Recovery to pick up, Bank of Canada says

Date: January 21st, 2010

Source: CBC News

The Bank of Canada has slightly raised its projection for growth in 2011, saying the Canadian economy will benefit from a faster-than-expected recovery in the U.S. this year.

The central bank said Thursday it expects the Canadian economy to grow by 3.5 per cent next year, up from its previous projection of 3.3 per cent.

But in late 2011 and into 2012, Carney said the country should get used to a lower growth rate.

“Once things settle down … growth is going to be more around two per cent as a run rate for the economy [rather] than the three per cent we have enjoyed earlier this decade or the last decade,” Carney told the CBC’s Amanda Lang. He cited disappointing productivity growth and demographic shifts as reasons for the lower growth.

The cental bank said GDP will grow by 3.5 per cent in the first quarter this year from Q4 of 2009. While that’s down from the 3.8 per cent quarter-over-quarter growth it was forecasting three months ago, the central bank now expects the economy to expand by 4.3 per cent in the second quarter and 4.0 per cent in the third quarter and 3.8 per cent in the final quarter of the year.

The Q2, Q3, and Q4 growth estimates are all increases from the central bank’s projections made last October.

“Export growth is projected to be somewhat stronger than was expected last October, owing to a more favourable outlook for the U.S. economy, particularly in the sectors that figure most importantly for Canadian exporters,” the bank said in its quarterly Monetary Policy Report.

The Bank of Canada substantially hiked its estimate for U.S. economic growth this year from 1.8 per cent to 2.5 per cent.

It says overall growth in Canada this year will come in at 2.9 per cent — down a tenth of a percentage point from its estimate of three months ago.

Still, the overall tone of the new outlook was slightly more upbeat than three months ago.

“Economic growth is expected to become more solidly entrenched over the projection period as self-sustaining growth in private demand takes hold.”

Canada fared better than most in downturn

The central bank says the Canadian economy shrank by 2.5 per cent in 2009. That’s larger than its previous estimate of 2.4 per cent.

But even though real GDP in Canada contracted for three consecutive quarters, “the magnitude of the downturn was more modest than in other major advanced economies.”

The central bank estimated that Canada’s GDP through the recession fell 3.3 per cent — less than most other advanced economies, even though Canadian exports plunged 20 per cent.

“Canada’s relatively solid economic performance, in spite of this trade shock, reflects the resilience of Canadian household demand. Consumer spending barely declined in Canada,” it said.

“Canada has suffered less than many other countries, partly because of its sound banking system and relatively strong household and corporate balance sheets, and also because of the speed and scale of monetary policy actions.”

Employment levels likely bottomed last summer, according to the central bank.

“The deterioration in the labour market appears to have stopped,” Bank of Canada governor Mark Carney told a news conference. But the bank noted that its recent surveys have found that “ongoing weakness in the labour market is nevertheless evident.”

The jobless rate is now hovering around 8.5 per cent.

Inflationary pressures edge higher

Inflationary pressures in Canada are building slowly. The central bank now expects total CPI inflation in the first quarter will be 1.6 per cent, up two-tenths of a percentage point from its estimate in October. It projects inflation will jump to 1.9 per cent by the fourth quarter of this year, up three-tenths of a point from its last projection.

Core inflation, which excludes the more volatile items in the consumer price index, has been “slightly higher” than expected recently, the bank said. “Nevertheless, considerable excess supply remains, and the bank judges that the economy was operating about 3.25 per cent below its production capacity in the fourth quarter of 2009,” it said.

The outlook for global economic growth this year and next is “somewhat stronger” than it was in October, the bank added. But it warned that “the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.”

On Tuesday, the Bank of Canada left its key lending rate at a rock-bottom 0.25 per cent and reaffirmed its commitment to keep it at that level through June, assuming inflation does not become a concern.

Bank Of Canada: Economy still not ready to stand on own legs

Date: January 19th, 2010

OTTAWA – Julian Beltrame, The Canadian Press

It will be another year before the Canadian economy can stand on its own feet without government assistance, the Bank of Canada said Tuesday.

The slightly pessimistic assessment came as the central bank signalled in no uncertain terms that it was in no hurry to move off historically low interests rates, saying they are still needed to stimulate borrowing and business expansion.

And it revised downward – ever so slightly – its previous forecasts on growth for this year while raising it slightly for next year.

The key message governor Mark Carney sought to impart was that both the Canadian and global economies may be improving, but that they are still primarily being propped up by massive government spending, and historically low interest rates, along with other measures.

“While the outlook for global growth through 2010 and 2011 is somewhat stronger than the bank had projected (in October), the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems,” Carney and his policy-making council said.

As for the Canadian economy, the council noted that the economy is operating 3.5 per cent under capacity and that the private sector won’t likely become the “sole driver” of demand growth until 2011.

With that in mind, the bank kept its trendsetting overnight interest rate at 0.25 per cent, the lowest in history, and again pledged to keep it there for the next six months.

To reinforce the commitment, it extended its emergency lending instruments to April, allowing chartered banks to access funds at the historically low rate.

The discouraging language on interest rate hikes sent the Canadian dollar below 97 cents for most of the trading day, from its 97.42 cents US closing Monday. It finished down 0.40 of a cent Tuesday at 97.02 cents US.

In that regard, mission accomplished, said independent economist Dale Orr.

One of the key challenges facing Carney in the next several months, Orr said, is to discourage markets from thinking he will hike interests rates ahead of the U.S. Federal Reserve. That would strengthen the loonie and weaken the recovery by discouraging exports.

Overall, the bank’s view on the economy remains little changed since October, when it last issued an outlook, and is falling in line with many other forecasters.

On Tuesday, the Conference Board of Canada issued its latest projection, pegging growth at 2.8 per cent this year.

The Bank of Canada’s estimate of growth is a tick higher at 2.9 per cent, which is still above the consensus estimate of 2.6 per cent. It expects the economy will expand by 3.5 per cent in 2011, also above many other forecasts.

Tuesday brought an indication that the economy is starting to revive after almost a year of contraction and job losses.

Statistics Canada said its leading index for December rose by 1.5 per cent, the biggest one-month advance since 1958, with none of the 10 major components registering losses.

Despite what several commentators called the “dovish” nature of the central bank’s remarks, some analysts saw elements of optimism in the statement.

Scotiabank economist Derek Holt noted that central bank removed from its text an earlier comment that “significant fragilities remain,” and forecast that global expansion would be somewhat stronger in 2010 and 2011 than it thought three months ago.

Economists are now projecting that Canada’s gross domestic product grew by between three and four per cent in the last three months of 2009, and will likely advance at a similar pace this winter.

“The justification for giving away free money is a lot tougher now,” Holt said, even if growth is muted.

However, Carney reiterated his concern about the low demand for Canadian exports – particularly in the U.S. – and the high price manufacturers are paying for the continuing strong loonie.

“The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economy activity in Canada,” the bank statement said.

The bank was given some backing on the point by a TD Bank report, also released Tuesday.

The assessment called for manufacturing output to outperform most other sectors over the next few years. But output still won’t get it back to where it was a decade ago because of how far it has fallen in the recession.

Especially noticeable will be the drop-off in auto sales and production, said economist Dina Cover.

In another aspect of the Bank of Canada statement, the central bank said inflation has been rising faster than anticipated but it did not appear to be overly concerned at this point.

The bank said it still doesn’t believe inflation will return to the two per cent target until the third quarter of 2011, another indication it is not in a hurry to raise interest rates.

Ontario Home Prices To Trend Higher In 2010

Date: January 7th, 2010

Cautious optimism is on the lips of many Real Estate agents and economists. Though the last 12-18 months has definitely held some uncertainty in the housing market the future is looking much brighter for the Ontario home market.

Canada and Ontario appears to have avoided any lasting impact from the collapse of the US housing market and the subprime mortgage market meltdown. What we have seen over the past 18 months was fear versus demand and fair market values relative to the true economic environment in Ontario. From the price stability I have seen, I would say we are on great footing.

Here is my rational for Ontario home price appreciation for 2010.

Ontario home prices are fairly valued. Despite a healthy appreciation in home prices in Ontario between 2001-2009 we have avoided the huge run ups (and drops) in prices seen in Alberta and British Columbia.

Ontario’s housing supply appears to be inline or undersupplied versus the demand.

The 40 billion dollar economic stimulus package Canada has added to its current 507 billion dollar national debt represents approximately 8.5% in new debt. While this is bad news for most tax payers, borrowing to this degree will definitely cause price inflation. This will directly and positively affect the value of real estate.

The world economy appears to be stable or growing. Despite a US collapse, China’s GDP growth rate for 2009 is estimated to be around 8.2% and is forecasted to be in the 8%-9% range for 2010. India grew at a rate of 7.9% over 2009 and expects a 7% growth rate in 2010. Since Canada benefits directly from rising demand of natural resources, if the demand continues, this will be sure to have a further positive impact on the Canadian economy.

The unemployment rate in Ontario rose sharply as a result of the US economic collapse however has since started to slowly decline. The unemployment rate currently sits around 8.5%, it averaged around 6.2% during the 36 months of 2006-2008.

Slowly improving consumer confidence and record low interest rates are bound to have a positive impact on the spring 2010 housing market. The spring housing market may even be exaggerated by the fact that the Bank of Canada has signaled their intention to raise interest rates in June and the introduction of the HST on new home purchases in July.

Where prices go beyond the summer of 2010 will really depend on how much and how quickly the bank of Canada intends on raising rates.

Bank of Canada warns of debt peril

Date: December 10th, 2009

Source CBC News

Rising government and household debt risk derailing Canada’s economic recovery, the Bank of Canada warned Thursday.

In its semi-annual Financial System Review, Canada’s central bank says that despite positive signs of economic recovery in the last six months, rising household debt levels are currently the biggest risk to the country’s financial system.

“Conditions in the international financial system and in the global economy have improved considerably since June 2009,” the report says.

But of the five factors that the central bank singles out as risks to the recovery, the only factor it deems to have worsened since its last update in June is household debt.

The risk of a system-wide stress on Canada’s economy due to debt levels remains low, the report notes. But “the likelihood of this risk materializing in the medium term is judged to have risen as a result of increased indebtedness.”

On Tuesday, the bank reiterated its conditional commitment to keep lending rates low until June of 2010, holding the benchmark overnight lending rate steady at 0.25 per cent.

To illustrate its concerns, the bank outlined two simulated scenarios for what might happen with lending rates over the next three years. In the first, it assumed the benchmark rate would rise to 3.2 per cent by mid-2012. In the second, it assumed the benchmark rate would rise to 4.5 per cent.

The bank says that a debt-to-service ratio higher than 40 per cent for a household makes it “financially vulnerable.”

Should the first scenario come to pass, it estimates the level of households that would be above that level would be 8.5 per cent by mid-2010. Under the second scenario, the figure would jump to 9.6 per cent.

That compares with an average of 6.1 per cent over the past 10 years and a historical peak of 7.4 per cent in 2000, the bank says.

Although the average net worth of Canadian households increased during the most recent quarter, debt arrears and bankruptcies have continued to rise since June, the bank notes.

“Indeed, personal bankruptcies as a proportion of the population aged 20 and over increased to its highest level since 1991,” the report says.

Government debt also a concern

The bank also highlighted mounting concerns over the fiscal positions of many countries that now have large deficits because of recession and stimulus spending.

The bank says the debt being accumulated by governments could trigger a disorderly adjustment to global imbalances.

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Economists say BOC could raise interest rates by one per cent in mid-2010

Date: December 9th, 2009

Sunny Freeman, The Canadian Press

TORONTO — The Bank of Canada repeated its pledge Tuesday to keep interest rates at historic lows until the middle of next year to stimulate growth and a sense of stability in the midst of an unsteady economic recovery.

But many economists are predicting rate hikes as much as a full percentage point or more later next year, and say the bank’s commitment to keep its key overnight rate at 0.25 per cent creates a false sense of security among borrowers who have taken on debts larger than they could normally afford.

The median target for the overnight rate of the C.D. Howe Institute’s 12-member monetary policy council is for one per cent in the second half of 2010.

The council said the central bank should give a strong signal that an eventual overnight rate move may be quick and large. They also suggested the bank rein in the housing market by raising the required down payment on government-insured mortgages.

C.D. Howe president and CEO William Robson said a rapid rise in interest rates expected late next year could prove devastating for homeowners who have not evaluated their ability to carry their mortgage at a higher interest rate.

“The concern is…does the simple experience of short-term interest rates being so low, for so long, encourage people…to mortgage themselves more than they otherwise would, and buy a bigger house than they otherwise would … and get themselves into trouble longer term?”

Meanwhile, the central bank also announced Tuesday that the global economy has been slightly more positive than it was at the time of the bank’s October pronouncement, but that “significant fragilities remain.”

The Canadian economy grew less than analysts expected in the third quarter of the year and inflation has been slightly higher than the central bank expected. Its target is two per cent.

Dawn Desjardins, assistant chief economist at RBC Economics, said still-volatile markets and global market uncertainties suggest a significant change to the central bank’s interest rate policy is premature.

But she added that if the economy continues to build momentum by next summer, the bank will likely increase the rate by one percentage point.

Diana Petramala, an economist at TD Bank, said as long as economic fragilities remain, the Bank of Canada will not be swayed to move quickly with interest rate hikes.

She said the central bank’s projection for three per cent growth in 2010 is slightly more optimistic than TD’s forecast of 2.7 per cent growth. She believes the Bank of Canada’s first rate hike will not come until the fourth quarter of next year.

Canada’s slow economic recovery has been driven by a boom in the housing market, with sales of existing homes never stronger than in the recently completed third quarter.

Cameron Muir, chief economist at the B.C. Real Estate Association, said low interest rates have played a key role in home sales, which have rebounded dramatically compared with the beginning of the year.

“When we look at that target overnight rate staying fairly static for the next six months, that bodes well for homebuyers,” he said.

But he forecasted long-term and short-term mortgage rates will edge up in late 2010.

“In the next 12 to 18 months, it’s likely that rate is going to start heading higher and it’s going to have an impact on those consumers who have short-term variable rates and home equity lines of credit,” Muir said.

The C.D. Howe’s Robson said there is risk of a housing bubble stemming from interest rates set too low. “People are getting a little bit too used to this emergency low on the overnight rate,” he said.

If the economy grows at four or five per cent, the overnight rate cannot stay down at one or two per cent, he said. Over a longer period he sees interest rates jumping, with a high of five per cent and an average hovering around three per cent.

Meanwhile, the Bank of Canada announcement repeated, but softened, its warning on the persistent strength of the Canadian dollar acting as a “significant drag” on growth.

An October pronouncement on interest rates warned the soaring loonie was undermining Canada’s economic recovery to such an extent that it was more than offsetting the more favourable developments seen over the summer.

But Robson said he believes the risk is debatable and said the Canadian dollar is strong for fundamental reasons.

“It’s a symptom of a buoyant outlook for Canada, it’s not an independent cause of weakness in the future.”

He said the Bank of Canada’s preoccupation with the high exchange rate also encourages people to think the overnight rate is going to stay low longer.

“The Bank of Canada’s OK with that because they see that as important to stimulate the economy. But if you look at the housing market you have to wonder, are we seeing too much of a good thing?” he said.