costing Canadian businesses more money for the same levels of economic output — unit labour costs are up 30 per cent over the past decade, the report says.

Desjardins says this situation has dire implications not only for the economy, but also for Canadian households’ standards of living.

A more productive economy allows businesses to pay their workers more without fuelling inflation, letting Canadians get ahead rather than feeling like they’re falling behind the cost of living.

“Over time, it does really take a toll on people’s standards of living and the amount of how their income grows,” Desjardins says.

Deloitte expects this situation will turn around in the months ahead amid signs in the Bank of Canada’s latest Business Outlook Survey that confidence and investment are set to pick up. The start of construction on electric vehicle battery plants also gives reason for optimism, the report says.

“We think that tide is going to turn, but it will take some time,” Desjardins says.