This weeks top stories include how the Canadian economy beat analysts expectations and expanded by 5% in the final quarter of 2009, how Candians are still quite fearfull of job losses, how the Canadian housing market is set to see growth this year, how the Bank of Canada has left interest rates unchanged this week due to the high dollar and slower than expected improvements in the economy, how home sales in Toronto are expected to cool off in the second half of this year, how interest rates will have large movements starting this summer and how Canadian bankruptcies and insolvencies seem to be on the decline as the economic recovery takes hold.
Economy expands 5% in Q4
The final quarter of 2009 was when Canada’s economy finally gained some momentum but no one expected this. The final quarter of 2009 had growth at a 5% annualized rate, which trumped market expectations as strong consumer spending and exports did their part. This news came from Statistics Canada in a report that was released early on Monday of this week.
The pace of growth surpassed all forecasts, even the most optimistic, which is causing higher expectations that the Bank of Canada will raise interest rates before their previously announced deadline. Sal Guatieri, senior economist at BMO Capital Markets stated, “The economy seems to be firing on all cylinders now outside of business investment. There was a lot of momentum in activity as evident by the strong and broadly based gain in December GDP (gross domestic product). So it sets growth up nicely for the first quarter for strength to continue.”
The fourth quarter gains were not enough to offset the impact from the economic downturn, which caused GDP to shrink by 2.6% in the 2009 year. Exports did their part as the largest contributor to quarterly growth up 3.7% and led mainly by the automotive sector and aided through industrial goods and energy products. Consumer spending also helped. Spending grew at the same pace, of 0.9%, as it did in the third quarter of 2009. Investments in new housing finally posted a quarterly gain, the first since 2007.
Analysts had expected 4.1% annualized growth in Q4 but were shocked to learn the true number. When compared to the previous quarter, GDP expanded 1.2%, which was the largest increase witnessed since Q3 of 2000. The economy grew 0.6% in the month of December, from the previous month, alone. The Bank of Canada’s (BoC) latest projection had only forecasted 3.3% annualized growth in Q4.
RBC chief economist, Paul Ferley commented, “At this point, I think the bank does have scope to maintain its conditional commitment of holding the overnight interest rate unchanged until the end of the second quarter, although certainly the probability is rising that they may have to move in advance of that.” I have to agree with Mr. Ferley. With the quick turn seen in the economy, we will have to take quick action to respond. What do you think? Please comment below.
Fear of job losses
With the economic picture looking much brighter than before, you would think that Canadians would feel more secure. This is not the case as some Canadians are still concerned about job security. This was the findings of a consumer outlook survey released on Monday by the Royal Bank of Canada.
The overall index was up in the last month with 62% of respondents now stating that they have expectations that the economy will improve over the next year or so. This doesn’t mean that they are not feeling anxious about their jobs. The survey outlined that 25% of Canadians feel that a member of their family is worried about losing their job or being laid off, which is not a significant change from what was seen in the month of January.
Job anxiety in Ontario was up 5% from the 25% previously seen. Atlantic Canada also had more job anxiety with a raise from 18% to 24%. In the rest of Canada, anxiety seemed to have dropped. Canadians are still split on the overall state of the economy with 53% stating that the economy is in good shape and 47% describing it in poor shape for the month of February.
The number of Canadians who feel that their personal financial situation will improve in the next three months dropped to 30% in the month of February, down 2% from the previous month. Over a period of a year, more than 25% feel that their personal situations will improve. The survey also stated that 66% of Canadians are expecting interest rates to rise within the next six months.
Roughly 280 000 jobs have disappeared since October 2008 when the recession first took hold. This is partially responsible for Canadians high level of job anxiety. The outlook is for sustained improvement in the labour market over the course of this year. The survey was based on the results of an online poll of 1064 adult Canadians.
Housing to grow in 2010
Canada Mortgage Housing Corporation (CMHC) has stated that a swift rebound in home construction will take effect this year as the Canadian economy continues to show significant signs of a recovery. This will lead to more new homes being built this year than last year.
Housing starts are expected to reach between 152 000 to 189 000 starts this year, which is up from the 149 081 units seen last year. Next year in 2011, housing starts are expected to reach between 156 400 to 205 600 units. Take these as further signs that the economy is expected to recover in the near future if a recovery isn’t already underway.
CMHC’s chief economist Bob Dugan commented by saying, “Canadian housing markets will benefit from improving economic conditions and low mortgage rates. As well, measures recently announced by the government of Canada to support the long term stability of Canada’s housing market will help moderate housing activity as some potential buyers will have to save a larger down payment or consider a less expensive home.”
He also stated that the current housing market has now moved from a buyers market to a sellers market. This is definitely true as there are less active listings on the market and many consumers trying to get into the market. CMHC put in their two cents on this matter stating, “The relative lack of new listings for existing homes has pushed some of the demand into the new home market, which helps explain the forecast for higher housing starts activity in 2010.”
Even with this positive outlook for the housing market, home prices will likely remain around the levels seen during the last quarter of 2009 before a modest rise in 2011. What do you think? Has your home increased in value significantly in the last little while? Please comment below.
BoC leaves interest rate unchanged
Canadians can take advantage of historically low interest rates for another four months. This is the latest news as the Bank of Canada (BoC) left their overnight lending rate unchanged at its policy meeting on Tuesday this week. The central bank did note that the economy is improving but stated that it needs the help of low interest rates to help spur economic activity.
The BoC mentioned that the high Canadian dollar will continue to be a major drag on future economic growth. This aided in their decision to keep the benchmark interest rate at 0.25% at least until the next meeting, which is scheduled for April 20th. The economy has drastically improved from last year due to quick actions from the government and the central bank.
The central bank commented by saying, “The underlying factors supporting Canada’s recovery are largely unchanged. These include policy stimulus, increased confidence, improved financial conditions, global growth and higher terms of trade. At the same time, the persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity.”
Conditions around the world have improved as well as the global outlook but have been a result of exceptional monetary and fiscal stimulus in the advanced economies. Canada is no exception and this is why interest rates have stayed unchanged. The main growth in Canada remains on domestic spending and is still hindered by a rough exports sector. Some of the higher inflationary pressures are due to transitory factors but the outlook for prices remains unchanged since January.
The BoC closed off by saying, “Conditional on the current outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.” Let’s hope that this is the case as many of us are enjoying the low interest rate environment.
Toronto homes sales to cool in 2010
A new forecast released on Wednesday from Canada Mortgage and Housing Corporation (CMHC) on Wednesday outlines how sales of new and existing homes in the Toronto area will decline drastically in 2011. The market is expected to slow as interest rates rise and new taxes, such as the HST, take effect.
CMHC stated that existing home sales are expected to decline to 83 00 units, which is a 9.3% drop when compared to the numbers expected this year. The new homes market is expected to be hit even harder than the existing homes market with a decline of 38.5% expected from the numbers forecasted for 2010.
As of April 19th of this year, new mortgage rules will take effect. When you mix this with a higher interest rate environment as well as the Harmonized Sales Tax, you can see why the housing market looks bleak next year and how sales will be impacted.
2010 is still expected to be a great year with sales currently forecasted to surpass last years numbers. New home sales are expected to be 29% higher this year and existing home sales are expected to be 2.5% higher than the numbers seen in 2009.
CMHC is expecting sales prices to be up by roughly 8.5% this year over last year but price appreciation and sales are forecasted to drop as the market loses traction moving forward. What do you think? Will the housing market lose steam later this year? Please comment below.
Interest rates to have large movements
The outlook for interest rates is that they may end up moving higher at a faster pace than expected. As of right now, the Bank of Canada’s (BoC) overnight lending rate is 0.25%, which is at a record low. By mid 2011, we could see interest rates be 3% higher, which would effect almost everyone in Canada’s budget.
University of Western Ontario economics professor, Michael Parkin, is all for the increases. He hopes to see the overnight rate increase by 50 Basis Points (Bps), or 0.5%, at a time starting as early as this summer. This would put the overnight lending rate at 3.25% and our variable rates in the 5.25% range. His theory is that the interest rate hikes are necessary in order to keep inflation under control.
Rapid increases to the overnight lending rate could spell disaster for Canada’s housing market, which is currently on fire. This may be part of the reason by the monetary policy council is pushing for smaller increases. The nine member council recommended gradual hikes, starting this summer, hoping to bring the overnight lending rate to 2% by March of next year. That would put our variable rates in the 4% range. How do you feel about the raises forecasted? Please comment below.
Canadian bankruptcies down
We have seen yet another decline in the number of consumers applying for bankruptcies. Bankruptcies have continued to decline on a monthly basis across Canada as the economic recovery takes effect. Insolvencies have also been declining on a monthly basis, leading us to believe that we have seen the worst.
Total insolvencies, which include proposals amongst businesses and consumers along with bankruptcies, were down 11.1% in the month of December when compared to the previous month. This is the latest news provided from the Office of the Superintendent of Bankruptcy Canada this week on Wednesday.
Bankruptcies were down 8.6% with proposals dropping 16.6%. Proposals are offers to creditors to settle consumer’s debts under other conditions than the ones they are currently under. Consumer bankruptcies were down 8.7% after seeing a decrease of 3.8% in the month of November. Business bankruptcies were also down 7.1% after witnessing a 7.7% decrease in the month of October.
Consumers filed the majority of insolvencies last year and were still up 8.5% in December from the previous year. Business insolvencies were down 15.7% when compared to the previous year. Do you think that this is enough to account for an actual recovery? Please comment below.
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