Economic News
Bank of Canada Warns Low Inflation to Persist for Some Time
The Bank of Canada signaled on Wednesday it is more concerned about weak inflation than it was three months ago and explicitly stated that its next move on interest rates could be either down or up, depending on how economic data unfolds.
The bank held its main overnight rate unchanged at 1.0%, as expected. While it said a more firmly entrenched U.S. recovery and a weaker Canadian dollar would help lift exports this year, its guidance on monetary policy was incrementally more dovish than it had been.
“Although the fundamental drivers of growth and future inflation appear to be strengthening, inflation is expected to remain well below target for some time and therefore the downside risks to inflation have grown in importance,” it said.
“The timing and direction of the next change to the policy rate will depend on how the new information influences the balance of risks,” it added, acknowledging the possibility of easing monetary policy.
Governor Stephen Poloz had said in an earlier news conference that the bank’s stance was neutral and that this meant that rates could fall as easily as rise, but such language has not been put into the bank’s official rate statement until now.
The bank omitted a phrase it used in its last two rate announcements that said “the substantial monetary policy stimulus currently in place remains appropriate”.
The Canadian dollar fell to a four-year low of 90.59 U.S. cents, after the bank’s statement, down from Tuesday’s close of 91.14 U.S. cents.
Canada’s dollar has fallen almost 7% since October when Poloz dropped language about the need to raise interest rates.
Bank of Montreal chief economist Douglas Porter said Mr. Poloz is getting what he wants – a lower dollar – without actually cutting rates to get it.
“Suffice it to say that the bank is welcoming the weakening Canadian dollar with open arms,” Mr. Porter said.
In a Reuters poll last week, analysts predicted the bank’s next move would be a rate hike but not until the second quarter of 2015. Although none of the 37 analysts surveyed actually forecast a rate cut, many bet correctly that the bank would sound a bit more dovish in its statement on Wednesday.
The central bank, led by Poloz since June, dropped a longstanding bias towards hiking interest rates last October. It has not changed its key rate since September 2010.
The bank’s increased concern about possible disinflation is shared by policymakers around the world and comes at a time when global markets are highly sensitive to interest rate risk.
The U.S. Federal Reserve has begun scaling back its massive stimulus program and there is talk about the Bank of England possibly raising rates. On the other hand, the European Central Bank and Bank of Japan are firmly in stimulus mode.
The bank sees inflation lower than it had forecast in its last quarterly report in October, with total and core measures around 1% in the first half of 2014, at the bottom end of its target range of 1 to 3%. But it still sees the inflation rate returning to the 2% target in “about two years”.
The central bank’s tone suggests an eventual return to higher rates may be delayed, yet again. Several Canadian banks this week lowered their own rates on mortgages and other loans.
Canadian economic growth sped up in the latter half of 2013, absorbing a little more spare capacity, it said, but it warned there was no sign so far that exports and business investment were replacing indebted consumers as the drivers of growth.
The bank said, however, it is hopeful the sources of growth will broaden. It sees net exports contributing to annual growth in 2014 after being flat or detracting from growth since 2009.
Stronger foreign demand will also prompt businesses to invest more, it said, while consumer spending will be moderate and housing investment relatively unchanged.
The recent depreciation of the Canadian dollar will help in that process, the bank said, as well as exert some upward pressure on inflation.
The Canadian dollar has fallen by more than 6% against the U.S. dollar since the bank’s October policy shift.
“This depreciation likely reflects the improved growth prospects in the United States, as well as reduced safe-haven effects that had pushed the Canadian dollar higher in the aftermath of the global financial crisis,” the bank said.
However, it said the dollar “remained strong” and would continue to pose challenges for non-commodity exports.
The bank raised its forecast of 2014 growth to 2.5% from 2.3%, following anticipated growth of 1.8% in 2013.
Source: Reuters, The Globe and Mail
Loonie is World's Worst Performing Currency in Early 2014
The New Year is only a few weeks old and already the Canadian dollar has fallen almost 3 cents US (3+%), making it the worst performing primary currency among 16 major peers.
The loonie is currently trading around US $0.91, the lowest level since late 2009.
After hovering near parity in recent years, the loonie has been in decline for the past year, tumbling nearly 10% since the start of 2013 (almost 7% in 2013 and 3% so far in a still young 2014), one of the biggest annual falls in more than two decades.
The currency has been eroding for several reasons, notably the Bank of Canada’s dovish tone on interest rates, disappointing Canadian trade and employment data, concerns about the country’s oil exports and signs of a strengthening U.S. economy and rising U.S. dollar as the Federal Reserve starts to cut back on its monthly bond buyback program known as quantitative easing or QE.
And analysts say we should prepare for a weak loonie to be the new normal for most of 2014.
Senior economists, speaking at an annual economic outlook forum in Toronto in early January, gave their views on everything from the housing market to interest rates. On the Canadian dollar, several said they see it weakening further in the coming quarters.
TD Bank was the most bearish of the bunch. It sees the currency ebbing to 90 cents by year’s end and into the high 80-cent mark in early 2015 due to “a large current account deficit and just more international competition for capital,” deputy chief economist Derek Burleton said at the Economic Club of Canada forum.
CIBC’s Avery Shenfeld sees the loonie falling to about 90 cents in the next several quarters before returning to the 94-cent mark by year’s end as trade improves.
And Bank of Montreal’s Douglas Porter sees the loonie ebbing to about 91 cents by year’s end “with some downside risks” to that prediction.
The Canadian dollar’s fall is based in part on the strengthening U.S. economy and the Bank of Canada’s dropping of the tightening bias to weaken the loonie, said Blake Jespersen, BMO Capital Markets’ managing director of foreign exchange.
With Bank of Canada governor Stephen Poloz looking unlikely to hike interest rates until 2015, expect a bumpy ride for the loonie until then, he said.
“I think Canadian companies and consumers will have to adjust to a weaker Canadian dollar,” Mr. Jespersen said. “I just don’t think the economy nor commodity prices, nor interest rates warrant a Canadian dollar above US95¢. So I think we could be trading between US88¢ and US95¢ over the coming year.”
With a strong U.S. economic performance and employment outlook likely to spur the U.S. Federal Reserve to continue tapering its bond-buying program, keeping the U.S. dollar on strong footing against mundane Canadian economic data, the fundamentals point to a continued slide for the Canadian dollar before it stabilizes in the second half of the year, said Camilla Sutton, chief foreign exchange strategist for Scotiabank.
Where the loonie will settle is difficult to predict — Scotiabank’s forecast for the low was US92.5¢, which it has already surpassed, said Ms. Sutton, but the overall trend is downward.
The loonie’s downward trend is both welcome and dreaded news for Canadians.
Basically, the biggest winners include any companies that collect revenue in U.S. dollars while paying costs in Canadian currency. Back in the glory days of the auto industry, provinces like Ontario and Quebec benefited enormously from the low dollar, since it provided huge incentive for car makers (all of which are headquartered south of the border) to shift jobs north as a way to take advantage.
If all goes according to plan that phenomenon should re-emerge, a much-needed tonic for a beleaguered sector.
“Even some retailers will be breathing a tad easier, as the loud siren call of cross-border shopping fades for consumers with each tick down in the currency,” said BMO’s chief economist Douglas Porter. “Overall, we estimate that a 10 per cent drop in the currency could add as much as 1.5 percentage points to real GDP over a two year period, or 0.5-to-1.0 percentage points per year.”
It’s a gift for Canadian exporters, who have been struggling in recent years, said Jayson Myers, the president and chief executive of the Canadian Manufacturers and Exporters.
“When the dollar was at parity, our per-unit costs of production were some of the highest in the world. … Say the dollar goes down to 90¢ and stays there, that means we are 10% more cost competitive to do business in Canada, and that’s a 10% better return on investment in Canada,” he said.
A weaker loonie means Canada is in a better position to keep and attract investment here and to compensate for some of the post-recession wave of activity that Canada has largely missed out on, he added.
While Canadian manufacturers and exporters are the big winners in the loonie sell-off, the big losers are importers who have less buying power when bringing in products from afar, said Mr. Jespersen.
“And Canadian consumers as well, who are used to much cheaper shopping south of the border over the last three or four years,” he added.
A weaker dollar will also put pressure on travel operators and sporting teams, both of which have cross-border operations that operate in greenbacks.
For example, salaries and revenues from National Hockey League events are tabulated in U.S. dollars, and any fluctuation in currency has a major impact, said established NHL player agent Anton Thun of MFIVE Sports in Toronto.
A weaker Canadian dollar cuts into overall revenues, and Mr. Thun estimates that Canada represents as much as one-third of the NHL’s revenues. Hockey players’ salaries may also feel the pinch, as they are capped at 50% of all hockey-related revenues, Mr. Thun added.
“The weaker the Canadian dollar becomes, if it gets down to the US88¢ range, that can have a significant impact on the salary cap and [hockey related revenues],” he said.
However, many companies, such as importers and sporting franchises, hedge their costs to prepare for currency fluctuations and soften the impact of a weakening Canadian dollar, Mr. Jespersen said.
Source: The Financial Post
IMF Sees Stronger Global Economic Growth in 2014
The International Monetary Fund (IMF) says the global economy has turned a corner, propelled by faster-than-expected growth in the United States and Europe.
Global economic output will increase by 3.7% this year, the IMF said Tuesday in a revised outlook. The estimate is a slight revision from the 3.6% increase the fund predicted in the fall. Its forecast for 2015 is unchanged at 3.9%.
While the increase is slight, it represents a break from 2013, which was marked by disappointments. If the revised forecast holds, the global economy will grow the most this year since 2011, when the world’s GDP expanded almost 4%.
After rebounding sharply from the 2009 recession, the global economy sputtered. Many of the problems were rooted in the world’s wealthiest economies. The U.S. recovery was especially disappointing, weighed down by households’ desire to pay off debt rather than shop, government austerity and weak business confidence. Europe, meanwhile, was gripped by a sovereign-debt crisis that challenged the viability of the euro. With their biggest trading partners in turmoil, emerging markets began to struggle as it become clear their growing middle classes still were too small to support the rapid growth to which many of those countries had become accustomed.
That picture is starting to change, as richer countries start to gain momentum after years of stagnation. The U.S. is back as the undisputed growth leader in the Group of 7 advanced economies: the world’s largest economy will expand 2.8% in 2014, the IMF said, an increase from the previous forecast of 2.6%. The euro zone finally will reverse a two-year-old recession in 2014, and Britain will grow at the fastest pace since 2007, the fund said.
“There will be more growth rotation from emerging market economies to advanced economies in 2014-15,” Olivier Blanchard, the IMF’s chief economist, said in a statement.
Canada’s economy will expand 2.2% in 2014 and 2.4% in 2015, the IMF said. (The previous estimate was for growth of 2.1% this year and 2.5% next year.)
The more positive outlook hasn’t entirely restored the IMF’s confidence in the global economy, however. The fund noted that inflation is running persistently below central banks’ targets across many advanced economies, elevating the threat of deflation. Weaker inflation also makes the fixed costs of existing debt harder to pay, damping consumption. The IMF called on central banks in richer economies to leave their aggressive stimulus policies in place for an extended period, even as growth picks up.
China, the world’s second-biggest economy, will grow 7.5% in 2014, compared with a previous estimate of 7.2%, the IMF said. That still is less than previous years, reflecting the Chinese government’s efforts to restrain the country’s expansion to avoid inflation and asset-price bubbles. The IMF said the investment boom that sparked faster-than expected growth at the end of 2013, won’t be sustained and that domestic demand is increasing fast enough to make up the difference. China will grow 7.3% in 2015, the IMF said.
The biggest positive changes in the IMF’s outlook were in Britain, where growth was revised higher by 0.6 of a percentage point, and in Japan and Spain, where the forecasts for 2014 were adjust 0.4 percentage points higher.
There was one big negative adjustment. The IMF said Russia’s economy will expand 2% in 2014 and 2.5% in 2015, underwhelming for an emerging market. Both predictions are 1 percentage point lower than the IMF had forecast in the fall.
Source: The Globe and Mail
(Article by Michael Babad, The Globe and Mail)
There are two distinct camps where Canada’s housing market is concerned: The doom-and-gloomers and the I’m-alright-Jack folks.
It’s interesting to note, too, that those in the first camp are largely observing from afar, while the latter group lives here.
There’s no doubt that sales are cooling somewhat – indeed, it had been expected. The question remains whether there’s a bubble yet to burst or a soft landing.
As The Globe and Mail’s Tara Perkins reports, the latest figures from the Canadian Real Estate Association (CREA) show sales up almost 13% in December from a year earlier, though down on a monthly basis for the third consecutive month, the latest a drop of 1.8% from November.
The average house price climbed 10.4% from a year earlier, while the MLS home price index, which is deemed a preferred measure, rose by 4.3%.
Given the many observations, it can be difficult to judge just where things stand and where they’re headed. But here are a range of views, some after today’s report from CREA, others from earlier.
(We start off with the happy campers, and let things deteriorate from there.)
“For the year as a whole, existing home sales rose by 0.8 per cent, a pace that is neither too hot, nor too cold, but largely in line with our view of a soft landing in the Canadian housing market. While price gains are slightly too hot for comfort, an expected increase in homes for sale over the next two years will help provide homebuyers with more choice and hopefully bargaining power … Over all, we expect the level of sales to stabilize in 2014 and prices to grow by a more moderate 2 per cent in the year.” (Diana Petramala, economist, TD Bank, January, 2014)
"Sales volumes are running almost bang on the 10-year average; the sales-to-new listings ratio sat a sturdy 55 per cent in December, very close to long-run norms; the inventory of homes for sale finished the year at 6.2 months’ worth, right in the range seen over the past three years; and while price growth has accelerated in the past 6 months (particularly in Vancouver and Toronto), upward drifting interest rates and balanced conditions should contain the gains this year … It’s hard to find evidence to suggest anything but a soft landing for the Canadian housing market in 2013. Look for current balanced conditions and somewhat higher interest rates to lead to steady sales this year, with price growth tucked below the rate of income growth.” (Robert Kavcic, senior economist, BMO Nesbitt Burns, January, 2014)
“Market conditions remain fairly well balanced, though slightly favour sellers at the margin, putting continued modest upward pressure on prices. The national average new-listings-to-sales ratio was 1.82 last month, while the average number of months of inventory was 6.2. For 2013 as a whole, the national average home price rose 5 per cent, with the increase skewed to the upside by the strong sales rebound in a number of high-priced markets, including Vancouver and Calgary. Constant quality home price indices, including the MLS Home Price Index (HPI) and the Teranet-National Bank House Price Index, put the average annual gain in 2013 at 2-3 per cent, slightly outpacing broader inflation.” (Adrienne Warren, senior economist, Bank of Nova Scotia, January, 2014)
“As the rate of property appreciation accelerates further above personal income growth (which averaged a little more than 4 per cent in the past two years), the risk of deterioration in housing affordability will rise. We expect, however, that upward pressure on prices will ease in the period ahead as the earlier strength in homebuyer demand continues to partly unwind and supply of homes (consisting increasingly of condos) available for sale resumes an upward trajectory.” (Robert Hogue, senior economist, Royal Bank of Canada, January, 2014)
“Even a modest uptick in mortgage rates will translate into much higher homeownership costs, easily outpacing any expected increase in household incomes. This will price out some prospective home buyers, reinforcing the drop back in existing home sales that is already under way … As a result, the downward pressure on house price inflation will intensify, translating into outright price declines in due course. Renovation spending may also fall as homeowners feel less need to add value to an asset that's declining in value.” (Amna Asaf, economist, Capital Economics, January, 2014)
“By one estimate Canada’s house price to rent ratio–an important metric–is the furthest from historic trends than any country in the world right now. Various estimates have Canadian house prices at between a third and two-thirds over-valued. Canadian property has hit the sort of extremes that run the risk of spontaneous implosion … All of these numbers point to the economy’s deeply unhealthy dependence on property. And anyone who still doubts only needs to count cranes and condo towers across Toronto’s skyline.” (Commentary, The Wall Street Journal, January 2014)
“Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the U.K. (well, London).” (Nouriel Roubini, New York University professor and chairman of Roubini Global Economics, December 2013)
“Perhaps scariest of all, if Roubini is right, is that if these are bubbles that eventually pop, policy makers will not have the tools they had in 2008 to cushion the blow. The world's central banks, in particular, don't have much (arguably any) room to lower interest rates further. Which means that if these regulatory tools aren't up to the job, when the next global financial crisis comes, we can all take a lesson from the creators of ‘South Park.’ It will be time to Blame Canada.” (The Washington Post, December 2013)
“But as home prices rally and construction projects proliferate – particularly in Toronto, Montreal and Vancouver – industry analysts say the country’s property sector is perched precariously at its peak … Although Canada has so far defied a U.S.-style property crash, recent surveys have raised alarm about parts of the market.” (Financial Times, November 2013)
“There is also a risk of a disorderly correction in the housing market, in the context of a high level of household debt. Such a correction would depress consumption and residential construction and in an extreme case could threaten financial stability.” (OECD, November 2013)
“On this basis, Canada’s house prices are bubbly whereas Japan’s are undeservedly flat.” (The Economist, referring to the measures used to gauge prices, August, 2013)
“The housing market has been building very steadily over a period based on growth, jobs, good income, and a Canadian economy that’s been in good shape. Frankly, it’s not a bubble in the sense of great big speculation in the property. I think there will be a cull in some investment in the sector, which will see prices stabilize over time.” (Angel Gurria, secretary-general of the OECD, June 2013)
“This is the case in Canada, Norway, New Zealand and, to a lesser extent, Sweden. Economies in this category [where property appears overvalued but prices continue to climb] are most vulnerable to the risk of a price correction – especially if borrowing costs were to rise or income growth were to slow.” (OECD, June 2013)
Then there’s Deutsche Bank, which said in a recent study that Canada’s housing market is the most overvalued in the world, by 60%, and ahead of Belgium, New Zealand, Norway, Australia, France, Britain, Sweden, Finland and Spain.
Source: The Globe and Mail
