‘A classic temporary oil price driven shock’: Desjardins’ chief economist predicts what’s next for investors

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The conflict in the Middle East is approaching the two-month mark. For now, this uncertain geopolitical backdrop has resulted in minor revisions to economic growth forecasts with expectations that an agreement may be reached in the near term and surging oil prices may soon retreat.

On April 16, The Globe and Mail spoke with Jimmy Jean, chief economist and strategist at Desjardins Group, for a two-part interview. In part one, featured below, Mr. Jean broadly discusses his inflation expectations arising from the Iran war and the potential impacts on the economy, interest rates, the Canadian dollar and the consumer. In part two of this interview which will be published later this week, Mr. Jean comments on the sustainability of the market rally in this uncertain environment and suggests investments to consider owning.

What effects will the Iran war have on the Canadian economy and consumers?

The straight answer to that is more inflation.

In our forecasting, we’ve adjusted our position taking into consideration the physical damage to energy producing infrastructure in the Middle East, which accounts for 30 per cent of global oil supply. There is some extensive damage, which even if the war were to end, even if there was a permanent ceasefire, it would take months to years to repair all that capacity. So, it will take time for oil supply to really come back to its previous path. Therefore, we think by the end of the year WTI is at US$80 per barrel, which is higher than we previously forecast.

We’re going to see headline inflation rise above 3 per cent and stay there for some time, and that’s really what puts central banks in a tough spot right now.

With your forecast calling for headline inflation to exceed 3 per cent, how does that impact your forecasts for real GDP growth and interest rates?

That’s where it gets interesting and a little bit tricky in the sense that for Canada, all things equal, an oil price shock is a net positive for the economy because we are a net oil exporter, which brings in more revenue, particularly in provinces like Alberta, Saskatchewan and Newfoundland. This offsets the negative impact it has on consumers and businesses that are seeing their profitability or their income deteriorate. This is why you’ve seen financial markets price in faster rate hikes in Canada.

Having said that, I think it’s important to take into consideration the starting point of the Canadian economy heading into this. We were seeing the labour market deteriorate. The housing markets in two of the three major cities in Canada, Toronto and Vancouver, are not doing well. And if the Bank of Canada were to hike rates, it would have very significant consequences on those housing markets - that’s why it’s trickier.

So, have you revised your Canadian real GDP growth forecasts?

For 2026, we’re forecasting around 1.3 per cent, somewhere between 1 and 1.5 per cent. We haven’t modified our forecast because, again, there’s offsetting factors. So, we think it’s broadly neutral, but it’s true that it will support the outlooks for provinces like Alberta and Saskatchewan, while at the same time, negatively affect the outlooks for Ontario and Quebec, the provinces that are net importers of energy products.

When we spoke in October of last year, you expected the Bank of Canada would begin rate hikes in the fourth quarter of 2026, and that the overnight rate would rise to 2.75 per cent in 2027. How have you adjusted this forecast?

Since that conversation, we have delayed that timeline for rate hikes. We have rate hikes starting in 2027, in the first or second quarter. We expect just a few hikes from the Bank of Canada, just a normalization to get more towards the middle of the neutral range. It’s not so much tightening per se because the economy does not need tightening, underlying inflation is well behaved. And we think we should be beyond the negative uncertainty impact coming from CUSMA [Canada-U.S.-Mexico Agreement] in 2027. As well, the government’s initiatives when it comes to defense and infrastructure should start to reflect more positively on the economy and also on private investments.

But this is a very uncertain environment and there are scenarios where the next move could be a cut, that’s not our baseline scenario but we’re still mindful of risks.

Your expectation for headline inflation to rise above 3 per cent will that be temporary or is that going to be something that stays with us for a while?

We see this as a classic temporary oil price driven shock.

How long it persists will depend on the spillovers to other components of the CPI basket, and one that we’re watching very closely is the fertilizer channel and food inflation down the road.

What’s the probability of that?

I think we’re likely to see some of that. Then, the question will be the extent to which grocers are going to be willing to pass this through to consumers as opposed to absorbing part of the shock.

In this environment, generally across the economy, there’s less pricing power so we could see grocers absorb at least part of it, but of course to what extent is difficult to know in advance. And it will also depend on how much fertilizer costs increase. If this gets solved very quickly, it might prevent the worst, but if it drags on, that’s what we could see.

In general, how have CEOs that you’ve spoken to reacted to the war in the Middle East? What actions are they taking or considering taking?

There’s a lot of concern surrounding the consumer. There are pressures on household budgets stemming from higher food prices, from housing, even though rents have come down a little bit, but still cumulatively, this has taken a heavy toll on many households’ budgets.

Of course, oil is another pressure. Everything that has to do with transportation, freight transportation, because of the diesel component that’s tied to the shock, that’s also top of mind.

You have sectors that were not really touched by CUSMA but are now going to see some pressure. For instance, if we see some pressure on food prices, restaurants are going to see an impact. So, it means that we’re going to see fewer businesses that are truly resilient. You’re narrowing the pool of industries that are not dealing with a problem of some form.

There’s a confluence of factors that are acting as headwinds right now and are top of mind.

What is your outlook for the Canadian labour market?

We’ve seen the employment-to-population ratio, that’s what I look at most, moved from 60.8 per cent at the beginning of the year with the latest figure at 60.6 per cent. That’s a significant decline in that span of time. It shows that it’s not just lower population, but that there’s significantly less appetite from employers to hire. It’s a sign of businesses being very cautious.

And I would say, probably to a smaller extent at this time, but it could also partly reflect displacement from AI, artificial intelligence, certainly for entry level positions. It’s very well documented, in the U.S. at least, that the market has dried up for new interns in certain sectors.

Did you say 60.8 per cent down to 60.6 per cent because that seems like such a small amount?

It seems like it’s small, but that’s actually a pretty big movement.

Could you comment on Fed chair nominee Kevin Warsh and U.S. monetary policy?

Kevin Warsh has been very well received as someone who kind of toes the line between what the president wants ultimately, but also keeping in mind the implications that could arise from a Fed that’s no longer independent. That’s why he was well received and when he was named, we saw gold prices fall.

He likely promised President Trump that he would cut interest rates, that’s why we still have the Fed, despite the oil price shock, cutting interest rates, probably in the back end of this year.

But I think his big focus will be on the balance sheet. He wants to reduce the size of the balance sheet, and that is something that still needs to bear watching because if it’s done too rapidly or in a disorderly way, it is something that could push up longer-term interest rates, where we’ve seen some pressures since the start of the year, and that could derail many economies, including the U.S.

What’s your outlook for the Canadian dollar relative to the U.S. dollar? Last October, you said that you see it slowing rising and getting up to 78 cents by the first quarter of 2027.

Right now, we still think the Canadian dollar has room to move higher and that supposes that some of the elevated uncertainty related to Iran starts to fade. We think that the push that this has had on the U.S. dollar is going to wear down, and that’s going to support the Canadian dollar.

After that, the big hurdle for the Canadian dollar will be the CUSMA. Certainly with the news that we had about steel and aluminum tariffs and how they have broadened out to finished products, that’s a major issue that could limit foreign investors’ appetite to invest in Canada and something that could be a source of downside risk into July 1^st,, when they decide on whether they agree to extend CUSMA. There are still pressures that over the next few months could negatively affect the Canadian dollar.

But into year end and 2027, that’s when we have the Canadian dollar on firmer footing in the $1.35s or thereabouts.

Turning to the housing market, the Ontario condo market has been a source of pain for many homeowners. When will prices stabilize? And when do you see prices eventually rising?

This year, there’s still likely to be some pain.

2027, 2028 is when we think things might be more stable. We have immigration starting to recover in 2027, and the economy doing a little bit better. That’s why we say 2027 is when we see stability but it’s going to look like a lost decade for the most part. We’re not likely to see very strong pricing increases because of where affordability stands at this point.

What’s the number one question you are asked by clients?

I would say, “Fixed or variable?”. Every day I get that question.

It’s on interest rates, how likely we are to see interest rate increases, and how much the Bank of Canada could hike interest rates.

So, what do you reply when you are asked, “Fixed or variable?”

Right now, I think given the shocks and the fact that the balance of risks on inflation is more skewed to the upside, I don’t hate the idea of locking in.

If you didn’t like the last few years and the surprises that you’ve gotten on mortgage rates, variable rates, if you are losing sleep at night on increases, I think it’s not a bad idea to lock in to get protection from that risk. I don’t think the risk is that material, but there’s more upside versus downside risk to inflation right now.

Importantly, you also have the fiscal situation. Governments have seen their balance sheets deteriorate quite a bit, and that is pushing term premiums higher worldwide, which has a spillover impact on mortgage products and other financial products.

Personally, being more risk averse, I like locking in. I think rates right now look pretty attractive, in my opinion, and I’m not sure that you’re going to be finding that much downside by taking a variable rate right now.

What is the key message on the economy that you want to leave with readers?

I think it’s still very messy right now and it’s likely to remain so, and it’s because of the uncertainty that gets injected seemingly every day with all the decision making that is often difficult to really make sense of. We’re likely to remain in this environment for the next few months just given those deadlines and hurdles - the ceasefire with Iran, the CUSMA.

We have midterm elections and things are not looking up for the Republicans right now. But should we have an outcome that limits Donald Trump’s leeway, I think that could start to bring back some confidence.

So, the message is to hold the line. We’re getting to - maybe not the finish line, but over key hurdles. But for the time being, it’s likely to remain tough.

This Q&A has been edited for clarity.