This weeks top stories include how the U.S is set to make aggressive interest rate hikes, how employment insurance failed the stress test of the recession, how home prices are set to stay where they are in Toronto over the next year, how Vancouver will lead Canada in growth this year and the new debate on whether or not we should end the home renovation tax credit.
Aggressive hikes to come
More and more each day we are seeing signs that the Federal Reserve Bank will raise interest rates sooner and more aggressively than everyone expects. Investors should be prepared for the increase as the Fed has stopped using the term “extended period” when referencing rates.
Derek Holt from Scotia Capital stated, “That will ultimately result in increases to each of the interest on excess reserves, the Fed funds target rate, and naturally the effective Fed funds rate. The case for emergency rates has waned and we’ve transitioned toward the need for a different, low but not emergency rate environment.” This statement is even more true when you look at Canada’s position on interest rates.
Some of the major variable factors would be excess capacity, still in massive supply, but is slowly being shut off. This excess capacity requires low rates and not just emergency rates. After seeing a bottom out period in the month of June, it has gradually climbed back up 4% in the month of December. Scotia analysts feel that the unemployment rate is either peaking now or on the verge of peaking which leads them to believe that job growth will resume for the U.S economy this year.
Scotia further stated, “Zero liquidity and frozen credit markets amplified the just in time inventory management cycle’s response to the de-leveraging shock such that production and employment over corrected in dropping over 7 million jobs in 2008 and 2009. Automatic stabilizers require re-hiring some of them, and so does fiscal stimulus.”
Scotia analysts also feel that the continued challenges in the U.S housing market are not enough to keep the Fed from hiking interest rates in the second half of 2010. If the market does correct itself on anticipated hikes, analysts suggested that the U.S Fed would be in a better position to increase interest rates by clearing that concern out of the way. What do you think? Will the U.S Federal Reserve raise interest rates in the second half of 2010? Please comment below.
EI fails recession test
A new study released this week states that the Harper government should extend employment insurance benefits by a minimum of 26 weeks for all jobless Canadians due to the fact that the country’s employment insurance (EI) program has failed the stress test of the recession. The study by the Canadian Centre for Policy Alternatives stated that the extended benefits should be accessible to all EI claimants between the months of October 2008 and October 2010.
Mr. Jackson from the Canadian Labour Congress made the following statement on the matter. “Even before the recession, more than one in four employment insurance claimants exhausted benefits before finding a new job. It is estimated that as many as 500 000 Canadians who initiated an EI claim in 2009 will exhaust their employment insurance benefits because new jobs remain difficult to find.”
The concern is that as more people wind down on their EI benefits with no new jobs, more and more of these people will end up the Canadian welfare roll and living in poverty. The economic downturn has been seen as an extreme stress test for the employment insurance system as more and more Canadians are falling through the cracks despite the fact that the government has extended benefits for some workers by as much as 20 weeks.
The number of unemployed Canadian workers that are not currently receiving EI has swelled from 650 760 in October of 2008 to 777 400 in October of last year as per the report. The proposed 26 week extension is considered to be an add on to the current extension that the government has committed to. The cost of expanding the benefits program will be another $4 billion above the already committed $2 billion. This price tag is expected to drop if the unemployment numbers work their way down.
Home prices to stay
The supply of new homes that are expected to be completed this year will cause home appreciation in the Toronto market to slow this year. The new stock of construction is rising and will effect home prices by slowing the increases. Toronto home prices saw an increase of 4% at the end of last year with sales rising 17% year over year. Homes also sold in an average 23 days which is considered to be the shortest interval in recent history.
This year is expected to see change as a record number of completions will bring more listings to the market. Move up buyers are also expected to list more homes for sale which will help with the current supply crunch. With all these factor in play, appreciation is expected to be quite mild this year or Toronto home prices may even flat line for the year.
Marc Pinsonneault, Senior Economist at National Bank of Canada, stated, “Certain factors lead us to believe the price growth will slow soon. The number of homes on the market has been mounting since November and could continue to do so. Recent price increases and the current tight conditions on the resale market have stimulated housing starts. Once these dwellings are completed and enter the market, they will reduce the scarcity of available homes.”
Canada Mortgage Housing Corporation (CMHC) estimates that there are currently 36 000 condominiums under construction in the Toronto area with another 7000 single family homes under construction in Toronto at the end of last year. The concern is about how many of those were purchased by investors who will flip them by putting them back onto the resale market. CMHC feels that the high-rise sector will be more affected by the new supply and the low-rise sector will be effected by increased resale listings. What do you think? Please comment below.
Vancouver to lead growth
Vancouver is forecasted to lead Canadian cities in economic growth this year as predicted by the Conference Board of Canada. The main reason being a boost in spending related to the 2010 Winter Olympic Games and aided by a rebound in housing construction and consumer spending to help with growth. Vancouver is expected to see 4.5% growth this year and is listed to top all 27 cities in the outlook.
The report had no specific numbers on how much the Olympic Games will contribute to the local economy but it will definitely aid the services side. The report also stressed that other factors are lifting the economy such as builders who expect to break twice as much ground this year than last. Infrastructure projects will also take place in the second half of this year and a global recovery will boost factory output as retail sales rebound.
Toronto and Kitchener are second and third on the list with all sectors in the Toronto economy forecasted to rebound this year and will lead to overall real gross domestic product growth of 3.5%. Manufacturing output is expected to rise in Toronto for the first time in the last five years. Better manufacturing prospects in Kitchener will help it rise to a real gross domestic product growth of 3.3% this year.
Oshawa, Ottawa-Gatineau, Edmonton and Saskatoon are currently forecasted to post a growth of 3.2% this year. All 27 cities in the report are expected to expand but will see sluggish growth at less than 1.5%. What do you think of the report? How do you think Toronto will fare this year? Please comment below.
End of the reno tax credit?
The federal renovation tax credit was a good short-term stimulus measure but analysts feel that it would be bad economics to allow it to continue. The problem with the home renovation tax credit is that it only benefits a small group of people. It seems that it only applies to a subset of the population that are homeowners who can afford to do renovations.
Analysts are saying that the credit would be of better use if it was available to low income groups or the unemployed as they will put the money back into the economy faster because they are certain to spend the money and are considered to be more in need. The home renovation tax credit is set to expire on February 1st of this year but has been quite popular for the time that it has been around.
Homeowners and developers have been lobbying to have the government keep the rebates permanent but the government has not made a decision as of yet. At the time of inception, the home renovation tax credit did its part to help stimulate demand immediately while other larger infrastructure projects got underway. Now those projects are under construction and there is no advantage for the economy to keep the credit.
Under the current renovation tax credit you can qualify for up to $1350 on home improvements if you spend up to $10 000. Although it is obvious that construction is good for creating domestic demand, you must look at the fact that 70% of our goods in Ontario are exported. This is why it would only make sense to subsidize industries that are export driven.
Developers that are currently lobbying the government to continue with the credit feel that the Harmonized Sales Tax will encourage renovators to work under the table for cash without the renovation tax credit. If this is the case then Ottawa will lose up to $1.6 billion annually in income tax revenue as a result. What do you think? Should we extend the credit? Please comment below.
Prime Rate: 3%
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