This weeks top stories have economists saying real estate is recovering, how the Bank of Canada may purchase bonds to offset the dollar, how Ontario will have the slowest growth in 2010, news on the great rate debate, looking at at an exit strategy, having a surplus strategy and how stimulus seems to be on track according to some.
Economists say real estate is recovering
The first sign of recovery that many realtors have experienced this month was the return of bidding wars on resale homes. Most agents have been busier than usual with the rates being so low and the housing prices being below where they were this time last year. Economists are saying that these changes are a sign that Canada’s real estate market is clearly on the path to recovery. For the fourth month in a row, local real estate boards are reporting strong sales for the month of May. National sales have been on the incline month over month since February but we still are waiting to see a year over year gain. This is a drastic rebound from January where sales were at the lowest point seen in the last 10 years. With majority of activity coming from first time home buyers, they are stating it’s due to low mortgage interest rates and the lowering in prices of homes across the board, making them more confident in our housing market. Another reason for the increase in numbers is due to pent up demand for homes from the final quarter of last year. Economists feel that there will be a leveling off though, once the delayed activity of last year is satisfied. Did you purchase a home this year? What were your reasons? Please comment below.
Bank of Canada may purchase bonds to offset Dollar
BOC Governor Mark Carney says that a strengthening currency may choke our economic recovery. He stated that the BOC may be pressed into creating dollars and purchasing assets, such as government bonds, to offset the rise in the dollar. With a 16% gain since March 9th, the dollar is threatening to sway an already battered Canadian exports market. With the Federal Reserve, Swiss National Bank, and Bank of England already pursuing quantitive easing measures, this will increase the likelihood that Carney will follow suit. The assets purchased will serve a dual purpose for the bank which would primarily cut borrowing costs for businesses and also weaken the currency by making short term Canadian dollar investments less attractive. Yields on Canadian and U.S 1 year Treasury bills rose last week by 20 Basis Points, the first time since February, where investors can earn higher yields on Canadian assets than on U.S assets. Although the BOC could purchase assets if needed to boost the economy, the BOC has refrained from using such measures. The real problem is that the BOC can not use tools, like lower interest rates, that are normally used to counter a stronger dollar. One option the BOC has is to keep the overnight lending rate at 0.25%, where it is now, past the expected June 2010 date. Another option is to sell the dollar directly into currency markets which will also weaken the dollar as stated by Benjamin Tal, senior economist at CIBC World Markets. Tal went on to state that the bank is very concerned about the strengthening dollar because we are still in the midst of a serious recession and the currency is rising much too fast. Finance Minister Jim Flaherty made a comment on June 11th that he was concerned there may be a speculative element to the appreciation. These comments helped weaken the dollar which fell the very next day against 16 of the most traded currencies. The dilemma is how to bring down the dollar without undermining Canada’s reputation as an advocate of flexible currencies. The BOC has long promoted flexible currencies but has a mandate to keep inflation at 2%.
Ontario to have slowest growth in 2010
The Royal Bank made comments this week that the Canadian economy would be strong in 2010. RBC predicts that the economy will shrink by 2.4% this year, mainly based on the 5.4% annual GDP contraction in the first quarter of this year. This was the worst economic performance since 1991 but the good news is that these numbers are expected to rise throughout the year. RBC predicts that growth will return next year as our economy is benefitting from low interest rates and government stimulus programs. The magic growth number from RBC’s predictions was 2.5%. They also predicted that majority of this growth would happen in Newfoundland in 2010 and that the slowest growth would happen in Ontario and P.E.I. With the national jobless rate at an average of 8.5% this year, RBC expects the jobless rate to reach 9% by 2010. Do you have an idea on how to stimulate growth in your province? Please share it below.
The great rate debate
Soaring interest rates in the bond market are leaving brokers wondering if the BOC will raise interest rates ahead of the mid 2010 schedule. Although rate hikes were unthinkable a month or two ago, bond traders are fixating on the threat of inflation which may cause banks to jump the gun and raise their rates. There has been a quick upwards hike in longer term bond yields in the recent weeks and have caused most mortgage rates to increase. These rising rates are putting a strain on consumers by driving up the cost of lines of credit, variable rate mortgages and other loans. Economists are worried that this will hurt the economy before a recovery can take effect. With bank rates for 5 year fixed rate mortgage loans around the 5.85% (posted rate) range, up 60 Basis Points (0.6%) you can see where the rising concern is coming from. Canadians should care about a rise in bond yields as it will ultimately raise the borrowing costs for loans even though bond yields are due for a correction. Higher borrowing costs during a time of economic weakness will slow growth and slow down an economic recovery which is already being jeopardized by the high dollar. The U.S Federal Reserve may raise its interest rates as early as the end of this year which will put pressure on the BOC to follow suit. This is something Mark Carney stated is not in the best interest of the BOC and of Canada to help it’s recovery. Let’s hope that Mark Carney keeps his word on this one.
What’s our exit strategy?
The Group of Eight industrialized countries are preparing for the economic recovery by agreeing to ask the International Monetary Fund (IMF) to study ways to find ways out of our current stimulus packages. They stated that there are signs of stabilization in our economies and that although the global economy is still weak, exit strategies from monetary and fiscal stimulus measures are essential to promote a sustainable recovery over the long term. The ministers, including our own Jim Flaherty, asked the IMF to analyze potential strategies that would assist with the process. Although the current situation remains uncertain and there is significant risks to economical and financial stability the ministers have stressed there commitment to provide more stimulus if the economy needs it. The U.S Treasury Secretary, Timothy Geithner, stated “These early signs of improvement are encouraging, but the global economy is still operating well below potential and we still face acute challenges.” The main worry was that continental Europe had not done enough to deal with the recession on their end. There was also concern that until the banking sectors across the world aren’t fixed, there would be a limit on how much capital and access to funding could be provided to support lending. The consensus was that none of the parties there were ready to exit now but were looking down the road to be prepared for their exits. Germany took its own stance at the meeting by criticizing lower interest rates, tax cuts and measures that boost the money supply. Germany warned that all of these measures are potentially inflationary and deficit building in nature and should be viewed as a temporary fix that should have the option to be quickly reversible. Italian Finance Minister Giulio Tremonti stated that exit strategies are fundamental to creating a climate of trust but added that designing a program would require compromises from the G8 bloc. Another topic of interest, not mentioned, was of the public stress tests on major banks. Britan conducted theirs releasing less information and details on their results than their U.S counterparts. Germany spoke up again on the matter arguing that they could undermine economic confidence. What do you think? Please comment below.
The Surplus Strategy
Jim Flaherty, Canada’s Finance Minister, insists that he has a plan that will return the federal government to a surplus. He says that the current spending is due to temporary programs. When the temporary spending stops, the government will use the surplus to pay off the deficits that it incurs now. This is after the minister came under fire to explain the $50.2 billion dollar deficit that was $16.5 billion more than the expected budget. Michael Ignatieff, the Official Opposition Leader, has been demanding clarity on long term deficit projections in return for his continued support of the minority government. Global financial markets investors are worried about how governments will pay for all the debt they’ve taken on trying to spend their way out of the global recession. This left Flaherty reiterating his pledge that a small surplus of $700 million is still achievable by 2014 despite this year’s deficit. The only concern is that his pledge is based on economic growth. Something that is not guaranteed in today’s global economy although it has been predicted, by a few banks, that our economy will expand by 2.5% next year. Flaherty believes that his stimulus measures are on track to meet the budgets pledge of creating around 190 000 jobs. He also stated that he will not raise taxes to make up for the budget shortfall.
Stimulus said to be on track
The most recent economic reports have revised their projections for the world and Canadian economies. For the first time in a year Ottawa revised its projections for growth upwards and projections for unemployment downwards. Jim Flaherty, the Finance Minister, is adamant that the Canadian economy is on it’s way to a recovery and that his plan to get out of deficit in four years is on track. He’s confident that we will move out of the recession later this year with positive growth next year. “Positive growth means positive revenues,” which was his statement this Tuesday. Analysts had feared of a double dip pattern would occur with a crash in the market, once government stimulus had run out, but that seems to have changed now. Analysts now say that the rebound will be more muted but there will be no second crash. The good news that was passed on was that the short term credit markets have returned to normal. This is a sign that the financial crisis is coming to an end and is the basis for a solid recovery. Royal Bank economist Paul Ferley commented by saying, “We’re assuming the cost of capital continues to move down and that starts supporting the economy in 2011, so you have growth continuing and possibly accelerating.” Part of our growth will be based on the end of stimulus funding that has a maximum 2 year window to use. With projections staying mainly in line with job losses continuing through this year and possibly into 2010 and the employment rate expected to hit 10% in the second half of next year, the question on my mind is whether Ottawa will actually escape from its deficit hole when it says it will.
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