Stagflation is defined as when slow or stagnant economic growth, rising unemployment and high inflation all happen simultaneously. Let's look at the numbers.
The headline Consumer Price Index (CPI) rose to 4% last month, up from 3.3% and higher than the expected 3.8%.
Looking ahead, we likely have one more month of acceleration in September before a temporary cooling in October.
Core inflation, which the Bank of Canada looks at, also rose to 4% from 3.8% previously. Not good! As a result, markets are now pricing in another rate hike before year end and no cuts in 2024. It is worth noting that market expectations fluctuate wildly. In this volatile time, predictions for the rest of 2024 are hardly accurate. This reinforces the notion that we are nearing the end of this rate hike cycle; however, rates are going to be higher for longer, and a return to near zero rates is unlikely.
The unemployment rate sits at 5.5% in Canada currently. Slightly higher than last year, but well below the long-term average. The interesting part here is that high immigration, especially in the foreign temporary worker cohort, is at an all-time high. As economic activity slows, we will likely see a large pull back on inflows of temporary workers. As of now, permanent resident applications are down 7% YoY, and public sentiment is starting to shift regarding Canada's out-of-touch immigration policies. All of this could lead to an increase in the unemployment rate over the next 12 months.
Last quarter, the economy contracted by 0.05% as higher interest rates and the cost of living took hold. A recession is defined as 2 or more quarters of a decline in GDP. Looking forward, GDP growth is expected to be flat at 0% for the third quarter of 2023.
What assets perform well during Stagflation?
Gold, energy stocks, and real estate all tend to perform well during periods of stagflation based on historical data. Obviously, high interest rates will continue to put a roof on real estate gains; however, very low housing starts and investment in new construction as well as high immigration will continue to provide a floor over the long term. In my opinion, as rates come down, prices will continue to rise, and the affordability crisis won't get better barring government intervention.
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Real Estate Investor and Entrepreneur
Jonathan Beam is a real estate investor in the Niagara region who is passionate about helping you achieve financial freedom through real estate. He works with new and experienced investors to formulate a plan that fits your specific situation and provides market guidance and consultation on the best places and strategies to pursue within the Niagara Region. Book a free, half hour no obligation consultation to see how he can help you to achieve your goals. His travels are available at www.realestateandrepeat.com
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