Economic Outlook

Economic Outlook

Posted on Jun 17th, 2024

Hello, my name is Davis Vaitkunas, and this is the June 2024 edition of Bond Capital TV. Over time we see economic cycles of roughly 5 to 8 good years only to be followed by 2 to 3 bad years. Due to central bank intervention interest rates normally mimic this pattern by cresting in better times and then troughing in worse times. The down change in direction is often the result of an economic crisis such as the recent Covid-19 pandemic in 2020, the Global Financial Crisis of 2007 – 2008 and the dot-com bubble burst in 2000. And the up often being inflation.

As of June 2024, central banks around the world are currently leaning towards lowering interest rates. Central banks in smaller economies have already cut rates, including in Canada, Sweden, Switzerland, Hungary and Czechia. The Bank of Canada announced a 25-bps interest rate cut last week as did the European Central Bank. Today the Fed announced no change to its current benchmark level of 5.25% to 5.5%. Japan is the outlier today raising rates to combat inflation after years of below-zero rates and low inflation.

Specific to North America there can be divergence between the BOC and the FED however Canada’s rates tend to stay near the US to avoid currency devaluation and the import of unwanted inflation. Canada with 5-year mortgages and its exposure to commodities is more interest rate sensitive than the US with its 30-year mortgages and technology sector contribution.

I have noticed several recent reports using the words “record high interest rates”. I think we should dispute that language. The 30-year US mortgage rate averaged 7.73% from 1971 until 2024. Since the year 2000, the US has ranged from 3% to 5.5% with Canada seeing 4% to 6% averages for its prime interest rates.

If you are taking on debt and can get a rate under 5%, I think you have done very well. If it’s just over five percent or in that range close to five percent perhaps you may want to take a shorter-term mortgage and hope for a better rate down the road. If you are a business your concern is more likely availability and not cost.

With today’s North American prime rates in the 7% to 8% range I think a prudent person should stress test future debt service costs prior to accepting a loan by using a 10% to 11% rate. Across multiple cycles and for over 20 years, Bond Capital has advised on interest rates and advanced secured investment quality business loans to middle market companies throughout North America.

This has been another edition of Bond Capital TV. Thank you for watching.