Economic webcast

Our latest economic webcast is now available: “Waiting for weakness.”

COVID conclusion

COVID-19 ceased to have a material effect on the global economy when China reopened in December. Symbolically, the World Health Organization declared the pandemic officially over on May 11.

This is not to say that the virus has ceased to circulate. A relatively new XBB.1.16 sub-variant is in fact surging in India and present in at least 30 countries, alongside a range of other long-standing variants. More will presumably emerge. But the high level of immunity and acquired antibodies worldwide now limit the scale of the damage to human health, and policymakers are no longer willing to crimp their economies with restrictions.

Ukraine war reversal

After months of Russia making incremental gains, it may now be Ukraine’s turn. Ukraine recently reported some gains around the fiercely contested city of Bakhmut, though the long-awaited spring Ukrainian counteroffensive is apparently still pending. Leaked U.S. intelligence suggests this effort may prove underwhelming in terms of territory captured.

It still seems wisest to expect a protracted war, even as China now tries its hand as peacemaker between the two nations.

Satellite data suggests – via pollution readings – that the Russian economy may have been hit harder than the country’s official statistics indicate.

Banking stress

In the weeks since our last #MacroMemo, an additional mid-sized U.S. bank named First Republic failed and was acquired by JP Morgan. It was much the same narrative as the two prior failures: large bond market losses paired with substantial depositor flight.

A handful of other regional banks remain vulnerable, most obviously PacWest, but also potentially Western Alliance.

What makes the banking stress so frustrating is that the Fed’s special liquidity program is theoretically sufficient to stop a bank run. U.S. banks can secure liquidity and paper over any temporary insolvency via the program. In practice, the government also appears willing to make all depositors whole, not just those with less than $250,000 in their accounts. In turn, it is not necessary for depositors to pull their money.

However, if depositors extract their money anyway, as has been happening across a range of mid-sized American banks, the program isn’t enough by itself to keep the banks operational. Although the liquidity program allows banks to pay out their depositors, the cost of the new funding is much more expensive. Whereas a bank pays no interest on funds secured via a chequing account, it must pay approximately 5% to access the Fed’s special program. It is hard to run a viable bank when the cost of funding is that high. And even if the bank’s customer base eventually stabilizes, it is quite unlikely that a bank that has lost, say, half of its deposit base will be able to organically rebuild it over a reasonable timeframe. So the bank would have to continue leaning on the liquidity program, slowly bleeding money.

Smaller banks

It appears that larger U.S. banks are weathering the stress well. But what about banks that are smaller than the troubled mid-sized entities? One might imagine that small banks should be even more vulnerable than mid-sized banks given even greater geographic and sector concentration, a greater reliance on a smaller number of potentially flighty depositors, lighter regulations, and so on.

But in practice the small banks look pretty good, at least on the aggregate. The smallest U.S. banks actually have more capital than their larger brethren (see next chart).

Smallest U.S. banks have more capital

As of Q4 2022. Source: Federal Deposit Insurance Corporation, Macrobond, RBC GAM

Similarly, the smallest banks have the most insured deposits as a fraction of their deposit base (see next chart). They also have significantly more liquid assets than mid-sized banks.

Smallest banks have the most insured deposits as a percentage of total deposits

As of 10/01/2022. Source: Federal Deposit Insurance Corporation, Macrobond, RBC GAM

Finally, the smallest banks appear to be much less exposed to the troubled U.S. commercial real estate sector than mid-sized banks (see next chart).

Smallest banks appear less exposed to commercial real estate risks than mid-sized banks

As of Q4 2022. Source: Federal Deposit Insurance Corporation, Macrobond, RBC GAM

Thus, on the aggregate, the smallest U.S. banks don’t appear to be all that vulnerable to recent stressors. They are better capitalized, more liquid, less exposed to deposit flight and less exposed to commercial real estate than the mid-sized banks that have stumbled. Among the thousands of small banks there are surely a number of outliers that contradict this cozy conclusion. But the fact that they are quite small limits the economic damage, and the fact that they are not publicly traded limits the direct market impact.

Business cycle still ‘end of cycle’

We have refreshed our U.S. business cycle scorecard for the latest quarter (see next chart). It continues to emit an end of cycle’ reading, though the ‘recession’ argument has strengthened significantly over the past quarter. The bottom line is that the economy appears to be old and thus vulnerable to a recession in the not-too-distant future.

U.S. business cycle score suggests end of cycle

As at 04/28/2023. Calculated via scorecard technique by RBC GAM. Source: RBC GAM

Among the more interesting inputs, the default rate on high-yield debt is now rising (see next chart).

U.S. high-yield default rates are rising steadily

As of March 2023. Last-12-month default rates of U.S. high yield corporate bonds. Source: Bank of America, RBC GAM

Similarly, the wage-growth of low-skilled workers has now decelerated to the point that is below that of the average worker – a development that usually only happens when a recession is beginning (see next chart).

Wage growth of U.S. low-skilled workers is decelerating quickly

Limited-service restaurants as of Feb 2023. Total private non-farm as of March 2023. Source: U.S. Bureau of Labor Statistics, Macrobond, RBC GAM

Economic developments

The San Francisco Fed’s news sentiment index continues to trend downward, hinting at more difficult economic conditions (see next chart).

Daily news sentiment is again trending downward

As of 05/07/2023. Source: Federal Reserve Bank of San Francisco, Macrobond, RBC GAM

In contrast, the North American job numbers remain robust. The U.S. added another 253,000 workers in April, and Canada added 41,000. Unemployment rates remain at cycle (and multi-decade) lows.

But we continue to flag that second-tier employment indicators are skewing more negatively than positively. As an example, U.S. job openings are now clearly descending (see next chart). Jobless claims also continue to rise, though the picture is blurred by revisions and distortions (see subsequent chart). In Canada, the latest round of corporate earnings calls reveals an ongoing shift away from the mention of ‘labour shortages’ toward ‘layoffs.’

U.S. labour market shortage continues

Unemployment as of April 2023. Job openings as of March 2023. Source: BLS, Macrobond, RBC GAM

U.S. initial jobless claims have been inching higher

As of the week ending 05/06/2023. Source: U.S. Department of Labor, Macrobond, RBC GAM

Lending standards continue to tighten

While much of the economic data is ambiguous about the direction of the economy, credit conditions argue strongly for weakness ahead. Optimists will note that the latest data on lending standards didn’t deteriorate as sharply as one might have imagined after the banking stress of the past few months. This misses the point, however, that there was a great deal of tightening over the prior several quarters such that the latest readings are now squarely in recessionary territory. Business lending standards are now quite tight – especially for commercial real estate loans (see next chart).

U.S. business lending standards are tightening

April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices. Source: Federal Reserve Board, Macrobond, RBC GAM

Businesses appear to recognize that economic conditions are set to deteriorate, as their demand for credit has also plummeted (see next chart).

U.S. demand for business loans has plunged

April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices. Source: Federal Reserve Board, Macrobond, RBC GAM

Bank lending standards have also tightened for consumers (see next chart).

U.S. bank lending standards for consumers continue to tighten

April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices. Shaded area represents recession. Source: Federal Reserve Board, Macrobond, RBC GAM

Curiously, the consumer demand for loans has actually ticked up slightly (see next chart), with ambiguous interpretation. Does it mean that consumers are feeling more optimistic, or instead that households have run out of money and so need credit? Either way, perhaps the bigger point is that demand is still significantly weaker than normal.

U.S. consumer demand for loans has ticked up

April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices. Shaded area represents recession. Source: Federal Reserve Board, Macrobond, RBC GAM

Non-U.S. developments

Canadian Gross Domestic Product (GDP) is always quite lagged, with February rising by a below-consensus 0.1% and March tracking -0.1%. Looking closer to the present, Statistics Canada’s Real-Time Local Business Conditions Index recently plummeted (see next chart). This has historically been a volatile series, but usually not to quite this extent. There is tentative weakness ahead for Canada.

Business conditions in Canada have plunged

As of the week of 05/08/2023. Equal-weighted average of Business Conditions Index of Calgary, Edmonton, Montreal, Ottawa-Gatineau, Toronto, Vancouver and Winnipeg. Source: Statistics Canada, Macrobond, RBC GAM

In Germany, factory orders and industrial production both fell sharply in March. This highlights the possibility that German GDP will be revised down in the first quarter to the extent that the country will have recorded two consecutive quarters of decline – a rough-hewn proxy for recession.

A less-bad Canadian recession?

Ever since we penciled in a developed-world recession, we have assumed that the Canadian experience would be moderately worse than the U.S. due to additional household debt and a greater housing vulnerability to rising interest rates.

However, we now believe any Canadian recession may be no worse than in the U.S., for several reasons.

First, Canada’s immigration rate has surged remarkably (see next chart), creating a pool of additional prospective workers and demand for products.

Canadian net immigration has surged

As of Q4 2022. Source: Statistics Canada, Macrobond, RBC GAM

Even though Canada has a chronically worse productivity growth rate than the U.S., Canada’s demographic profile is sufficiently superior to the U.S. (see next chart) that it increasingly seems reasonable to assume a faster potential growth rate for the country than for the U.S. This provides a buffer against a deep economic decline.

Working-age population is growing in Canada

As of 2022. Source: United Nations Department of Economic & Social Affairs (UNDESA), Macrobond, RBC GAM

Canada has also enjoyed a significantly positive terms of trade shock over the past few years, even if this is now fading slightly as commodity prices have retreated off of their highs (see next chart). The bottom line is that commodity prices are still higher than normal, and so Canadian producers are capturing more profits than usual.

Canada’s positive terms of trade are fading slightly

Terms of Trade Index as of Q4 2022. S&P GSCI Index as of Q1 2023. Source: Macrobond, RBC GAM

While Canada’s fiscal positions remains in deficit, it is far better positioned than most of its peers (see next chart). At some point, all of those other developed countries with structural governmental deficits of 4% to 7% of GDP will have to engage in austerity to avoid spiraling debt-servicing costs. Canada does not face this plight.

Significant structural fiscal deficits persist

International Monetary Fund projections for year 2023. Source: IMF World Economic Outlook, April 2023, Macrobond, RBC GAM

For the moment, Canada’s housing market is tentatively stabilizing (see next chart). We are not fully convinced this new uptrend can continue, but the worst of the decline may be over.

Canadian home price by market is tentatively stabilizing

As of March 2023. Source: Canadian Real Estate Association, Macrobond, RBC GAM

• Canadian households are carrying more excess savings from the pandemic than most countries. They may very well need this to service resetting mortgage rates, of course, but at least the funds exist.
• Canadian inflation is moderately lower than in the U.S. and many other developed countries. This argues there is a lower risk that additional monetary tightening will be needed in Canada.
• Canadian banks are not suffering the same stress as U.S. mid-sized lenders, with the result that lending standards are not tightening as sharply – especially toward business borrowers.
• Finally, the Canadian dollar remains somewhat undervalued, providing a competitiveness boost to Canada.

Again, this doesn’t mean Canada can avoid a recession, but it argues that any recession doesn’t necessarily have to be any worse in Canada than the U.S.

More recession musings

The most important thing to know is that we still assign an 80% chance of a North American recession over the next 12 months. But there are a few other thoughts worth sharing.

Most anticipated recession in history

We have previously discussed the idea that this is the most anticipated recession in history. The first question is whether that makes the recession more or less likely to happen. You can argue ‘less likely’ because it gives an opportunity for businesses and other economic actors to pre-emptively resolve their vulnerabilities and so avoid the intense household- and business-level problems that can arise when a recession arrives with no notice. Furthermore, advance notice would normally give central banks a chance to cut interest rates. This could reduce the likelihood or at least intensity of any recession.

However, this time is somewhat different. Central banks are not cutting rates because they are still busy taming inflation. That eliminates a key advantage from advance warning. Additionally, when a recession is expected, businesses and households may cut back their spending, creating a self-fulfilling recession prophecy. Weighing this evidence, we tentatively conclude that the highly anticipated nature of the recession makes it incrementally more likely.

But there is a second angle to the matter of an anticipated recession that is worth thinking about: the market implications of a recession. On this front, it seems quite clear that – all else equal – an anticipated recession should do less financial market damage as it arrives because much of the adjustment will have happened in advance. As such, it could be that the effect on the stock and bond market is smaller than during the average recession. This aligns with the fact that risk assets were weak last year as recession expectations mounted.

Interpreting a steeper yield curve

In the previous #MacroMemo we noted that the U.S. 2 year—10 year yield curve had steepened significantly. This didn’t invalidate the recession call because when the yield curve bull steepens that is usually bad news for the economy in the near term.

Furthermore, one usually sees a pivot from a flattening curve to a steepening curve when the recession grows near.

We have now put numbers to that claim. Indeed, a flattening yield curve to the point of inversion is a recession signal from more than a year out, but a bull steepening 2 year—10 year curve normally signals a recession is about seven months away. To the extent this steepening began in March, one might argue for an October recession start. We are inclined to think this could happen sooner, but that’s what the yield curve signals.

Sticky inflation

The April inflation data largely stagnated after a nice improvement in March. Headline inflation in the U.S. merely fell from 5.0% to 4.9% year-over-year (YoY) and the monthly price increase of +0.4% was consistent with about a similarly hot 5% annualized pace. Gas prices didn’t help, used car prices rebounded, and housing costs continue to exert significant pressure. Of course, on the latter, the influence is famously lagged and should begin to turn around the middle of 2023.

The inflation report wasn’t all bad. A variety of core inflation metrics have started to decline (see next chart). At the same time, the overall breadth of inflation continues to narrow, signaling that inflation is becoming less pervasive (see subsequent chart).

U.S. core inflation metrics have started to decline

Personal Consumption Expenditures (PCE) deflator as of March 2023. Consumer Price Index measures as of April 2023. Shaded area represents recession. Source: Macrobond, RBC GAM

High inflation in the U.S. is quite broad, but finally narrowing

As of April 2023. Share of Consumer Price Index (CPI) components with year-over-year % change falling within the ranges specified. Source: Haver Analytics, RBC GAM

Inflation resurgence risk

While the most likely path for inflation from here is downward, there remains the risk that inflation gets stuck at an elevated level. Fortunately, the definition of ‘elevated’ has changed over the past year such that the worry today is merely inflation getting stuck at 3-5% rather than at 10%, but the consequences would still be undesirable.

This risk has arguably increased recently, in part due to the aforementioned inflation report, but also because a few other things either aren’t fully cooperating or could cease to cooperate.

The biggest risk is arguably that a recession fails to materialize. Without a looser labour market, it will be hard to pull down stubbornly high service-sector inflation. While a recession remains likely, it is not certain and the fact that it has stubbornly refused to appear for several quarters is worrisome.

Home prices are staging a tentative rebound in North America, and – if sustained – could reignite the largest single component of the price basket. We have our doubts that this rebound will persist, but it would be highly consequential for inflation if it did.

Commodity prices have mostly cooperated, but we continue to flag the risk that the war in Ukraine ignites a further increase in energy prices, or that China’s economic reopening drives energy and base metals prices higher.

Manufacturers are becoming slightly more worried about raw material prices again (see next chart), though it is nothing like a few years ago.

Raw material prices are increasing again

As of April 2023. Shaded area represents recession. Source: Institute for Supply Management, Macrobond, RBC GAM

Used car prices, which soared during the pandemic, have lately ceased their post-pandemic decline (see next chart).

Wholesale used car prices have turned again

As of April 2023. Shaded area represents recession. Source: Manheim Consulting, Macrobond, RBC GAM

There is also the risk that consumers become accustomed to moderately elevated inflation. People are fretting about inflation less than before (see next chart) and yet expecting more of it (see subsequent chart). This makes it harder to eradicate the last remnants of excess inflation.

Google searches fall on ‘worldwide inflation’

As of the week ending 05/06/2023 (partial data used for the week). The number of Google web searches for the topic relative to the highest point within the finance category for the region and time period selected. Source: Google Trends, RBC GAM

U.S. consumers’ inflation expectations are rising again

As of April 2023. Source: University of Michigan Surveys of Consumers, Macrobond, RBC GAM

Finally, it is notable that the real-time inflation data from late April and early May – since the last formal Consumer Price Index (CPI report was compiled – isn’t fully cooperating (see next chart).

Real-time inflation data isn’t fully cooperating

PriceStats Inflation Index as of 05/07/2023. CPI as of April 2023. Sources: State Street Global Markets Research, RBC GAM

For all of this, let us reiterate that the most likely scenario is that inflation resumes its decline given higher interest rates, lower commodity prices, improved supply chains, falling producer prices in China and diminished company pricing power. But the scenario of inflation remaining elevated is more conceivable than it was a few months ago, as demonstrated by this inflation probability density function for the next five years generated by the Minneapolis Fed (see next chart). It shows that while markets believe the most likely scenario is a return to normal inflation, uncertainty is higher than normal in both directions and especially to the upside.

Uncertainty over path of inflation is high

Probability density function of CPI inflation, generated by the Federal Reserve Bank of Minneapolis, is derived from inflation caps and floors.  Source: Federal Reserve Bank of Minneapolis

Central banks nearing target

Most developed-world central banks continue to converge upon approximately 5% policy rates. The Fed raised its fed funds rate from 5.0% to 5.25% and suggests it may be done (while emphasizing that further tightening remains more likely than easing). Symbolically, the U.S. policy rate is now higher than the country’s annual inflation rate – positive real interest rates of a sort, finally!

The Bank of Canada remains on hold at 4.5%. The Bank of England just raised its policy rate from 4.25% to 4.5% and may have a little further to go. The European Central Bank has slowed from 50 basis point rate increases to 25 basis point hikes, reaching a 3.75% policy rate recently – also with a little more tightening likely.

As central banks near the finish line, it is worth acknowledging the uniqueness of the journey over the past 18 months. The tightening cycle was unusually aggressive and rapid (see next chart for the U.S. experience versus prior tightening cycles).

Current hiking cycle is the most aggressive in decades

As of March 2023. Source: Federal Reserve Board, Macrobond, RBC GAM

From here, rate cuts are unlikely in the near term. That would be out of step with historical cycles and inconsistent with the primary goal of taming inflation. But the discussion of cuts could become more serious as the year nears conclusion.

Debt ceiling draws near

The U.S. debt ceiling is set to become a binding constraint around or just after June 1, according to Treasury Secretary Janet Yellen. Government bills that mature immediately before that date are trading at a considerable premium, while those maturing immediately after it are trading at a notable discount. The situation is more serious than usual given a divided Congress and promises by some Republicans to hold the debt ceiling unchanged.

Some experts predict catastrophic economic outcomes with the loss of as many as seven million jobs and a seven percentage point hit to GDP. But this is only conceivable if the debt ceiling remains permanently unchanged and the government is suddenly forced to become and remain about one-quarter smaller overnight. That is extremely unlikely. One might conceive of the government having to be temporarily smaller for a few days until the pressure gets to politicians, but that annualizes to a fairly small economic hit to annual GDP.

A deal before the deadline remains possible. In fact, all previous debt ceiling confrontations have ended with the debt ceiling raised, and without default. The White House and Republicans are now engaging, with the recognition that time is short and some spending cuts will prove necessary. The amount is in question, as is the number of years the spending cuts will last. The Republicans will surely remember that the 2011 tussle over the debt ceiling ended with a significant drop in the popularity of the Republican Party, presumably limiting its desire for a reprise.

Some weird ideas could yet be deployed to avoid significant problems. A ‘trillion dollar coin’ could theoretically be minted to pay for government expenses. The 14^th Amendment insists that the “validity of the public debt of the United States … shall not be questioned,” seemingly overruling the debt ceiling. It may even be possible to issue government bonds at a premium, meaning that a government bond worth $100 at maturity (which is what matters for the debt ceiling) could be issued at $110, raising more money than the debt ceiling technically permits. Investors would have to be wooed into a certain capital loss with an extremely generous coupon. In reality, these are all unlikely.

If a deal is not reached before the deadline, the most likely scenario is that the government will prioritize certain payments over others. Debt payments – interest and principal – would likely be prioritized over other expenses, avoiding a technical default. The government would have to cut back on other spending, potentially including such areas as government payrolls or even pension payments. One could imagine a missed pension payment prompting a nationwide outcry that forces politicians to quickly raise the debt ceiling. There is ample precedent for government workers not being paid for a temporary stretch, as per brief government shutdowns in 2018 and 2019.

Prominent pundits assign a risk of no more than 1-3% that the U.S. government actually defaults on its debt. If this were to happen the government would presumably repay any amounts owing as soon as the debt ceiling is lifted.

There are nevertheless various financial market risks. Most obviously, political turmoil with an uncertain resolution could send risk assets lower and – somewhat ironically given that the theoretical threat is to the sovereign bond market – send bond prices higher (and bond yields accordingly lower).

What if the U.S. sovereign debt rating were downgraded in response to a technical default or even a near miss? One betting market assigns a 77% chance to this scenario. It could prevent some low-risk institutional investors from holding Treasuries, forcing a large outflow that could instead send bond prices lower. But it is not clear that a technical default would immediately result in a downgrade. Many such investors have some flexibility in their decision-making over the short run, and would likely scramble to adjust their investment mandates to permit such ownership over the medium run.

There is also the risk of some U.S. money market funds ‘breaking the buck’ in the event of a default: losing sufficient money that their valuation falls below par. If investors responded by selling their money market funds, it could force the funds to sell a wide range of short-term securities, creating distortions elsewhere.

There are also concerns that the many corporations that hold their cash in ‘risk free’ Treasury bills will suddenly be without that cash at the time they need it, rendering them unable to pay their bills with a cascading effect on the economy.

Despite these more exotic risks, we return to the basic observation that a technical default is quite unlikely and would be temporary if it happened. As such, any market weakness in response to debt ceiling issues should arguably be viewed as a buying opportunity.

Once the debt ceiling has been dealt with, there will be a liquidity drain on the economy. This is to say, the Treasury will be in a hurry to issue a slew of debt so that it can return to normal functioning and also replenish the various reserve funds that have been drained in recent months. This means quite a lot of money will suddenly be sucked out of the economy and into government coffers. That could send yields higher and have a modestly negative impact on the economy.

Housing strength

Recent housing data in both the U.S. and Canada has strengthened, reversing an earlier downward trend. Prices are now rising in both countries, prospective buyer traffic has increased and the U.S. National Association of Home Builders sentiment metric is elevating off its low (see next chart).

U.S. home builder sentiment rebounds

As of April 2023. Shaded area represents recession. Source: National Association of Home Builders, Macrobond, RBC GAM

It is critically important to get the call right on the housing market. If the housing market continues to revive, a recession is much less likely to occur give the centrality of housing to the economy and its past status as a recession bellwether. Similarly, if home prices continue to rise, it will be significantly harder to tame inflation over the next few years, and central banks may have to increase their policy rates further (eventually felling housing at a later date?).

There are undeniably arguments as to why housing might continue to rebound. In the U.S., most people aren’t suffering all that much from rising interest rates given the popularity of 30-year mortgage terms and relatedly because so many people locked in their mortgages at ultra-low rates a few years ago. The mortgage term arrangement is much less helpful in Canada, but Canada has a different ace in the hole: a massive inflow of immigrants that have created a structural shortage of housing units for the foreseeable future.

Despite these points  we are dubious that this housing rebound can last. This is for several reasons.

1. It is not unusual for housing markets to be seasonally strong in the spring but then to cool off in the summer.
2. The number of homes for sale is extremely constrained in both countries (see next two charts). Owners don’t want to crystalize recent losses, or don’t want to move to a new home given the higher mortgage rate it would entail. That leaves a large number of potential buyers – who have enjoyed rising employment, higher wages and falling home prices – all competing over a limited supply of properties. Over time, more supply should come to the market, easing this acute constraint.

U.S. housing supply shortage continues

As of March 2023. Source: Redfin, Haver Analytics, RBC GAM

Canada’s housing inventory is running low

As of March 2023. Active listings estimated by multiplying months of inventory by number of sales during the month. Shaded area represents recession. Source: Canadian Real Estate Association, Haver Analytics, Macrobond, RBC GAM

3. We believe a recession is coming. That normally translates into a weaker housing market. It should also reduce employment and wage growth in a way that limits homebuyers’ purchasing power.
4. Turning to more fundamental matters, housing affordability is poor in the U.S. and atrocious in Canada, due in part to rising home prices in previous years and in part to the more recent spike in mortgage rates. Affordability is usually magnetically attracted back toward normal. This suggests that home prices need to decline or at least stabilize for a period of years. It would be unusual for a new housing cycle to begin without significantly resolving poor affordability.
5. Most housing downturns take longer to resolve than a mere 12 months (see next table). Our review of historical housing busts across a range of developed nations finds that the median housing bust lasts 6.6 years. They are not rapid affairs. Even the shortest housing correction in modern history took longer than this: 1.3 years in the U.K. in 2007-2009. Furthermore, the median decline in home prices across historical episodes is 25.9%: significantly more than the decline in either country so far.

Historical housing downturns take extended time to resolve

Source: Statistics Canada, S&P Global, CoreLogic, Federal Reserve Bank of Dallas, Bank for International Settlements, Bank of Spain, Macrobond, RBC GAM

It may be that the worst of the housing decline is over. Many of the past corrections saw a sharp decline for a few years followed by a multi-year malaise (see next chart for a Canadian example). But it would be verging on unprecedented for home prices to sustainably rise from here. We continue to budget for an underwhelming housing market, which keeps the prospect of a recession and falling inflation alive.

Historical housing corrections experience long malaise after initial decline

As of March 2023. Source: Statistics Canada, Macrobond, RBC GAM

-With contributions from Vivien Lee, Thao Le and Aaron Ma