Both the U.S. and Canadian economies will go into recession in 2025, according to Peter Berezin, chief global strategist at BCA Research. Neither will suffer the kind of balance sheet recession that followed the global financial crisis in 2008, but he’s pessimistic about both central banks’ ability to engineer a soft landing.
At a CFA Society Toronto meeting on Wednesday, Berezin — who insisted that he’s not a “perma-bear” — laid out a wide-ranging argument for a U.S. slowdown that covered unemployment, spending, as well as fiscal and monetary policy.
“The labour market is starting to crack,” he said. “The number of people on unemployment insurance — continuing unemployment claims — is about 15% higher than it was in 2018 and 2019 at this time of year.”
Consumer spending is showing signs of weaking too, because American households have burned through their pandemic savings. “That money is gone,” he said.
Additionally, personal disposable income growth “will continue to trend down,” said Berezin. And past-due debt figures are rising, beyond pre-pandemic levels.
Even the recent dip in credit-card delinquencies is more indicative of tighter lending standards among financial institutions than it is of households clearing debt. “They’ve been raising interest rates to very high levels, and so the marginal borrower just can’t get a credit card anymore. Delinquencies have come down, but at the price of much lower credit card debt growth.”
U.S. investment spending is looking vulnerable too.
On the real-estate front, Berezin said the number of housing units under construction this year has declined. “You would think that maybe with home prices so high, home builders would be building more homes,” he said. “We haven’t seen that. This year, existing housing markets are basically frozen.”
A drop-off in housing starts is another reliable leading indicator of recession, Berezin said.
Commercial real estate isn’t any better. Berezin described the office market as “grim.” The vacancy rate has reached “unchartered territory.”
Delinquency rates are climbing in the multi-family housing sector. “Some markets are OK, but in other markets, like Austin, for example, … rents are plummeting. Their developers are going bankrupt.”
And a word of warning: “I think this is going to have implications for the banking system. I’m not predicting a Lehman Brothers-style crisis, but we could have something more akin to the savings and loan crisis, which is more of a slow-moving crisis.”
Berezin’s fear is that smaller regional lenders are overexposed to commercial real estate, and they don’t have the kind of balance sheets required to sustain a sharp downturn.
Trade policies espoused by president-elect Donald Trump present additional risk to the U.S. economy. “Trump was very, very serious about raising tariffs. I keep hearing this argument that it’s just a negotiating tactic. … I don’t think Trump sees tariffs as a means to an end. He sees tariffs as the end in themselves.”
Berezin said trade policy, and more broadly fiscal policy, will fail to promote economic growth in the new year.
On the monetary policy front, he said the U.S. Federal Reserve “is behind the curve. Even if the Fed cuts rates next year, mortgage rates on average are still going to rise.”
Berezin explained that people buying homes in the next 12 months will take on a mortgage of about 7% — that’s a higher rate than a lot of U.S. homeowners have currently. “So, the average mortgage rate is going to rise,” he said, “even if rates are coming down and even if mortgage rates are falling from current levels.”
If he’s right, U.S. equity holdings are in for a beating. Berezin has forecast that the S&P 500 will fall to 4,100 — about a 30% drop from Friday’s opening. The index hasn’t closed that low since March 2023.
“I’m just assuming that the forward [price-to-earnings] multiple drops to 17,” he said. “That was the average between 2015 and 2019, for most of Trump’s first term.” Those weren’t recession years, Berezin noted. The index’s current forward price-to-earnings ratio is about 22.
Berezin shared a similar outlook for Canada, seeing how the country is seeing many of the same trends as its neighbour.
“Canada is already on the verge of recession,” he said.
In an interview with Investment Executive, Berezin said we’re in for something like the 2001 downturn. “During that recession, there weren’t even two consecutive quarters of negative growth, and yet stocks still fell 49% at the trough.”