This weeks top stories include how Canada is finally out of a recession, how interest rates may stay low, how Canadians hope that 2010 will bring an economic recovery, how Australia keeps raising its interest rates, how the real estate surge is no glitch, how nearly all the stimulus has been committed, how Canada is seeking a trade relationship with China, how the pace of the recovery is all set to speed up and how the housing recovery is all set to accelerate full throttle.
Canada finally out of recession
A weaker than expected increase led the way for an official end to Canada’s economic recession during the fourth quarter of this year. A report released by Statistics Canada this Monday stated that gross domestic product (GDP) was up by an annualized 0.4% in this quarter after following a revised 3.1% contraction for the previous three month period which represented the third quarterly decline in a row. Economists had previously forecasted annualized growth at 1% for the period between July and September of this year. This number did not come close to the Bank of Canada’s (BoC) forecast of 1% annualized growth but on a monthly basis GDP was up 0.1% in the third quarter.
Final domestic demand was aided by a second consecutive quarterly gain in personal expenditures as the first expansion on business capital expenditure was witnessed since the first quarter of 2007. Export and import volume numbers also saw an increase after many quarters of decline.
Septembers GDP numbers were also up with an increase of 0.4% as many economists had expected an advance of 0.3% to 0.4%, which was in line with the figures seen. This will lead the way for a better fourth quarter where the expectation is to advance just over a 3% annual rate. The quarterly gain for the third quarter was considered to be low but this will not alter the larger picture that the Canadian economy is slowly emerging from the recession and is being led by broad gains in domestic spending. Third quarter GDP figures compares with a 2.8% growth seen during the same period in our U.S counterparts which is Canada’s largest trading partner.
The Canadian consumer is helping propel our economy into recovery through a red hot real estate market, which has sparked a large bounce back in housing starts. Consumer spending on goods and services also saw an increase of 0.8% during the third quarter and was the largest increase seen since the fourth quarter of 2007. Also noted in the report was the fact that business investments in machinery and equipment had a surge of 5.9% during the third quarter after seeing five consecutive quarters of decline.
Interest rates may stay low
There are rumours that the Bank of Canada (BoC) could keep its benchmark interest rate somewhat accommodative through 2015 to offset fiscal restraint by the government which will have to hike taxes in order to balance it’s budget. This rumour was stated by David Dodge who is the former central bank chief who also mentioned that the plan could be backed by his successor, Governor Mark Carney, to hold interest rates where they are until mid 2010. He also stated that the bank could back away from unconventional initiatives. Mr. Dodge was governor of the BoC until January of last year and is now a senior advisor at Bennett Jones Llp and says that any credible plan to eliminate the federal governments fiscal deficit by 2015 would likely include tax increases.
This statement conflicts with the Conservative governments promise to not introduce any tax hikes to balance its books and is the opposite of their vow to rely entirely on economic growth and lower rate of growth in program spending. Mr. Dodge stated that if the government focused its efforts only on the spending side, then spending would have to be reduced to zero real growth from 2012 to 2015. This is under the assumption that all temporary stimulus spending will stop by the end of 2011.
Restraint of this magnitude is very difficult so some tax increases will be necessary regardless. Consumption taxes would be the least harmful to our long-term growth. In order for a budget to work, the fiscal plan must include a mix of expenditure cuts and tax increases that will have a combined impact of 3% gross domestic product (GDP).
Ottawa went into a deficit last year after seeing a decade of surpluses. They now predict a shortfall in the 2009/2010 fiscal years of $56 billion. Last week on Friday, the government reported an accumulated deficit in the first six months of this year of $28.64 billion, which is huge when compared to the same period a year ago when we saw a surplus of $535 million.
Hopes that 2010 will bring recovery
The new monthly RBC Canadian Consumer Outlook index was launched Tuesday of this week with majority of Canadians agreeing that the economy will improve next year. Even with that consensus, Canadians are cutting back on holiday spending this year with one out of five Canadians not purchasing gifts at all this year.
The report measures Canadians perception of our current economic conditions when compared to three months previous. The report found that 47% of Canadians intend to spend less this Christmas season when compared to last years season. It also found that 18% will go without purchasing gifts altogether during this season. The report stated that the average Canadian expects to spend $1218 on holiday purchases this Christmas, which includes gifts, decorations and entertaining guests. In the report, a figure of 62% is the percentage of Canadians that expect the Canadian economy to improve over the next year with only 14% expecting it to get worse before it can get better.
The recent economic conditions have left numerous Canadians feeling uneasy about their financial well being and is reflected by restraint in holiday spending. The results of the report came from an online survey of 1018 Canadians between the dates of November 9th to November 16th and not only measures Canadians perception of their personal finances but of job anxiety and other factors as well. What do you think about the survey? Does it seem accurate to you? Please comment below.
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Australia keeps raising rates
Australia will continue to lead the world in raising interest rates as economists predict a record fourth straight increase at the central banks next meeting in February. The Reserve Banks Governor Stevens will raise the overnight cash rate target by another .25 basis points (Bps) from 3.75% to 4% on the February 2nd meeting which will add to this Tuesday’s unprecedented third monthly increase. This is the consensus amongst all 16 economists that were surveyed this week by Bloomberg News.
Australia’s economy has outpaced Europe, Japan and the U.S, which have all managed to keep their interest rates at or near record lows this year. Cash handouts from Australia’s Prime Minister have helped consumer confidence and housing prices. Another factor that played a significant role was China’s demand for resources such as iron ore, which has created a mining jobs boom in the country. Iron ore production was at a record high in the third quarter as Australia tried to meet China’s demand for steel, which aided the 5% rise in exports in September of this year.
It seems that the Reserve Bank officials are now taking the path of least hazard with another increase expected in February and an expectation of steady gains through 2010. Australia is raising interest rates while time is on their side and they can make their stimulus exit in an orderly fashion. But it seems that traders are not convinced as this was reflected through a slight fall in Australia’s currency on Tuesday after Stevens said that the board’s material adjustments to the benchmark rate, which is now at 3.75%, would be enough to keep inflation within his target range of 2% to 3%. Investors are betting against analysts with only 36% believing that there will be a rate increase in the month of February.
Home prices have also climbed by 10% this year as employment was up in the month of October and companies that were surveyed stated that they expect investments of $105 billion Australian dollars in the year ending June 30, 2010. That number is 5.9% higher than what was estimated three months ago. This year’s interest rate increase may prompt consumers to cut spending over the holidays as spending had surged during the first part of this year when the government had distributed more than $20 billion Australian dollars in cash handouts to households.
Australia’s economy seems to be in a gradual recovery that is expected to grow gross domestic product (GDP) to 3.25% next year and in 2011 according to Governor Stevens. Growth seems to be boosted by the $20 billion U.S in spending by the government who spent money on roads, railways, ports and schools. An estimate of economists surveyed by Bloomberg News this Tuesday showed that many economists feel that the benchmark rate will be as high as 5% by the fourth quarter of 2010.
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Real estate surge is no glitch
TD Economics warned that the housing market could get carried away if the recent enthusiasm continues even though the recovery in the Canadian housing market is based on fundamentals. Average prices and sales prices have both recovered since the inception of the recession with both at levels 5% higher than the previous peak that was seen in October of 2007. Prices had previously retracted by as much as 12% during the recession as the economic downturn took its toll. If we look at only the last two years as a cycle, it could be highly misleading as the price adjustment during the downturn was warranted by fundamentals, which has left the current home prices lightly over valuated just like what was seen during the end of 2007.
Economists feel that current prices are not too high but have warned that the current market momentum has the potential to lead to over inflated prices. Next year will see a market transition to a more balanced situation, with higher prices creating more supply on the market. As home prices become more expensive, less people will be willing to get into bidding wars on properties. This will lead us into 2011 when the housing market and the overall economy will begin to experience a role reversal. This will see the economy strengthen, as resale housing market conditions will weaken. What do you think? Please comment below.
Nearly all stimulus committed
This week Prime Minister Stephen Harper said from his trip from China that $28 billion in federal stimulus funds, which is 97% of what was allocated for the current budget year, has now been committed. In excess of 12 000 infrastructure projects across the country have now been approved with work on 8000 already in progress. The government states that it has preserved or created more than 220 000 jobs to date and has exceeded it’s target of 190 000 jobs that was set in the January budget.
Many in the House of Commons are disputing the Prime Ministers claims and say that his choice to deliver the news to Canadians while in China was a poor one. Harper rebutted by saying, “The economy remains our number one priority wherever we are in the world and I didn’t want to miss the opportunity to comment on what I think is an important milestone in the implementation of our economic action plan.
The opposition is arguing that infrastructure money that was meant to aide the economy has been slow to get out the door and has been spent disproportionately to help communities that are in conservative held ridings. They went on to state that when the government says that it has committed 97% of its stimulus funds, it means that the government has agreed to fund projects proposed by cities or provinces but does not necessarily mean that any money has actually been spent on creating jobs.
The Department of Finance estimates that 70% of this years stimulus money is actually being spent in the economy already. That 70% has been used on such things as tax breaks as well as boosts to unemployment insurance benefits. The government states that 167 000 Canadians are currently enrolled in work sharing programs and that they are preserving jobs that would otherwise be lost. What do you think? Do you feel that the stimulus is doing its job? Please comment below.
Canada seeks trade with China
Prime Minister Stephen Harper travelled to China for the first time this week as he seeks to expand trade with the country to reduce Canada’s dependence on the hurting U.S economy. Canada is currently the second largest exporter to the United States after China. In August we saw Finance Minister Jim Flaherty make a trip to China in an effort to encourage Chinese investors to consider investments in Canada’s natural resources and to seek access to Chinese markets for Canada’s banks and businesses.
Mr. Harper commented on Sunday saying, “In terms of Canada being open for investment, obviously the thing we’ll want to emphasize with our Chinese partners is that we’re both advocates of opening up markets and that always has to be a two way street.” Canada is currently amongst the world’s top ten largest producers of oil and natural gas. It sits on the largest pool of oil reserves outside the Middle East. Canada is also a major exporter of fertilizer, nickel and wheat, which makes it extremely important to resource hungry China.
Harper also commented that he did not sense any support among lawmakers to extend Canada’s current military mission in Afghanistan. He also stated that he made need to make some adjustments to Canada’s greenhouse gas emissions targets in order to bring them in line with our U.S counterparts target south of the border.
Pace of recovery to speed up
Finance Minister Jim Flaherty stated on Tuesday that Canada’s economic growth rate would be higher for the remainder of the year and in 2010 after a miserable performance during the third quarter of this year. Flaherty played down potential threats to the recovery, such as the strong Canadian dollar and the Dubai debt problems. He told reporters this Tuesday, “We hope that we’ll have a continuation of growth at a greater pace in the fourth quarter. We are certainly more optimistic about economic growth in 2010.” The Finance Minister gave his latest update on the federal government stimulus plan in Winnipeg this Wednesday.
Canada came out of its recession in the third quarter after seeing three quarters of contraction. The annual growth rate reached 0.4% but was significantly shy of the 0.7% growth expected by the market as well as the Bank of Canada’s (BoC) previous forecast of 2%. Some feel it was the strength in the loonie that hindered our growth but Flaherty feels that the strong Canadian dollar does not warrant special measures like those taken by the Japanese central bank on Monday.
With concerns that Japan could easily slip back into a recession and an economic outlook that is hindered by the surging yen, the Bank of Japan announced an emergency quantative easing measure on Monday to create an influx of cash into the banking system. The Canadian dollar has also been rising against the U.S dollar for most of this year causing BoC Governor Mark Carney to warn that the currency’s rise could delay our recovery and may even warrant steps to prevent its rise.
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Housing recovery to accelerate
A new housing report released this week states that residential real estate sales will recover in almost all of the major Canadian cities by the end of 2009. It also stated that average prices will reach new record highs once the economic climate improves. The Re/Max Housing Market Outlook survey for 2010 has predictions that a national increase in sales will take place with a 45% rise in the Greater Vancouver area. It also outlined that Quebec City and Ottawa will reach levels of home sales that will be at historical highs with average prices across Canada expected to improve in 65% of the Canadian markets as we come out of the economic downturn.
There are expectations that sales in 2010 will increase over 2009 levels in 83% of markets with housing values expected to rise in 91% of Canadian centers. There are predictions that levels in the remaining markets will match those seen during this year. The average price of homes is also expected to rise to $325 000 in 2010 which is a 2% rise from current levels. The Re/Max report assesses residential real estate trends in 23 markets across Canada.
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