Weak labour market poses greater risk to economic recovery than renewal cliff
RBC has warned that the real risk to Canada's economy isn't the much-feared wave of mortgage renewals but rather a weakening job market.
While higher mortgage payments will strain household budgets, it’s the potential rise in unemployment that poses a greater threat to economic stability, according to RBC assistant chief economist Nathan Janzen.
“In the midst of a historic interest rate hiking cycle over 2021-2023, a persistent concern has been that a mortgage renewal “cliff” would derail the Canadian consumer and broader economy along with it,” Janzen wrote in a blog post.
The threat posed by mortgage renewals is manageable, especially with the Bank of Canada already cutting rates by 75 basis points and possibly more to come – but the renewal wave will still “act as a brake” on the economy, according to the economist.
Though some households, particularly those with four- or five-year fixed-rate mortgages, will still face higher payments, these increases will be smaller than anticipated, as interest rates begin to fall. Homeowners who have built up equity in their properties could refinance or extend their mortgage amortization periods to ease the financial strain.
What’s more concerning, according to RBC, is the labour market.
“We made the point as far back as almost a year ago that 2025’s mortgage renewal wave would be manageable as long as (1) the Bank of Canada was cutting rates and (2) the job market doesn’t soften too much,” Janzen added. “That first condition has clearly been met, but we are more concerned about the second as a slew of labour market data continues to weaken.”
Job vacancies have dropped by 25% over the last year, and as hiring demand weakens, the risk of rising unemployment grows.
“Higher mortgage payments certainly hurt the total amount of income available in the economy to spend, but higher unemployment does as well,” said Janzen. “We anticipate a one-percentage-point rise in the unemployment rate typically lowers household disposable income in the economy by 0.5%.
“Our forecast calls for continued modest rises in Canada’s unemployment rate from its low of 5% in mid-2022 to 7% by early 2025.”
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That’s a sharp increase from the 5% unemployment rate seen in mid-2022 and well above pre-pandemic levels.
The growing concern lies in how much further unemployment might increase. Job vacancies in Canada have dropped by 25% compared to a year ago, and hiring demand is now significantly lower than pre-pandemic levels.
With fewer job vacancies and more people looking for work, any further weakening in the labour market could push unemployment even higher than RBC’s current forecast.
Janzen noted that while job vacancies previously outpaced the number of people looking for work, the situation has changed, with unemployment now above pre-pandemic levels.
"Any further drop in hiring demand raises the risk of the unemployment rate rising more," he said.
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