Thursday, February 28, 2013

Recession or stability for Canada

Throughout the Global Financial Crisis, when the world economies slowed down, Canada held onto economic growth. This was due, in large part, to the approach taken by the Bank of Canada and the Government.

It has been a long, slow process for other countries to catch up. While we are starting to see signs of life in our largest trading partner, the U.S., other parts of the world, especially Europe continues to struggle.  Now, however, Canada is feeling the effects of the economic slowdown. It’s true that some sectors, in particular housing, as been impacted by the government rule changes to mortgages and home equity lines of credit. Other sectors such as manufacturing and exports for example, arefeeling the fallout from countries which normally bought goods deal with their own struggling economies

For an economy to function, money needs to keep moving. A quick look at the stats shows an economy growing at its slowest pace since pre-recession 2007. The use of consumer credit has dropped to levels not seen since the 1990s. The pace of retail sales is mediocre at best. Already, it has dropped 1.2 percentage points below the long-term average. Fewer people are accessing their lines of credit. Personal loans remain stable, however, largely due to the demand for auto loans.

We still hear about the rising debt-to-incomes ratios. Yet it is rising at the slowest pace we’ve seen in more than a decade. Interest payments on consumer debt are the lowest since 2009.

Consumers seem to have slowed their spending, for now. It could be the media’s emphasis on household debt, on gaps in retirement savings, on gaps on overall savings, or on the amount of credit card debt. It could be news of lost jobs,or maybe people are just tired of hearing the news.

Credit card growth is soft but maybe that’s a good thing. Insolvencies are falling, slowly, yet falling nonetheless. A sharp rise in the unemployment rate can lead to an increase in insolvencies but that’s not happening either. Yes, there have been job losses but employment increased by 1.6% or 286,000, all in full-time work, year-over-year in 2012.  Over the same period, the total number of hours worked rose 1.7%. In January, employment declined in Ontario and British Columbia. At the same time, there were increases in Alberta, Saskatchewan and New Brunswick.

In economics, a recession is a business cycle contraction, a general slowdown in economic activity. Economic indicators such as GDP, employment, investment spending, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. While we are living in a slow down, we are not seeing high job losses or increases in bankruptcies.

Economic stability refers to an economy that experiences constant growth and low inflation. Our inflation rate is the lowest it’s been in three years. And while the pace of economic growth has slowed, there is still growth.

Recession or stability? We believe stability.

Thursday, February 21, 2013

Mixed messages from media – it’s the norm

Once again, we are getting mixed messages from the media. Headlines warn that house prices are easing, yet on further reading, we find that only a few major centres are feeling the pinch. In local markets, prices have stabilized and even increased slightly.

For example, in Vancouver, prices fell 0.81 per cent in January from December, and were down 2.54 per cent from a year earlier. Prices in Calgary slipped 0.1 per cent on the month, but rose 4.29 per cent on the year. And Toronto saw prices dip 0.37 per cent between December and January, but register a gain of 5.31 per cent from a year earlier.

While prices may be stabilizing, sales are lower than a year earlier. Information from The Canadian Real Estate Association (CREA) showed the number of sales had not changed much month-to-month since September, 2012. That just changed with CREA’s latest report released on February 15 stating that national home sales activity edged up on a month-over-month basis in January 2013.

Yes, the housing market has cooled since January 2012 but signs point to a fairly healthy spring market.
Despite recent media attention to a slowing housing market as well as reporting on job losses, and an underperforming economy, as usual, things are not as bad as they seem.  Really! Let’s first take a look at what’s happening in the U.S.

That country’s export market expanded in the fourth quarter of 2012, which means that factories are increasing their output and products are being sold. This is a good omen for the manufacturing sector there and it points to an increase in trade with other countries.

There are positive signs in the retail sector and in the consumer credit market – people are starting to spend more, albeit it’s slow, but still a good sign. 

While average home prices in the U.S. are still about 30 per cent lower than their 2005 peak, the long road to recovery has begun. Real home prices in the third quarter of 2012 were 5% higher than a year ago.
In Canada, we need to accept the market for what it is – balanced – which, actually means normal. A hot real estate market is not the norm, yet people think that anything less than boom times is doom and gloom.  Hot markets can’t be sustained. It’s great when we’re in it – all sectors benefit – but eventually, the market returns to normal.

According to a report by Benjamin Tal, Deputy Chief Economist for CIBC, the Canadian economy is making sense again. Both the labour market and housing starts, although weaker than what we’ve been experiencing, he says, are in line with what we should be seeing at this point.

The big picture is that the Canadian economy will probably grow by 1.7%-2.0% in 2013 and that’s normal.