Analysis | Economy and markets: what if the worst is ahead of us?

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Analysis | Éeconomy and markets: what if the worst was ahead of us?

Quebecer François Trahan is part of of the best Wall Street strategists for several years.

When Quebec economist and forecaster François Trahan asserts that the worst is yet to come economically, in the United States as in Canada, he bases a large part of his analysis on the marked slowdown in the real estate market. He who saw the 2008 crisis coming is of the opinion that a similar scenario is emerging.

François Trahan's move to Economy Zone at the start on ICI RDI provoked strong reactions among our viewers. The investor has been named, multiple times over the past 20 years, as one or one of Wall Street's top strategists. His forecasts are closely followed by many investors, given his reputation.

However, for François Trahan, the worst is yet to come since we have not yet fully measured the impact of the rise in interest rates. As part of our interview on Tuesday evening, he reiterated that the next few years will be apocalyptic.

This word is heavy with meaning. I must tell you that I am not convinced that he chose the right term to describe what he means. But François Trahan assumes it. He says he has been using it for more than a year to illustrate how underestimated the real effect of rate hikes, which have been very rapid over the past year.

Recalling that 68% of the economy is based on consumption, François Trahan points out that there is a high sensitivity to changes in interest rates.

I say apocalyptic because [the recession] hasn't started yet, he told us. The unemployment rate is still at its lowest. What people seem to forget at all cycles, including all economists at the US Federal Reserve, is that there is a long lag between interest rate hikes and the impact on the economy. In the econometric models we use, it takes two years before having an impact on the economy.

Analysis/Is the Bank of Canada going too away?

François Trahan says he has never seen such a perilous economic situation. As Bloomberg reported on Wednesday, echoing a study by the brokerage firm Redfin, the US real estate market has just experienced its biggest drop since 2008.

The total value of properties in United States fell 4.9% in the second half of 2022 after hitting a high of US$47.7 trillion last June. This decline is the largest since the period from June to December 2008, when the market fell by 5.8%. And we all remember the collapse of 2008…

In addition, home resales are at their lowest since 2010 and have been declining for 12 months. That said, property values ​​remain US$13 trillion higher than in February 2020, when the COVID-19 crisis began.

Furthermore, the average price of houses in the United States fell from $433,133 in May 2022 to $383,249 in January 2023, a drop of 11.5%. The largest declines were recorded in New York, San Francisco, in the most expensive markets. However, the value is increasing in Florida, especially Miami, with a 20% increase from December 2021 to December 2022.

“Since World War II, the real estate market has given us a glimpse of what will happen to the economy eventually. The real estate market tends to weaken a year before the recession. So, if we want to have an idea of ​​what's to come, we just have to look at what's happening to the real estate market. »

— François Trahan, forecasting economist

So, according to François Trahan, a new slide in the real estate market and its impact on the economy cannot be underestimated. He is of the opinion that the rise in interest rates is not over and that there will be a rebound in inflation in the next three to six months, which will require further action by the Federal Reserve. .

Such a scenario leads us to a contraction of the economy. Unfortunately, the recession is in front of us, it's crystal clear, François Trahan told us, adding that the stock market could fall again and that job losses will multiply even more in the sector. technology.

After a difficult year on the stock market, the markets have been recovering since the beginning of 2023, by around 4%. These increases will be short-lived, according to François Trahan, who warns us not to be deceived by the temporary recovery of the markets. It's clear, he says, that the real bear market hasn't arrived yet.

Furthermore, already 100,000 jobs have been lost so far in 2023 in technology companies in the United States, after the loss of 140,000 jobs in 2022. It's only just begun, according to the forecaster.

François Trahan's projections are somewhat similar to those of Jean Boivin, director of the BlackRock Investment Institute, former deputy governor of the Bank of Canada, whom we have received on several occasions at Economy Zone. In a speech to members of CFA Montreal in late January, Jean Boivin said that more interest rate hikes are to be expected.

Without appearing as alarmed as François Trahan, Jean Boivin said that it is incoherent to think that the Federal Reserve in the United States will soon enter a form of quantitative easing. In other words, the rise in rates could continue and Jean Boivin is not one of the experts who expect a reduction in the key rate from the end of 2023, and more in 2024.

< p class="e-p">As reported by my colleague Richard Dufour in La Presseon January 26, Jean Boivin expects inflation to ease slowly, but it will remain above market expectations and central bank targets.

Bankers central will not be in a position to easing for a very long time. Forget about rate cuts for a very long time. According to him, we will have a recession with high inflation, a situation that we have not seen for 40 years.

Not many experts have such a projection bleak economy for the next year. Most economists expect inflation to ease further in the coming months, central banks to stop raising rates, in Canada at least, and a rate cut to begin eventually in late 2023. early 2024.

The future will tell. I can't say it better!

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