This weeks top stories include how the cost of food is through the roof, how Canadian retail sales are down, how Toronto slips as a global financial centre, how credit card losses are turning in to profits for banks, how the Bank of Canada will cut back on most liquidity boosting, a quick update on the G20 summit and how Flaherty will extend the mortgage buying program.
Cost of food through the roof
The cost of food has risen drastically from last year ignoring the negative inflation rate seen for the third straight month in August. The rise of 4% to food costs in August from the same time last year is a significant increase but still lower than the 5% raise seen in July and the 5.5% hike seen in June. The constant upward price shift for fresh fruits and vegetables, fish and meat have eased slightly from the record highs seen in recent months but not by much. When looking at a monthly basis there was a slight drop of 0.7% to food costs in August from July. Hopefully there will be greater relief in sight as the high Canadian dollar can allow grocery stores to pass along the savings from food imports at a lower cost. Canada’s overall inflation rate came in at -0.8% in August as the third month in a row where prices were down year over year. July saw the inflation rate at -0.9% and was the lowest rate seen in 56 years. A decline in prices for automobiles, gasoline, air travel and housing costs held down the rate of inflation as other factors such as lower clothing and footwear prices assisted for the month of August. The declines are not coming as a shock given the current state of the economy and the strength of the Canadian dollar. Canadians are gaining strength in purchasing power but feeling like they have less money to spend as unemployment keeps increasing and wages keep slumping. Economists say that they are not concerned about deflation, where a prolonged period of falling prices can effect the economy further, because they feel that the Bank of Canada (BoC) won’t let deflation take effect. Their standpoint is that the BoC will inject more stimulus into the economy to get consumers spending and prevent deflation from taking place. Currently core inflation is at 1.6% for August and is not far from the BoC’s target rate of 2%.
Canadian retail sales down
July saw an unexpected drop in retail sales as lower gas prices took their effect on the retail sales market. Sales were down 0.6% to $34.2 billion in July after seeing rises in five of the first seven months of this year. Economists had previously expected sales to rise by 0.7% in July after seeing a 1% rise in the month of June. Although the information is disappointing previous gains make it clear that our economy is on the mend. The current decline was seen in five of eight sectors in July where the automotive sector was down 1% and the decrease was mainly due to a 3.4% drop in sales at gas pumps as prices declined. This is the third time in four months where gasoline has been the largest contributor to the change in retail sales. Manufacturing saw an upswing in July as sales grew 5.5% to $41.4 billion led by the metals and automobile sector. The Bank of Canada (BoC) feels that the recession bottomed out in June and expects the economy to begin growing again with a forecast of 1.3% expansion from July to September of this year and 3% growth during the final quarter of this year.
Toronto slips as global financial centre
Toronto’s ranking as a financial centre has seen a slight drop globally but did see gains locally in North America. The latest index released on Tuesday shows that Toronto has surpassed Boston for third place and is only behind New York and Chicago in the financial index. Toronto’s overall ranking was down two spots from 11th to 13th on the Global Financial Centres Index. The index is produced by the Z/Yen Group, which uses surveys of industry figures and existing rankings to rate 75 financial centres based on competitiveness. As stated earlier the top two financial centres in North America remain to be New York and Chicago. Overall New York ranks second behind London when looking at the world rankings. Locally Toronto barely came in on the rating scale if looking at North American respondents but is strongly supported by offshore centres and respondents based in London. Toronto’s index rating rose 32 points but did not see the great jumps that other cities saw. The largest increases were seen in the Asian centres as Beijing saw an increase in it’s position up 29 spots to number 22, Shanghai was up 25 spots to 10th place and Seoul was up 18 spots to number 35 on the rankings. Large declines were seen across Europe with Glasgow taking a hit of 18 spots down to number 49 and Gibraltar also down 18 spots to a ranking of 51. Not surprisingly, one of the hardest hit cities from the recession was Reykjavik, the capital of Iceland, and came in at last place in the rankings.
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Credit card losses turn to profits
Canadian banks are ready to take advantage of lower losses on credit card business in the up and coming year if the economy continues to improve and the unemployment rate stabilizes. Gerry McCaughey, Chief Executive Officer of CIBC, suggests that there is a definite chance of credit card business continuing to grow across the industry next year. Gerry stated, “If Canadian unemployment has or does peak shortly and starts to decline and at the same time the economy performs reasonably, the probability that these portfolios will continue to grow and you’ll see a drop off in loss rates is significant.” The six big banks in Canada issue the majority of credit cards for the country. When economic times are solid, credit cards generate larger profit margins for banks than any other type of consumer loan. Gerry remained evasive when asked if CIBC plans to grow its credit card business next year with the new insight on improvements for consumer delinquencies. Canada’s largest credit card portfolio is operated by CIBC and they had stopped growing that portfolio in late 2008 when the economy started its decline. CIBC has set aside $547 million to mitigate credit card losses in the third quarter of this year versus the $203 million set-aside during the same three-month period in 2008. CIBC did note that loan losses were higher in cards and personal lending due to higher delinquencies and bankruptcies stemming from the recession.
Bank of Canada cuts back on liquidity boosting
The Bank of Canada (BoC) recently cited improved conditions in credit markets as justification for the central bank’s decision to cut back on the amounts of emergency liquidity it plans to offer. This is the first baby step towards its exit strategy from the stimulus program. The central bank will end two out of three liquidity programs towards the end of next month and scale back the third program at the same time. David Longworth elaborated by saying, “Financial markets have improved to such an extent that the demand for our team liquidity facilities has been waning.” He also added that there is no demand for term loan facilities, private sector instruments have been cut in half and demand for PRA’s has cut down drastically. Last year we saw the BoC inject billions, almost daily, to keep credit markets from going under. It also opted to accept other forms of collateral for loans and broaden the number of market players who could use the BoC for liquidity purposes. As the economy rebounds into positive territory, central banks from all countries are trying to put together a way to withdraw trillions in liquidity used to avoid potentially harmful inflation. BoC governor Mark Carney stated that Canadians should be prepared for a difficult recovery that will require more restructuring of the economy than the normal after a recession. He also said that the economy has begun to expand and that growth in the second half of this year is on track to exceed the BoC expectations. The growth is largely due to stimulus efforts through the BoC including low interest rates and an injection of $46 billion over two years. The only way to measure real growth will be when the stimulus is removed and if the economy can become self-sustaining.
G20 summit update
The Group of 20 summit was held this week in Pittsburgh and the topic of discussion was financial reforms. The concern going in was that efforts to make the world less prone to financial disasters was losing momentum. Although things look like they are on the right track there is large room for improvement, not only on the financial growth side, but also for the global growth model to climate change as well as tougher financial regulations and caps on bankers pay. European leaders are pressing for a conclusion to financial regulation reforms and others are asking for co-ordinated policies that will level out the imbalances between export dominating China and overly indebted United States. Policy makers are trying to reduce the excessive risk taking that made a mess of the financial markets and put the world’s economies into a recession. This is the third meeting thus far since the demise and fall of the Lehman Brother’s around a year ago. The first meeting took place when the world’s economies were on their knees and countries that had escaped the banking crises were still taking a large hit from the slump in global trade. Even though the recession appears to be coming to a halt in many countries, there should still be a sense of urgency to get the job at hand done. The best sign of the world’s recovery comes on the heels of the U.S. Federal Reserves latest comments that growth has returned to the world’s largest economy. Head of the International Monetary Fund, Dominique Strauss-Kahn, stated that G20 leaders should keep economic stimulus plans in place as long as the millions of people who lost their jobs during the crises remain unemployed. Top officials agreed not to wind down their aid before the time is right and to wait until economies are on solid ground before doing so. Washington is looking for the G20 nations to commit to a joint effort to reduce the worlds dependency on U.S shoppers by boosting consumption in exporting countries, like China, while encouraging debt ridden countries like the U.S. to save more. Currently China’s households save roughly 40% of their disposable income and the U.S. saves just over 3%. Canada’s message is to stay on the course we are currently on, trying to pull out of the recession slowly, rather than hastily ending current support measures. Prime Minister Stephan Harper stated, “We can begin to consider an exit strategy but at this time the real priority continues to be to resolve the problems associated with the global recession.” He went on further to state that work remains to fix the regulatory system, to continue to deliver stimulus measures and to counter protectionism.
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Flaherty extends mortgage buying program
Ottawa took a big step recently when they announced that they plan to extend the emergency measure created to help banks during the financial crisis. This is the first sign that the banking industry and the government are not ready to call an end to the economic mayhem. Jim Flaherty, Canada’s Finance Minister, is keeping the $125 billion program to buy mortgages from lenders in place. The program was originally scheduled to end next week but the banking industry has been pressuring the Finance Minister to extend the length of the program as the banks continue to benefit from it and bring up the possibility of liquidity pressures re-emerging. The decision comes with a lot of debate as central bankers, political leaders and economists try and figure out when to scale back on the measures that have been put in place to boost the flow of credit and stimulate economies. Now that the credit crunch has gone, banks have been seeing higher profits than expected and have scaled back use of the mortgage program. The banks have only sold $64 billion worth of mortgages into the program with another $61 billion remaining in the fund for further purchases of mortgages. While circumstances have changed for the better, the program is still a valuable asset as it lowers the cost of funds for the banks. The program is also creating profit for the government but returns are on the decline as conditions keep improving. Usage of the program seems to have come to a halt but should remain available in case the banks require liquidity assistance. Flaherty first unveiled the program in October of 2008 when banks around the world were having trouble funding their lending operations. It was originally intended as an emergency boost to the flow of credit and to reduce the prices of mortgages. The program was then extended into the 2009 budget, as Flaherty’s intentions were to buy mortgages through the first half of this year. The program gets a lot of praise from economists for supporting the banks at a critical time in the global crisis and for keeping mortgage rates from surging to exceptionally high levels when borrowing costs were rising. Economists feel that it was a key factor in supporting the quick turnaround in Canada’s housing market. More recently, the financial markets are returning closer to normal but funding costs are not back to where they were prior to the crisis. They have improved quite a bit as the big banks are seeing profit margins form their Canadian lending businesses rise in each of the last two quarters. Banks have stopped use of the mortgage purchase program since February as ability to fund clients needs have improved. Residential mortgage lending in the month of May was up 7.8% from a year earlier and consumer credit was also up 7.7% as the numbers show the results. What do you think of the program? Please comment below.
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