Scotiabank’s chief economist on where housing prices, interest rates and the economy are heading

How swift of an economic rebound can we expect in Canada, and what might it mean for interest rates? These are key questions that will come into greater focus for investors as 2025 nears.
Forecasts for Canadian economic growth are mixed for the upcoming year, ranging from 1.3 per cent to 2.1 per cent at the Big Five banks. Scotiabank is leading the pack with 2.1-per-cent growth anticipated for 2025, matching the Bank of Canada’s expectations.
The Globe and Mail recently spoke with Scotiabank’s chief economist Jean-François Perrault to find out why he feels hopeful about an economic recovery. We also discussed his views on the U.S. economy, interest rates, the housing market, immigration, as well as the Canadian dollar.
An expanded version of this Q&A is searchable on The Globe and Mail website.
The Bank of Canada has announced four consecutive rate cuts with the most recent an upsized 50-basis-point cut. What are the odds that we see another 50-basis-point cut announced by the Bank of Canada?
I’d say it’s less than 50/50 but it’s a tricky call because I don’t feel like I understand with 100-per-cent certainty what the Bank of Canada’s justification was for the 50-basis-point cut.
You had two things going on. Obviously, inflation coming in a little bit slower than anybody expected, including the Bank of Canada. But at the same time, their forecast for GDP growth next year didn’t change, they didn’t change their forecast for growth this year. So, it doesn’t look like there’s an economic urgency to cutting from their perspective. In fact, the Bank of Canada, like us as it happens, I’ve got the strongest forecast of all the Canadian banks next year. And so, they remain on the more optimistic side of things relative to other Canadian forecasters.
You’re sending a message by cutting by 50 basis points. That message seems to be more linked to inflation rather than concerns about the level of economic activity.
The Bank of Canada’s neutral rate is between two-and-a-quarter and three-and-a-quarter per cent, and you are at 3 per cent. How high is your conviction that we only get an additional 75 basis points of cuts from the Bank of Canada?
It’s not particularly strong. I don’t think anybody’s got high conviction about their rate forecasts going out to 2025 at this point in time.
Part of our thinking on ending at three versus ending significantly lower, which is where the other banks are, we’ve got 2.1-per-cent growth next year. Some of the banks have 1.3 per cent so there is a fair dispersion of views as to how the economy is going to unfold over next year.
As painful as the current situation has been for a lot of households in Canada, we do think there is a potential for pickup in consumption that might be a little bit stronger than what we’re currently assuming. If you look, for instance, at the high savings rate, consumers are being cautious, they’re saving more, which means in principle, they’ve got more savings to spend once they feel better about the outlook.
We are concerned about the rebound of the housing market early next year. We’re not forecasting a crazy increase in sales, but the stars are kind of lining up for more robustness there, which if the housing market picks up significantly, consumption picks up with that, house prices pick up with that, maybe rents pick up with that. So, inflation maybe picks up with that.
We’re just a little bit more cautious about some upside risks to the outlook going into 2025 than I think maybe other organizations are and that leads us to 3 per cent. Now, it might be two-and-three-quarters, it might be three-and-a-quarter. We don’t have super strong conviction on that, but we do think the Bank of Canada is going to stop cutting rates at a higher level than other forecasters generally think, not everybody, but generally think for Canada next year.
I look at your 2025 real GDP growth forecast of 2.1 per cent and, like you said, it’s higher compared to others on the Street.
But it’s not strong. I’m not talking about the economy roaring back into action.
When I look at the labour market, the unemployment rate ticking up, household debt levels are high, there’s reduced immigration, and it takes time for lower rates to make its way through economy. Your real GDP forecast is 2.1 per cent next year, which is in line with the Bank of Canada’s expectations. It seems like a lot must go in the right direction to hit those numbers, which is up from 1.2 per cent growth you forecast for this year.
Ideally, when you’re cutting interest rates, you’re trying to generate a return to economic activity that’s above potential growth and that potential growth, the Bank Canada estimated, will be about 2 per cent for next year. So, it’s a muted recovery.
GDP per person continues to fall. How concerning is it to you?
I think we’re making way too much of this. The thing that’s important is productivity, which is declining and that’s a huge problem.
There’s a compositional effect because a lot of the population increase is students, a lot of the population increase is non-permanent residents, low wage workers. It’s not that individual Canadians are getting poorer, but that you’re adding people to the economy that are earning less than the people that are already here. So, you get this decline in GDP per capita, the same thing occurs on consumption per capita.
Last week, the federal government announced its plan to reduce the number of permanent residents by 21 per cent. From an economic perspective is a reduction in the number of permanent residents the right move?
I don’t think so. The focus should be on non-permanent residents as the permanent stream is better able to identify individuals that can contribute significantly to Canada from an economic perspective right from the start. That being said, draconian changes in the number of non-permanent residents should be avoided. A gradual approach is better suited to the needs of the economy and, very importantly, to the individuals targeted by these measures.
What are your expectations for the housing market?
We’ve got a pickup in resale activity next year. We got a pickup in construction next year, and that’s normal. When you lower interest rates that’s the part of the economy you would expect to respond pretty significantly. And we know that there are massive unmet housing needs. So, we would expect a return in activity.
I would argue that some of the sales activity that we’re seeing in the last couple of months is indicative of a reasonable degree of momentum, a little bit more momentum than we thought would occur, and that’s ahead of the mortgage rule changes, which have the potential to change things a lot as we get into the spring or early next year.
How are home prices going trend in 2025?
I think they go up. It’s very difficult to see how they don’t go up next year. We’ve got a 6- to 7-per-cent increase. It could be a lot more, could be less.
Part of the reason the housing market was slow over the summer months and maybe the only reason is you had households knowing full well that the Bank of Canada is going to be cutting interest rates more as the year progressed and into 2025 and were basically waiting for cheaper financing costs because everybody is telling them if you wait a little bit, your mortgage rate is going to be cheaper.
As rates come down, there will come a point where folks will say mortgages have probably gone down enough or I don’t expect them to go down that much more and then you get into a world where because we know that there is this massive imbalance between supply and demand, you get the fear of missing out argument. The later you come into the market, maybe the less choice you’re going to have, maybe the more expensive your place is going to be. So, there’s going to be a trade off at some point – is it worth waiting for another 25, 50 basis point cut by the Bank of Canada to buy a place and maybe those places are more expensive or do you go a little bit earlier, maybe you pay a little bit more for your mortgage than you otherwise would want but have a price that’s maybe a little bit less expensive than it would be if you waited until next summer or next spring.
The U.S. economy has been resilient, and you’ve been taking your numbers up for this year and next year. Retail sales, roughly two-thirds of the U.S. economy, have been strong. What’s the probability that we see further upward revisions to your 2025 U.S. GDP forecast of 1.8 per cent, and what are the implications for future rate cuts and the potential impact on the Canadian dollar?
That’s a tough question to answer right now because the U.S. election is pending.
The direction of travel for U.S. rate forecasts have been continuously revised up so there is a trend there. And that’s because we were underestimating the resilience of the U.S. economy. As you raise rates, it’s normal to think the economy is going to slow, it didn’t really slow that much in the U.S.
Now, part of that is fiscal policy. But there’s this saying in the economics world that’s been there since I started working, which is like 25 years ago at least, which is never bet against the U.S. consumer – and you’re seeing a little bit of that.
There’s going to be an election next week, both potential presidents have pretty expansionary plans for fiscal policy in their platforms.
It’s not inconceivable that as you get into the early months of the year, you get a little bit more optimism in the U.S. because the election is behind us, people feel a little bit better regardless of the outcome. Maybe you have some policies that stimulate growth in the short run, like lower taxes if Trump wins, but set against a world where the potential for higher inflation is real because you have in the case of former president Trump, obviously tariffs are a key part of his platform, which of course are inflationary if he does that and bad for growth. So, there are all these uncertainties, major uncertainties, about the direction of policy and how that might impact things.
But you set that aside, the U.S. labour market is stronger than we thought, U.S. inflation is picking back up a little bit, which is indicative of a stronger economy. Folks are scaling back their expected rate cuts next year in the U.S. to some extent, to roughly where we have them.
If I were to bet on the U.S. next year at this point, setting the election aside, I’d say, probably stronger rather than weaker growth.
Now, what that means for rates in Canada, that’s unclear. Typically, a stronger U.S. economy means a stronger Canadian economy. They are our largest trading partner.
I would argue maybe the risk on Canadian rates is to the downside, whereas the risk on U.S. rates is to the upside. So, there is the potential there for the rate differential to widen relative to where it is now. And that would favour the U.S. dollar over the Canadian dollar.
That being said, our view is the Canadian dollar appreciates over the next year. And it appreciates largely because there is at present a safe haven premium in the U.S. dollar.
There’s always uncertainty in the world but there’s more uncertainty – about the U.S. election, the Israel-Hamas war, are we in a recession or not because there’s still some people that worry about that and think that we are.
So, there are these uncertainties clouding the outlook and that uncertainty almost always favours the U.S. dollar. It’s a safe haven. If you’re worried about something, you buy U.S. dollars and you keep your money in the U.S. for a little while, and then when that uncertainty fades, when risk aversion falls, then people will go into other currencies.
So, our assumption is roughly 2 per cent growth in Canada in 2025. We don’t think there’s a recession. We’re not overly worried about the state of the world. That as time progresses and we realize the U.S. is not going to have a recession. The U.S. election is behind us one way or another. Inflation is under control. The situation in the Middle East is not getting worse, maybe it’s gotten better.
What you are effectively doing as you progress in time is you’re reducing uncertainty, which means risk aversion should fall.
So, the flight to safety that’s lifted the U.S. dollar starts to unwind and that allows the Canadian dollar to appreciate.
Now, the U.S. election can completely change that. You put Trump in power, he’s an uncertainty machine. If he wins, you’re almost certainly in a world where it’s very difficult for the Canadian dollar or any currency to appreciate against the U.S. dollar next year.
U.S. equity markets have outperformed the TSX year-to-date. Given the recovery that you are expecting to see in the Canadian economy next year with real GDP forecast to expand to 2.1 per cent in 2025 from 1.2 per cent in 2024, compared to your forecast for a contraction in the U.S. with real GDP declining to 1.8 per cent in 2025 from 2.6 per cent in 2024, might that translate into higher earnings growth, perhaps leading to the TSX outperforming U.S. markets next year?
I’m not a strategist, but I will say a couple of things.
We do expect stronger growth in Canada next year than in the U.S. So, in principle, that equates into stronger earnings growth in Canada than you see in the U.S.
What’s more is as we go through this global monetary accommodation cycle, so we are cutting rates, the Americans are cutting rates, the Europeans are cutting rates, the Chinese are cutting rates, that will lead to stronger growth in the global economy as time goes by. And that means that the price of raw materials should improve to some extent, which of course we are very dependent upon. So, there is reason to believe that the economic circumstances would favour Canadian earnings relative to American earnings over the course of next year.
That being said, one of the key reasons U.S. equity markets are doing better than others is the ‘Magnificent Seven’ stocks. These AI firms who are just rocketing forward and we don’t have any of those. And if that momentum maintains, if people are still just as excited about those things six months from now as they are now then maybe you have, irrespective of earnings growth, you have the U.S. market doing a lot better because there is an appetite for these companies, which are located in the U.S.
You speak with business leaders and boards. What are your impressions on future business investment and sentiment?
Everybody is looking forward to the impact of lower interest rates. The fact that we’ve crossed that bridge is very positive for a lot of people, households and businesses.
There is a lot of anxiety about the results of the U.S. election. And we see that in behaviour, we see that more in the U.S. where companies are not engaging on doing certain things because they’re waiting to see what world they’re going to be operating in in a couple of months or early next year.
And then of course, you’ve got the added challenge of there’s a Canadian election that will take place at some point in time. That impacts how people view the economy and how they think about opportunities.
So, it’s just wait and see, neutral, even though people are happy with the rates coming down.
When we last spoke in April, you said sentiment was cautious so neutral is progress.
Last April, we didn’t know if the Bank of Canada was going to cut, we thought they were going to cut. At the time, it was unclear if the Fed would even cut this year.
So, there is much more clarity. We know rates are coming down and that’s a big relief. And it’s occurred, I’d argue without a recession, some would say there is a recession looking at GDP per capita, but I would say without a recession.
And we saw the employment report from last month where 46,700 jobs were created in Canada and they’re all full-time and they’re all private sector. That is not a sign of businesses behaving as though they are really worried about the state of the world.
There’s been a lot of talk in recent days about the swift spike that we’ve seen in yields, particularly U.S. treasury yields. What’s driving this move, does it concern you and what are the potential implications?
It doesn’t concern me. We’ve been expecting this.
The fact that rates have gone up in the five-year, 10-year space is entirely consistent with how we’ve been thinking about interest rates in the U.S. and Canada since the summer. And that’s because of two things.
One, we thought, particularly in the U.S. through the summer, markets were and especially when the Fed cut by 50 basis points, markets were far too worried about the economic environment in the U.S. and had priced in way too many short-term policy cuts.
Since then, expectations for short-term interest rates have changed a little bit. After the Fed moved by 50, U.S. data turned a little bit better, so markets took out a significant amount of cuts next year and that’s contributed to rising interest rates.
You’ve got two things going on, one to re-evaluate short term rates, which I think is largely over in the U.S., and a return to a more normal term premium.
I think those five- and 10-year rates were below where they should have been in normal economic circumstances. In principle, say a five-year interest rate is the sum of all the short-term interest rates between now and five years, and in normal times, there’s a term premium on that because you’re holding an instrument for five years as opposed to short term, there’s a reward for making
that investment, locking in for five years relative to just taking a short-term position and rolling it over all the time. So that term premium is starting to come back.
The move in long term interest rates is a little more rapid than we thought but it is directionally appropriate.
Directionally appropriate but we’re not there yet?
I think there’s more to go. In the U.S., if we go to the end of next year, we’ve got 4.3 per cent for the 10-year and in the five-year for Canada, we’ve got 3.75 per cent by the end of next year.
Disinflation or deflation how much of a concern is that to you?
It’s not a real concern.
We look at core measures of inflation, they’re still above two. When you look at wage growth, you set aside the most recent labour force report, but wage growth is trending in the 4 to 5 per cent range. House prices are probably going to go up from here. There might be deflation in some parts of the economy but not on balance.
What are you worried about?
The thing that is clouding out the sky is the U.S. election.