This weeks top stories include how the Organization for Economic Cooperation and Development states that Canada may need to cut interest rates further, how the growth of mortgage debt in Canada has begun to slow, how U.S. home prices have seen another decline, how some of the worlds central banks have joined forces to prevent another credit crunch, how Canada’s gross domestic product rose in the third quarter of this year, how Canadian banks are overexposed to consumer leveraging of debt and how U.S. jobless claims rose last week.
OECD says Canada needs rate cuts
The Organization for Economic Cooperation and Development (OECD) stated this week that Canada may need new stimulus measures from the Bank of Canada (BoC) due to the economy slowing on weaker foreign demand for our goods. They stated that gross domestic product (GDP) will expand 1.9% next year, down from previous forecast in May of a 2.8% expansion.
Finance Minister Jim Flaherty stated last week that he has additional stimulus at his disposal if required. He also stated that the risks to Canada’s global recovery are increasing as the turmoil related to Europe’s debt crisis continues. Mark Carney, BoC governor, has kept the overnight lending rate at 1% since September of last year and expects that the economy will not recover until deep into 2013. He states that if the need arises, he will cut interest rates further.
The OECD commented, “Output is projected to expand at a slow pace as exports are restrained by sluggish external demand. Domestic spending should sustain growth but at a moderate rate, as high debt and waning sentiment curb consumption growth.” Current consumer debt in Canada is at 150% of disposable income. When you mix this with a weak job market, government cutbacks and slow hiring, there is quite a bit of risk to our recovery. Unemployment is currently at 7.4% and is expected to drop to only 7.3% next year. What do you think? When will Canada begin to see a real recovery? Please comment below.
Mortgage debt slows
It seems that Canadians have slowed down with taking on new mortgage debt in recent months. Canada Mortgage and Housing Corporation (CMHC) released a statement this week saying that the Canadian housing market will hold up as long as mortgage debt continues to slow. The third quarter financial results were released on Tuesday of this week by CMHC.
Canada Mortgage and Housing Corporation commented on the report by stating, “The level of household debt remains a concern but there are encouraging signals, the growth of mortgage debt has significantly decelerated since March, particularly in recent months.” Personal loans, credit cards and lines of credit have also seen a decline in applications recently. CMHC went further to state that house prices are in line with demographic changes and economic growth but I feel that this statement is way off.
In response, CMHC did state, “CMHC, in consultation with the Bank of Canada and the Department of Finance, is continuing to refine models and techniques used to help identify risks of house price bubbles. At the moment, there is little evidence of a significant over-valuation in the Canadian housing market overall, although some centers warrant close monitoring.” This would be referring directly to Vancouver and Toronto. What do you think? Are low interest rates fueling home price increases? Please comment below.
U.S. home prices decline again
There are new signs emerging that the U.S. housing market will not see a recovery in the near future as home prices begin to fall again after witnessing small gains throughout the spring and summer of this year. The Standard & Poor’s/Case Shiller Index released on Tuesday of this week shows prices declining in 17 of the 20 cities tracked from August to September of this year. This is the first decline on record after five consecutive months of gains.
The chairman of S&P’s index committee David Blitzer, stated that steep price declines between 2007 and 2009 appear to be over but that home prices are down when compared to the same time last year and are not showing any signs of easing. He went further by stating, “Any chance for a sustained recovery will probably need a stronger economy.” This leaves Americans very reluctant to purchase a home, even two years after the recession has officially ended.
Weak job growth mixed with high unemployment is preventing many consumers from purchasing now in fears that the prices will continue to fall. Even the lowest mortgage interest rates in history are not enough to jump start the housing market. Sales have reached the worst record in the past 14 years with no signs of an upward tick. This could lead to the worst year on record, at the pace it’s going, since the government began keeping records roughly 50 years ago. This number will get drastically worse once the banks are allowed to foreclose on properties, which is currently on hold pending an investigation into bad mortgage lending practices south of the border.
Central banks work towards liquidity
It seems that five of the largest central banks in the world have joined forces to ease strains on the global financial system and bring more liquidity to the market. The Bank of Canada (BoC) has teamed up with the European Central Bank (ECB), the U.S. Federal Reserve (Feds), the Bank of England (BoE), the Japan Central Bank and the Switzerland Central Bank to improve the supply of credit to businesses and families.
The ECB stated that the banks are working together to make it cheaper, for all banks involved, to get U.S. dollar liquidity when it is needed. They are also taking measures to ensure that money is readily available in all currencies if needed. The BoC commented by stating, “The Bank of Canada continues to closely monitor developments in global financial markets and remains committed to providing liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets.”
With Europe’s debt crisis spreading quickly, the global financial system is pointing towards another credit crunch like the one witnessed in 2008 where loans were extremely tough to obtain. With an outlook that one or more European countries might default on their debts, there are signs of a shock to the global financial system that could lead to major losses for banks along with another recession in the U.S. and Europe. What do you think of the move? Will it be enough to prevent another credit crunch? Please comment below.
Canadian GDP rises
After witnessing a decline of 0.5% in gross domestic product (GDP) in the second quarter (Q2) of this year, GDP expanded an annualized rate of 3.5% in the third quarter (Q3) of this year according to the latest report from Statistics Canada. Real GDP south of the border only grew at 2% over the same period of time.
Q2 only witnessed an increase of 0.9% over Q1 as demand for exports rose. On a monthly basis, real GDP by industry was up 0.2% in the month of September. Consumer spending on goods and services rose 0.2%. Investments in housing also rose 2.6% and were well above the Q2 pace of 0.4%. Business investment in plant equipment didn’t fare so well, dropping 0.9% and being the first quarterly decline since 2009.
Statistics Canada stated that final domestic demand has been on the decline in 2011 when compared to the previous year. On average, Statistics Canada has recorded quarterly increases of 0.5% since the start of 2011, which is a large decline from the average quarterly growth of 1.1% over the same time frame in 2010. Although we have now witnessed solid growth in Q3, the question remains as to what Q4 will bring for GDP. What do you think? Please comment below.
Canadian banks overexposed
The European debt crisis has everyone on edge in the banking industry. Some, more so than others according to a report released this week by Moody’s Investors Service. The largest single asset on Canadian banks balance sheets seem to be residential mortgages. Of which, upwards of 30% are insured through Canada Mortgage and Housing Corporation (CMHC) shifting majority of the risk of default onto government and tax payers.
These are insured assets but banks have quite a bit of non-secured risk that leaves them vulnerable as well. This would include but is not limited to credit card debt, which comes at a time that household income to debt is at above 150% of disposable income. The report outlines that the Royal Bank of Canada is at greatest risk with 24% of its total managed assets consisting of uninsured loans. Bank of Nova Scotia comes in at second place with 21%, TD Bank and National Bank of Canada both come in at 18% and Bank of Montreal comes in at 14%.
The author of the report, Mr. Bettie stated, “Canadian household debt as a share of personal disposable income stood at a record 150.8% at the end of June this year. We are concerned that, while taking advantage of low interest rates, consumers are also taking on debt they may not be able to service when rates inevitably go up.” This is a great point made by Mr. Bettie as money is currently quite cheap to obtain but will not stay cheap forever. This will make large debt loads affordable for at least the next year or two but what will happen when interest rates rise? Please comment below.
U.S. jobless claims rise
New claims for unemployment benefits, south of the border, had a shocking rise last week reaching above 400 000 for the first time in a month. This is a sign that the U.S. labour market is not recovering as expected. Initial claims for state unemployment benefits rose to a seasonally adjusted 402 000 from an upwardly revised 396 000 the prior week according to the Labour Department.
Economists had predicted that claims would only reach 390 000 due to the economy gaining traction during the second half of the year. The U.S. economy grew at a 2% annual rate in the third quarter and hoped it would accelerate in the fourth quarter of this year. If this were the case, it could prevent the U.S. from sliding into a new recession, which may not be preventable if extended unemployment benefits and payroll tax cuts expire at the end of this year. What do you think? Will there be another U.S. recession? Please comment below.
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