It’s not easy these days to hold your own in the financial game when you’re getting your wallet hammered from all sides, all sides.
Interest rates are rising. The stock market is in correction. The bond market is falling. Buying a first home is less and less accessible. Inflation remains high. Products are more and more expensive. Savings are visibly melting among middle-income households. Wages are not rising enough. Companies are victims of the labor shortage. Refueling is extremely expensive.
Financial stress is at its peak these days. Unfortunately, this is likely to go on for quite a while. Might as well take our troubles patiently! It would be surprising if the financial situation changed dramatically in the short term.
Vladimir Putin’s invasion of Ukraine will continue, economically speaking, to heavily affect the whole world. And when the war ends, the economic consequences will be ubiquitous for quite some time.
Here are the six things that concern me:
1. PETROL BURST
The price of gasoline at the pump continues to climb. In Montreal yesterday, a liter of regular gasoline reached 205.9 cents. This is 68.7 cents more than the average retail price (137.2 cents) per liter in 2021. We are therefore talking here regarding a spectacular increase of 50%.
Compared to the average price (106.92 cents) of 2020, the increase at the pump reaches 92%.
Meanwhile, the governments of Quebec and Ottawa, but more particularly Quebec, are also taking advantage of soaring gas prices to fill their coffers on the backs of motorists.
Of the 205.9 cents per liter of gasoline, they pocket 59 cents in taxes, including 19 cents for Ottawa and 40 cents for Quebec. Compared to the taxes collected on the average price in 2021, the increase reaches 20%.
Given the summer holidays and the increase in travel this entails, it should come as no surprise to see the price of a liter of gasoline exceed 220 cents this summer.
2. INFLATION
In addition to soaring gas prices that are fueling inflation, there is also the rising grocery bill that is causing serious financial worries for low- and middle-income households.
So much so that, according to the Léger-Le Journal-TVA-QUB survey, some 80% of Quebecers earning less than $60,000 a year plan to reduce their spending.
And the most targeted expenditure items are: restaurant (and bar) outings, cultural activities, car travel and groceries.
Regarding groceries, households with tight finances are condemned to run right and left for bargains in order to feed themselves as much as possible at relatively reasonable prices.
3. EMPLOYMENT
Average weekly earnings in Quebec have increased by 4.9% over the past 12 months from March 2021 to March 2022. They now reach $1,113.94 per week, up $51.73.
On an annual basis, we are talking here regarding a gross income of $57,925, or $2,690 more over 12 months.
The job market is doing well. According to Statistics Canada data, the unemployment rate in the province is historically low: 3.9%. There are 179,600 unemployed people there.
One caveat: the number of employees may have increased by 7.9% over the past 12 months, but companies are still unable to operate at full capacity due to the shortage of labour.
There are currently 259,200 vacant positions in Quebec. The “vacant positions/salaried employees” ratio stands at 6.7%, the second highest provincial rate in the country.
4. RATE INCREASE
To counter inflationary pressures, central banks, such as the Bank of Canada and the US Federal Reserve, have no choice, they say, but to raise their respective key rates.
From an initial level of 0.25%, key rates might exceed 2.0% by the end of the current year.
This has the effect of pushing up the entire interest rate grid: mortgages, personal loans, business loans, etc.
This credit crunch will have the consequences for the ordinary world of making the purchase of residential properties less accessible, of putting more pressure on heavily indebted consumers, of reducing the rate of personal savings.
5. REAL ESTATE COOLING
Rising mortgage rates will likely cool the overheated residential real estate market. It was time.
In April, the median price of a single-family home across the province reached $450,000. This is $188,000 more than in April 2020, in the midst of the COVID-19 pandemic. This means that in two years, the price of the “Quebec cabin” has exploded by 72%.
Meanwhile, the median price of a condominium would increase from $134,000 to $384,000. Up 54% in two years.
In April, the APCIQ, which represents real estate brokers, reported a significant drop in total sales and active listings compared to April 2021.
Given the rise in mortgage rates, it would be surprising if the median price of single-family homes and condominiums might continue to climb.
At Desjardins, we even predict a price drop that might reach 12%.
6. MARKET CORRECTION
One of the worst enemies of the stock market is when the time comes for central banks to tighten credit by launching a series of increases in their key rates.
This credit crunch obviously has a negative impact on the level of corporate debt and profitability.
While companies in difficulty are likely to dig their graves, companies in good financial health will see their profits scoured by rising financing costs.
This is why, in the face of declining corporate profitability, or the threat of a decline, the securities of companies listed on the stock exchange have fallen sharply from their recent peaks. With the exception in particular of securities of oil companies which are largely benefiting from the vertiginous rise in the price of gasoline at the pump.
At the height of the storm last week, the NASDAQ was down 27% this year, the S&P 500 down 18% and the Dow Jones down 14%.
After eight weeks of declines, US equity markets managed to rebound this week, paring recent heavy losses by 3 to 4 percentage points.
During the American collapse, the Canadian stock market managed to limit its losses. Still, its main index, the S&P/TSX, only showed a slight decline of 5% at the worst of the storm.
Now, a good week on the stock market does not mean that the stock market correction is over.
Caution required!
