This particular column should enable the general public to make economic forecasts, reliable regarding trends, but imprecise as to timing.
One should recognize first of all that automobile companies now are offering seven-year, interest-free loans for the purchase of their cars. That, of course, stimulates sales currently, but what happens over the next years?
One has every reason to infer that the automobile companies will experience a sales slump as present-day terms are so favorable that most purchases are being made now borrowing from future sales. Hence, the sales decline will have adverse ramifications for our manufacturing sector, of which automobile production is such a vital component.
Nowadays one can purchase a house with a mortgage at historic low interest rates. At some point in the not too distant future mortgage rates will return to normal levels; say three per cent above the inflation rate or 2%-plus. That would entail a mortgage interest rate of at least 5%.
When that occurs, what will happen to new house sales or home owners who purchase a house predicated on very low mortgage interest rates? Major defaults are likely.
Also, house prices now in many areas are soaring with buyers told (in Calgary, for instance) to bid 10% above the asking price. Delinquencies are sure to climb, and there goes the construction industry. The timing of such an event is uncertain. Clearly, there now is a bubble-like frenzy, but it may last some time.
It has been stated that inflation remains subdued, particularly because the labour market appears at first glance to be so quiescent. With this factor so contained it is stated that central banks will not need to raise interest rates; inflation appears dormant for the time being. Wages are integral part of the price index.
Nevertheless, the labour market is tightening now as employment has being gaining for more than a year, and that will lead to wage response. Corporations confronted by higher wage costs certainly will raise selling prices to compensate for that.
Therefore, we can anticipate a growing economy. Thus, investment will expand, using more of our productive capacity. Then as demand surges, prices are sure to climb too. Central banks will be forced to raise interest rates then. Given these factors money velocity will expand; concomitantly inflation will appear again.
We have seen this pattern repeated time and time again. Forecasts made now must note these circumstances; the outcome appears inevitable.