This weeks top stories include how employment insurance claims are down for the first time in 11 months, how Canadians are sitting on their cash, how the Insured Mortgage Purchase Plan has been extended, how 90% of stimulus funds have been committed, how the Toronto real estate market is on fire, how mutual funds may be HST exempt, how July’s flat economy has shocked economists, how Canada will pave the way for the world recovery and how credit card rules are shaking the banking industry.
EI claims drop for first time in 11 months
The number of Canadians receiving employment insurance benefits saw a drastic decline in July of 3.8% from the previous month. This was the first decline seen in the last 11 months and is the first encouraging sign seen in a long time. The report, provided by Statistics Canada, is a reflection of the improving fortunes in the Canadian labour market and the economy. Ontario saw the largest decrease with beneficiaries falling 5.9% or 16 800 to 266 800. Quebec saw a decline of 5.3% to their beneficiaries with a total number of declines hitting 11 000 and now are down to 197 700. Alberta declined 4.4% to 59 500 beneficiaries, down 2 700. Nationally the number of people receiving benefits fell by 31 500 to 787 700 across Canada. Given that the labour market is a lagging indicator of economic activity, we will see modest improvements in the employment situation in the coming months, even though the economy has begun the process of an economic recovery. On the other hand, this could just mean that people previously on employment insurance benefits have run out of time on their benefits, which would mean that they are not, in fact, employed, but off the benefits and without a job. Only time will tell. What do you think these numbers reflect? Please comment below.
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Canadians sitting on their cash
Canadian households are sitting on a mountain of cash between the range of $635 billion and $1 trillion. The amount of cash out of the economy’s flow is crucial in determining how much further equity markets must rally. This could give policy makers a cause for concern as the cash may be distributed back in to the market too quickly and lead to asset bubbles and economy wide inflation. Cash and near cash holdings have increased drastically this decade with multiple drivers behind them. The most critical one is complacency and risk aversion on behalf of households when managing their finances. Large cash holdings at a particular point in time may make sense if one is bearish but when sustained over many years becomes difficult to justify. Part of this is understandable given the market shocks seen in recent years but the outcome will remain indisputable. Scotia Capital describes the amount of cash sitting on the sidelines as “astoundingly massive” and have suggested that there will be several implications for traders and policy makers. When looking at the scope of a rally in equities, this could create a potential riff in demand for new issues and for overall marketing efforts. The savings will weigh heavily on the inflation debate when looking at the scope for unleashing further asset price inflation and could translate into economy wide price pressures if it’s reallocated too quickly. It will also effect lenders when determining the future cost of credit and also skews indications of how well households can absorb future economic shocks. Although saving is a good thing, economically it will ruin statistics and data tracking measures that have been in place for some time.
Insured Mortgage Purchase Program extended
The federal government announced recently that it plans to extend its program for up to another six months. The Insured Mortgage Purchase Program (IMPP) provides liquidity to markets through the purchase of the banks mortgages. The program was extended even though private sector demand has declined for the $125 billion of financing in recent months. The federal governments IMPP was launched just over a year ago and was a response to tight credit markets resulting from the financial crisis. Ottawa had pledged to purchase up to $125 billion of mortgages that were held by the chartered banks in an effort to provide them with long term stable funding that they could lend out to consumers and businesses alike. The program was scheduled to wind down last week but the government recently said that it is committed to maintaining the availability of the program until the end of March 2010. The demand for the program has decreased as conditions in the market have improved. The program will stay available; as a source of liquidity should normal sources of funding become less available. The move is an attempt from the government for some protection in the event of another economic crisis or in the event of a double dip recession. The risk of keeping the program going could be in the form of letting another bubble form before the burst. Although analysts have said that the chance of that happening is not that great, there are still fears that the economy could fall into another downturn and the program will stay in place to ensure the makings of a sustainable recovery. Analysts have credited the program for keeping borrowing costs down and say it is one of the factors driving recent housing market activity. If housing activity stays on pace, Ottawa has the option of stopping the IMPP in its tracks.
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90% of stimulus funds committed
The most recent report card on the budget from the Harper administration shows that 90% of the money for Canada’s economic stimulus package has now been committed to projects across the country. The commitments include more than 7500 infrastructure and housing projects with over 4000 receiving approval at all levels of government and either have begun construction or are in the pre construction phases. The government now says that 220 000 jobs will either be maintained or created from the stimulus across Canada by the end of 2010 which is up significantly from the previous projection of 180 000 jobs. The most recent report card covers this year as well as majority of the next where the government will funnel $61 billion of stimulus money into the Canadian economy. The conservative party has been on its toes as there was some opposition to numerous programs listed by the Conservative party. If the Conservative government cannot get one of the three opposition parties to vote with them or abstain from voting, it will likely prompt a fall election which is not in our best interests at this time. In exchange for the support of the Liberals for the January federal budget, Conservatives have agreed to table quarterly reports on how the stimulus package is progressing which brings us to date. The June report had a showing that 80% of stimulus measures in the economic recovery package had received funding or had commitments in place for the flow of funding. The Liberals stated the opposite for this the third report, citing that only 12% of the money in the infrastructure fund has gone to projects that had started construction by the end of August. It looks like it’s going to be a long road ahead with majority of the battle being within our own government and not the economic recovery. What do you think? Please comment below.
Toronto real estate market on fire
RealNet Canada released a report this week that outlines the latest market data for housing activity and the numbers were incredible. There were 3074 new homes and condos sold in the Greater Toronto Area (GTA) in August of this year. That’s an increase of a whopping 62% when compared with August of last year. When looking at the figures, sales of new high-rise condo suites levelled out in August while sales of new low rise, such as town homes, single and semi detached homes, saw a huge increase. High-rise sales were previously on the decline but recently saw a 2% increase across the GTA and a 10% increase in the City of Toronto’s market. Low rises saw unconceivable numbers with a 163% increase across the GTA, a 224% increase in York and a 252% increase in Peel Region. The new home market has been coming in strong since May of this year as the surge in home buying is attributed to homebuyers recognizing that homebuilders are offering some of the best prices they might ever see and seizing on the opportunity and bargains available. First time homebuyers have been extremely active in the market as they combine attractive prices with low interest rates to get the best advantages seen since the 1992 recession. First time homebuyers are driving demand this year with numbers up to 57% outshining last years numbers of 33%. The total of new home sales are split between 63% low rise and 37% high-rise. Last year saw an almost even market with 45% low rise and 55% high-rise. Year to date sales are also up 11% for low rise but are down a drastic 42% for high-rise. The total new home sales are still running 18% behind the 2008 numbers as the relative recovery is currently based only on affordability. The consensus is that as long as builders keep offering affordable housing to the market, the strength in the housing market will continue.
Mutual funds may be HST exempt
The latest news on the new Harmonized Sales Tax (HST) is that mutual funds may be exempt from the tax. Premier Dalton McGuinty stated that his government is in talks with the mutual fund industry about possibly exempting the harmonized sales tax from mutual funds. Although there is no agreement right now, the Ministry of Finance is in discussions with groups, including the mutual fund companies, to try and get things right the first time around on the new tax harmonization. The mutual fund industry is not the only ones complaining about merging the 8% Ontario sales tax with the federal Government Sales Tax which would raise the cost of quite a few items currently exempt from the provincial levy. McGuinty is now at odds with Finance Minister Dwight Duncan who has taken a stance against the mutual fund industry’s complaints on the Harmonized Sales Tax. Politicians are lashing out at the finance minister for applying a new tax in a time of great hardship. NDP Leader Andrea Horwath stated that taxpayers should be outraged that the governing Liberals are aiding big businesses instead of finding more exemptions for regular families for everyday use items such as home heating oil. Peter Shurman of the Conservative party says that there are many groups with cases against the Harmonized Sales Tax and that we need to stop the HST in its tracks now, before it is implemented next year on July 1st.
July’s flat economy shocks economists
This month’s latest Stats Canada report came as a shock to many economists as the numbers showed that the economy was flat in the month of July. This casts doubt to the Bank of Canada’s (BoC) earlier statements that a strong recovery is already underway. The general measurement of all the goods and services provided, known as real gross domestic product (GDP), was left unchanged in the month of July after seeing a 0.1% increase in the month of June. Economists had previously predicted an expected increase of 0.5% for the month of July. Doug Porter, deputy chief economist for BMO Capital Markets, released a report stating, “We’re not talking about a shot across the bow of the optimists, this is more like a torpedo through the hull.” We did see a small incline in the manufacturing sector by 0.8% after seeing nine straight months of declines. There were further declines seen in the utilities, construction and mining sectors. Poter commented by saying, “In other words, wall to wall disappointment on the goods producing front, with a 0.4% drop.” Services were up 0.1% and were led by wholesale trade as finance, real estate and insurance saw a rise of 0.2%. Stalled growth is a reminder that the technical end of a recession may not imply a rapid recovery. Output has finally appeared to stop shrinking but is only showing stabilization today instead of growth. The BoC had previously predicted a growth of 1.3% for the third quarter of this year but now that number is in doubt. It leaves it unlikely that August will bring on a quick reversal of July given the broad based softness.
Canada to pave the way for world recovery
The International Monetary Fund (IMF) recently released a report stating that, although Canada’s economy will be slightly weaker than previously anticipated, it will surge ahead of the other G7 economies in 2010. The IMF is the international body that oversees the global monetary system and it recently raised its growth forecast for the world economy next year due to a surge in manufacturing across Europe and Asia. Canada is now expected to have the strongest growth of the Group of Seven developed countries next year. They went on to state that the Canadian economy would contract by 2.5% in 2009, down 0.2% from their previous forecast, and expand by 2.1% in 2010, up 0.5% from their previous forecast. These growth expectations have now put Canada ahead of the U.S. which is expected to contract by 2.7% this year and grow by 1.7% next year. On a global level, the IMF stated that the economy would contract by 1.1% this year and expand by 3.3% next year which are both better than their previous expectations. Despite the positive growth prospects, governments are torn over when to begin withdrawing previously issued financial aid from their economies. Economists fear that by tightening policies too early or too sharply that it may derail what fragile growth we are currently seeing. The IMF reiterated its concern that their biggest risk is if government withdraws stimulus support measures too soon. Growth is currently on pace to be positive in most countries for the remainder of the year, but to sustain a recovery, private consumption and investments will have to strengthen as high public spending and fiscal deficits are unwound. Every country will be on their own to define an exit strategy and time it to their own economies. What do you think? Please comment below.
Credit card rules shake banking industry
When the new credit card regulations take effect on January 1st, 2010 it will end up costing the banks hundreds of millions of dollars. The need to implement complex regulations in a small timeframe could lead to unexpected consequences such as less consumer choice and reduced credit availability. Regulations that were aimed at increasing disclosure, such as new calculators to show how long it will take to pay off your bill making only minimum payments, are complicated when looking at the 68 million statements that are sent out each month. Added information may potentially be more confusing rather than enlightening for the consumer. Banks may also react to the new costs by limiting the number of products that they offer and fewer card options could result in less credit availability for the overall consumer. The new rules also include expressed consent from cardholders and can be given orally but the banks must provide written confirmation of the consent. Jim Flaherty, Canada’s Finance minister, stated that the majority of new rules will take effect January 1st but made a small provision for a 21 day grace period on new purchases, when you pay your outstanding balance in full by the due date, to take effect on September 1, 2010. The new rules will also include a summary box on credit card contracts and applications that would clearly explain the cards features such as interest rates and fees. Do you think that this will help you as a consumer? Please comment below.
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