Tuesday, March 20, 2012

Canada getting ready to grow

Two interesting updates to Canada’s economy show that the country is growing again, with consumer confidence improving. And along with climbing household debt, net worth is also climbing. However, the more interesting stat  we should be looking at is the employment number.

Improving global conditions have resulted in a few economists, including those at Royal Bank of Canada, Toronto-Dominion Bank, UBS Securities Canada and the University of Toronto, to up their economic growth forecasts for this year. These economists see an improvement in consumer confidence as well as a business community ready to grow. According to Statistics Canada’s investment intentions survey, which was released last month, Canadian businesses plan to boost investment by 6.2 per cent to $306.3-billion this year – that investment would be at a record level.

As for net worth climbing, deputy chief economist at BMO Nesbitt Burns Douglas Porter said in an interview with the Globe and Mail that we should perhaps look at the rising-debt-income ratio in new terms. Although that ratio is set to rise even more – from approx. 151% to about 160% -- net worth now stands at 596% of disposable income.

"The most frequent comeback is that the value of assets can come and go,” Porter said. “But debt endures. But even comparing financial assets to household debt still shows Canadian households overall have a big cushion."

At the end of last year, financial assets in Canada were worth $4.3-trillion, or more than 400 per cent of disposable income and subtracting household debt leaves a net financial asset ratio to income of 255 per cent.

With all the good the news about the economy, there is one number to watch – the employment number. An analysis of the U.S. situation shows that one contributor to the mortgage meltdown was the rapid fall of employment. Even in Canada, during recessionary periods, we see the number of foreclosures up and house prices falling. It happened in Calgary in the early 80s and in Ontario in the early 90s.

So what do we know about Canada’s employment?

Well, employment was unchanged in February. Compared with 12 months earlier, employment was up by 121,000. If we couple that with the recent good news about consumer and business confidence, then we can safely assume that employment numbers are going in the right direction – up.

Another report from Statistics Canada said the economy operated at 80.5 per cent of its production capacity in the fourth quarter, up half a point from the third quarter.  This has been rising steadily since the second quarter of 2009.

The capacity utilization rate is one of the key measures used by the Bank of Canada when it sets its interest rates. If the rate is too high, the central bank gets concerned about inflation. However, the rate of 80.5 per cent in the fourth quarter of 2011 was below that of 83.4 per cent recorded in the first quarter of 2007 before the recession.

Bottom line, Canada is poised to grow.

1 comment:

  1. The economy should continue to show gradual improvement as businesses rebuild inventories following a sharp reduction during the recession. This might mean more relationship banking for banks.