This week’s top stories include how Canadian growth has reached a 10 year high, how this years Canadian deficit will be less than previously expected, how mortgage debt seems to be on the rise, how the Bank of Canada raised its overnight lending rate for the first time in almost three years, how higher interest rates may hurt the recreational property market, how the Canadian Real Estate Association announced that home prices would decrease in the near future, how jobless claims south of the border were down for the second straight week and how U.S. retail sales were erratic in the month of May.
Canadian growth hits ten year high
Statistics Canada reported on Monday of this week that the Canadian economy posted better than expected growth in the first three months of this year. This marks the best quarterly performance in Canada in over a decade as growth continues to gain traction.
In the strongest three month showing since 1999, strong domestic demand, mixed with a strengthening manufacturing sector, led the Canadian economy into a record annualized growth of 6.1% for the first quarter of this year. This followed Q4 of 2009 where growth was annualized at 4.9%. Analysts previously expected growth to reach 5.8% in the first quarter but were a little shy of the 6.1% that was achieved. This was the third consecutive quarter where growth expanded.
Douglas Porter, deputy chief economist at BMO Capital markets commented by saying, “While there are some questions on the sustainability of the rebound, there is simply no question that the early stages of Canada’s recovery exceeded even the most optimistic expectations.”
Analysts are suggesting that the pace of growth that we are experiencing can not last. The correlation between Q1 and Q2 of this year means that the current strength may be shared into Q2. Analysts are expecting growth of 3.5% to 4% in the second quarter of this year. What do you think? Please comment below.
Deficit to have deficit
Finance Minister Jim Flaherty had previously projected a budget deficit of $53.8 billion this year. Early numbers are indicating that Canada’s deficit will come in well below that projection. The shortfall between April of last year and March of this year was $47 billion according to The Finance Department. The full figures of the deficit will not actually be known until September once the end of year adjustments are taken into account.
Revenues for the year were down 5.5% from a year ago to $218.7 billion, which is down $12.7 billion. Last years federal budget deficit was only $2.2 billion but with stimulus packages to boost the economy, Ottawa added another $19 billion to help fight the recession. For the month of March, the federal deficit was up $3.5 billion from the same time last year to $6.4 billion.
Mortgage debt on rise
Statistics Canada stated this morning that residential investments have increased for the fourth straight quarter, as did consumer spending on goods and services. Import and export volumes also increased for the third straight quarter with growth in imports outpacing exports in the first quarter of 2010.
Business investments were also up 0.2% with spending on machinery and equipment rising 1.8%. These numbers are still below the peak seen in the first quarter of 2008 by 23%. The report also outlined how personal debt in Canada is also on the rise. Mortgage growth was up $76.4 billion annualized in the first quarter from $59.8 billion in the last quarter of 2009. Household debt as a percentage of personal income has risen to 148%, which could be a record.
Bank of Canada raises rates
This week Tuesday was the first time in almost three years that the Bank of Canada (BoC) raised its key interest rate. The BoC made a tough decision and decided to raise the overnight lending rate by 0.25% or 25 Basis Points (Bps). This now brings the overnight lending rate to 0.5%, which is still quite low in historical terms.
The move came with a statement outlining “considerable uncertainty” in the economic outlook given the fiscal and financial unrest across Europe. The statement also said that further interest rate hikes must be weighed carefully against global and domestic developments before they can be considered.
BoC governor Mark Carney commented by saying, “This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2% inflation target in light of the significant excess supply in Canada, the strength of domestic spending and the uneven global recovery.” This is leading many to believe that the BoC may not raise rates again at the next scheduled meeting on July 20th of this year.
This move makes Canada the first amongst the Group of Seven to raise interest rates. It is also one of the few industrialized countries to raise interest rates. The last time that the BoC actually raised interest rates was in July of 2007. What do you think the future of interest rates is? Do you feel that the BoC will hold off raising rates at the next meeting? Please comment below.
Higher rates to hamper cottage sales
As the recreational and cottage property market gets going with this great weather, higher interest rates may rain on the parade. According to a report released this Monday, before the interest rate announcement, Canadians looking to purchase a recreational property may change their mind based on an interest rate hike.
According to a poll released Monday by Royal LePage, one in ten Canadians stated that an interest rate hike would prevent them from purchasing a recreational property. Last week ReMax Canada reported that the recreational property market was showing tentative signs of recovery as sales surged 79% across Canada. They did note that the recovery in the recreational market was lagging behind the primary home market but this is a common thing.
Phil Soper CEO of Royal LePage commented by saying, “The tightening of lending requirements for second homes, coupled with an increase in taxes and expectations of higher interest rates may have a dampening effect on the recreational property market. Canadians are concerned about the increases in taxation affecting their ability to buy vacation properties.”
Only 43% of Canadians now feel that recreational properties are a good investment. This number is down from 2009 when 64% felt that buying a recreational property was a good investment. The fact that vacation properties in the U.S. have bottomed out, may add to the reason why Canadians feel that purchasing a recreational property in Canada is not a good investment. What do you think? Will you be searching for a cottage this year? Please comment below.
Housing correction next year
Home prices across Canada are expected to decline by the end of 2011 according to a report released this week from the Canadian Real Estate Association (CREA). CREA said, in an updated market forecast, that the national average resale price will reach $325 400 by the end of 2010. This is a gain of 1.6% from the current levels and will also set a new record for the national average resale price.
Most markets are expected to post modest price gains next year but lower prices in Ontario and British Columbia are expected to drag the national average down by roughly 2.2%. The January forecast from CREA calls for a 1.5% decline.
Gregory Klump, CREA chief economist commented by saying, “With interest rates soon expected to rise, Canada is widely believed to be entering a typical demand driven downturn due to recent price increases and raising interest rates. CREA had previously forecasted sales would remain at elevated levels through the first half of 2010 before easing in the second half of the year and over 2011.”
Tougher mortgage guidelines and threats of higher interest rates have caused many to jump into the real estate market sooner than they may have otherwise. This effect seems to have stolen sales from the second half of this year. CREA said, “It has been pulled forward, with the fourth quarter of 2009 marking the peak of national activity. This has had the effect of lowering the forecast for national activity over the rest of the year and in 2011.”
CREA did state that there was no threat of a U.S. style housing meltdown due to solid mortgage trends, prudent borrowing by home buyers and conservative lending practices. What do you think about CREA’s position on housing prices? Please comment below.
U.S jobless claims down
There is evidence that the job market south of the border is slowly improving as new claims for unemployment insurance fell for the second straight week. The declines come after seeing large increases three weeks ago while claims still remain at high levels.
The Labor Department stated that initial claims for jobless benefits were down last week by 10 000 to a seasonally adjusted 453 000. This number seems to be in line with analysts estimates who predicted 450 000. The number of continuing claims benefits were also up by 31 000 to 4.67 million. What do you think about the data? Is the U.S. finally on its way to a recovery? Please comment below.
U.S retail sales erratic in May
The month of May was full of mixed sales results for retailers. Reports suggested an erratic recovery in consumer spending in what was suppose to be a seasonally weaker period for shoppers. Based on reports from Thomson Reuters of 11 retailers out of the 28 tracked, 60% came in ahead of their expectations with 40% falling short of expectations.
U.S. consumers are now showing that they are ready to open their wallets again for goods like clothes and furniture after spending the recession focusing on only necessities. Shoppers are still being selective of where and when they spend money. The overall consumer sentiment has remained almost unchanged since February of this year.
A major factor influencing shopping in the month of May is the Memorial Day holiday, which fell on the last weekend of the month this year. Analysts suggest that the holiday may have dragged down sales by as much as 9% and remaining shopping will fall into the June month.
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