Tuesday, May 15, 2012

Where can the economy go to grow?

Two recent reports from Stats Can offer good news for the economy. In April, 58,200 more people found full-time work -- this is the second month in a row there has been an increase in jobs.

Further, the pace of household debt has slowed to levels seen prior to 2002. Delinquencies are down on lines of credit; there is healthy demand for auto loans and outstanding mortgage loans are below the rate of growth seen in the past two years.

What we have right now is a stabilizing economy. We also have an economy getting ready to grow.  And with that, there are new questions surrounding when and if the Bank of Canada (BOC) will raise interest rates this year and even questions about where will growth come from and how will we grow.

The slower pace in consumer credit markets, the federal government warnings of mounting debt loads and recent changes to mortgage rules have kept home prices in check.

Increasing construction starts are also a sign that the housing industry foresees good days ahead. And low interest rates are keeping buyers buying.

The challenge for the government and the BOC is how to keep the economy growing healthier and stronger in a world where global economies are weak. The US economy sputters along not knowing where to go, or if it should go at all. European countries can’t seem to reach financial consensus and emerging market economies like China have turned out to be weaker than expected.  No country is an island and Canada must be realistic about its current growth potential. We are in an enviable position but we have to wait for everyone else to catch up.

Should the BOC raise its overnight rate? In a recent CIBC report, economist Avery Shenfield wrote, “It’s not about whether Carney will look at June, July or September to strike, but whether the economic news this year will be sufficiently buoyant to raise rates at all.”

A rate hike at this time will directly impact consumers and may slow consumer credit markets even more, which would adversely affect our manufacturing sector and retail sales. With our largest trading partner not planning any rate hikes until 2014, it might be prudent for Canada to wait it out.

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