Bank of Canada Holds Rates and Bond-Buying Steady

General Bob Rees 10 Mar

Bank of Canada Holds Rates and Bond-Buying Steady
Much has changed since the Bank of Canada’s last decision on January 20. While the second pandemic wave was raging, new lockdowns were implemented in late 2020, and there were fears that the economy, in consequence, was likely to grow at a 4.8% annual rate in Q4 and contract in Q1. Instead, the lockdowns were less disruptive than feared, as Q4 growth came in at a surprisingly strong 9.6% annual rate–double the pace expected by the Bank.

Rather than a contraction in  Q1 this year, Statistics Canada’s flash estimate for January growth was 0.5% (not annualized). Strength in January came from housing, resources and government spending, and the mild weather likely helped. In today’s decision statement, the central bank acknowledged that “the economy is proving to be more resilient than anticipated to the second wave of the virus and the associated containment measures.”  The BoC now expects the economy to grow in the first quarter. “Consumers and businesses are adapting to containment measures, and housing market activity has been much stronger than expected. Improving foreign demand and higher commodity prices have also brightened the prospects for exports and business investment.”

A massive $1.9 trillion stimulus plan in the US is also about to turbocharge Canada’s largest trading partner’s economy, which will be a huge boon to the global economy and explains why commodity prices and bond yields have risen substantially in recent months. The Canadian dollar has been relatively stable against the US dollar but has appreciated against most other currencies.

Economists now expect Canada to expand at a 5.5% pace this year versus a 4% projection by the Bank of Canada in January. Going into today’s meeting, no one expected the Bank to raise the overnight policy rate, but markets were pricing in more than a 50% chance of an increase by this time next year, up from about 25% odds in January.

On the other hand, the BoC continued to emphasize the risks to the outlook and the huge degree of slack in the economy. “The labour market is a long way from recovery, with employment still well below pre-COVID levels. Low-wage workers, young people and women have borne the brunt of the job losses. The spread of more transmissible variants of the virus poses the largest downside risk to activity, as localized outbreaks and restrictions could restrain growth and add choppiness to the recovery.”

The Bank also attributed the recent rise in inflation was due to temporary factors. One year ago, many prices fell with the onslaught of the pandemic, so that year-over-year comparisons will rise for a while because of these base-year effects combined with higher gasoline prices pushed up by the recent run-up in oil prices. The Governing Council expects CPI inflation to moderate as these effects dissipate and excess capacity continues to exert downward pressure.
According to the policy statement, “While economic prospects have improved, the Governing Council judges that the recovery continues to require extraordinary monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s January projection, this does not happen until 2023.” The Bank will continue its QE program to reinforce this commitment and keep interest rates low across the yield curve until the recovery is well underway.  As the Governing Council continues to gain confidence in the recovery’s strength, the pace of net purchases of Government of Canada bonds will be adjusted as required. The central bank will “continue to provide the appropriate monetary policy stimulus to support the recovery and achieve the inflation objective.”
Bottom Line

The Bank gave no indication when it might start to taper its bond-buying. The next decision date is on April 21, when a full economic forecast will be released in the April Monetary Policy Report. Governor Macklem is more dovish than many had expected and will err on the side of caution. When the central bank starts tapering its asset purchases, it will be the equivalent of easing off the accelerator rather than applying the brakes. The Bank of Canada has been buying a minimum of $4 billion in federal government bonds each week to help keep borrowing costs low. That pace may no longer be warranted with an outlook that appears to show the economy absorbing all excess slack by next year, ahead of the Bank of Canada’s 2023 timeline for closing the so-called output gap.
French translation of this email will be available by 5pm ET March 12.

La traduction de ce courriel sera disponible d’ici 17 heures, le 12 mars.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Strong Canadian Economic Growth in Q4 and January

General Bob Rees 2 Mar

Strong Canadian Economic Growth in Q4 and January
This morning’s Stats Canada release showed that economic growth in the final quarter of last year was a surprisingly strong 9.6% (annualized). The surge in growth in January was even more interesting, estimated at a 0.5% (not annualized) pace. If these numbers pan out, it means that Canada did not suffer a contraction during the second wave and ensuing lockdown.

The January figure is noteworthy in that retail sales plunged as nonessential stores were closed in key parts of the country as we faced surging numbers of Covid cases. The strength came from resources, housing and government spending and the mild weather likely helped.

At its last meeting in January, the Bank of Canada (BoC) estimated that Q4 growth would come in at 4.8% (half the actual 9.6% pace) and that there would be a net contraction in Q1 of this year. The strength in Q4 emanated from very hot housing, some business investment in machinery, government outlays and a resurgence in inventory accumulation. Inventory build-up is often seen as a negative sign reflecting weak consumer spending. But maybe firms were preparing for a considerable rebound in demand.

Economists on Bay Street are upwardly revising their growth forecasts for this year, and no doubt the BoC will do so again when it meets next Wednesday. Clearly, the economy has been more resilient than expected. Will that change the Bank’s assessment of the continued need for monetary stimulus? Probably not. But it will likely temper their view that the next rate hike will not be until 2023, a sentiment the BoC has asserted regularly in the past.
Consumer spending was weak at the end of last year, not surprisingly given many stores were closed and a stay-at-home order was in place in several highly populated areas. Households have been hoarding cash. The savings rate declined to 12.7% in Q4 from as high as 27.8% earlier in the year, but that is still way above normal. Accumulated savings will provide a backstop for robust consumer spending once the economy opens up.

For all of 2020, the Canadian economy contracted by 5.4%–a substantially harder hit than in the US, which posted a 3.5% decline.
Bottom Line

The stronger-than-expected economy raises the potential that there is enough stimulus in the economy. The Trudeau government appears to be determined to hike government spending meaningfully in the next federal budget (likely coming this Spring). We know it is the government’s predilection to juice the economy for another couple of years, but that could well deserve a rethink.

 

Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres,

Longer-term Yields are Rising Despite Central Bank Inaction

General Bob Rees 23 Feb

Longer-term Yields are Rising Despite Central Bank Inaction
While central banks hold overnight rates at record lows, anchoring short-term interest rates and the prime rate, mid-to-long-term government yields have been rising since early this month. As the chart below shows, the 5-year Government of Canada bond, upon which mortgage rates are generally tethered, are currently at 0.69%, up 27 basis points since January 29th. This is the highest 5-year yield since late-March 2020.  Canadian bond yields have increased more than in the US, perhaps due to the surge in commodity prices, most notably oil, which has climbed 16.9% in just the past month, taking the year-to-date gain to 27%.

Growing government debt arising from fiscal measures to cushion the blow of the pandemic and stimulate the economy has set the stage for higher government bond yields in much of the developed world.

Inflation concerns are mounting. In a rare move, yesterday Statistics Canada revised up its estimate of core inflation–unveiled only five days ago–from 1.5% to 1.77%. The result is an inflation picture that is more elevated than reported last week, at a time when investors are becoming more worried about global price pressures. The core CPI is the Bank of Canada’s preferred measure of underlying inflation, and it has rattled markets that it now appears to be running at nearly a 1.8% year-over-year pace.

While inflation is expected to accelerate in the coming months on higher energy costs, policymakers led by Governor Tiff Macklem see little immediate threat from rising prices, even with extraordinary levels of stimulus coursing through the economy. Despite a temporary pickup early this year, the Bank of Canada doesn’t anticipate inflation will sustainably return to its 2% target until 2023. Macklem speaks in Calgary later today, and he is likely to suggest that the Canadian economy is still far from an inflationary threshold.
Keep in mind that Canada’s economy has considerable slack with unemployment rising in recent months and the lockdown continuing for at least a couple more weeks in the GTA. Moreover, Canada has fallen far beyond other countries in the vaccine rollout.

The biggest vaccination campaign in history is currently underway. More than 209 million doses have been administered across 92 countries, according to data collected by Bloomberg News. The latest pace was roughly 6.24 million doses a day. Israel has administered more than 82 doses of vaccine per 100 people, the UK is at 27.5, and the US is at 19.3. Canada, on the other hand, has administered only 4.1 doses per 100 people, now ranking 43rd in the world (see chart below).

This slow start to the rollout likely portends a longer period of economic underperformance.
Bottom Line

Some upward pressure on fixed mortgage rates might be in store, although the Big Five Banks have yet to respond, and the qualifying rate remains at 4.79%, well above contract rates. Without any prospect of near-term tightening by the Bank of Canada, variable rate mortgage rates–typically tied to the prime rate–will remain stable. But mortgage rates have moved up at some of the non-bank lenders. No question, the economy’s trajectory and interest rates will be linked to the return to the ‘new normal’ following the pandemic. Good news on the pandemic front inevitably means higher mortgage rates in 2022-23–if not sooner.
Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Housing Continued to Surge in January

General Bob Rees 16 Feb

Housing Continued to Surge in January
Today the Canadian Real Estate Association (CREA) released statistics showing national home sales hit another all-time high in January 2021. Canadian home sales increased 2.0% month-on-month (m-o-m) building on December’s 7.0% gain. On a year-over-year (y-o-y) basis, existing home sales surged 35.2%. As the chart below shows, January activity blew out all previous records for the month.

The seasonally adjusted activity was running at an annualized pace of 736,452 units in January, significantly above CREA’s current 2021 forecast for 583,635 home sales this year. Sales will be hard-pressed to maintain current activity levels in the busier months to come, absent a surge of much-needed new supply; However, that could materialize as current COVID-19 restrictions are increasingly eased and the weather starts to improve.

A mixed bag of gains led to the month-over-month increase in national sales activity from December to January, including Edmonton, the Greater Toronto Area (GTA), and Chilliwack B.C., Calgary, Montreal and Winnipeg. There was more of a pattern to the declines in January. Many of those were in Ontario markets, following predictions that sales in that part of the country might dip to start the year with so little inventory currently available and many of this year’s sellers likely to remain on the sidelines until spring.

Actual (not seasonally adjusted) sales activity posted a 35.2% y-o-y gain in January. In line with activity since last summer, it was a new record for January by a considerable margin. For the seventh straight month, sales activity was up in almost all Canadian housing markets compared to the same month the previous year. Among the 11 markets that posted year-over-year sales declines, nine were in Ontario, where supply is extremely limited at the moment.

CREA Chair Costa Poulopoulos said, “The two big challenges facing housing markets this year are the same ones we were facing last year – COVID and a lack of supply. It’s looking like our collective efforts to bring those COVID cases down over the last month and a half are working. With luck, some potential sellers who balked at wading into the market last year will feel more comfortable listing this year.”
New Listings

The dearth of new listings continues to be the biggest problem in the housing market. As we move into the spring market and continue to see fewer COVID cases, the likelihood is that new supply will emerge. But for now, the number of newly listed homes plunged 13.3% in January, led by double-digit declines in the GTA, Hamilton-Burlington, London and St. Thomas, Ottawa, Montreal, Quebec and Halifax Dartmouth.

With sales edging higher and new supply falling considerably in January, the national sales-to-new listings ratio tightened to 90.7% – the highest level on record for the measure by a significant margin. The previous monthly record was 81.5%, set 19 years ago. The long-term average for the national sales-to-new listings ratio is 54.3%.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about 20% of all local markets were in balanced market territory in January, measured as being within one standard deviation of their long-term average. The other 80% were above long-term norms, in many cases well above. This was a record for the number of markets in seller’s market territory.

There were only 1.9 months of inventory on a national basis at the end of January 2021 – the lowest reading on record for this measure. At the local market level, some 35 Ontario markets were under one month of inventory at the end of January.

Low available supply is the reason property values will continue to go up. Strong demand pre-pandemic and the historic market rally since summer have cleaned up inventories in many parts of the country. Relative to the 10-year average, active listings had plummeted between 50% and 61% in Ontario, Quebec and most of Atlantic Canada, and 29% in BC by the late stages of 2020. And that’s despite a surge in downtown condo listings since spring in Canada’s largest cities. With so few options to choose from (outside downtown condos), buyers will continue to compete fiercely. Buyers in the Prairie Provinces, and Newfoundland and Labrador, however, will feel less pressure to outbid each other given supply isn’t quite as scarce in these markets.

Home Prices

Viewed from another angle, sellers enter 2021 holding a powerful hand when setting prices in most of Canada. We see this continuing during most of 2021. We expect provincial sales-to-new listings ratios—a reliable gauge of price pressure—to generally stay above the threshold (0.60) where sellers have historically yielded more pricing power. In several cases (including BC, Ontario and Quebec), ratios are well above the threshold, providing plenty of buffer against demand-supply conditions flipping in favour of buyers.

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1.9% m-o-m in January 2021. Of the 40 markets now tracked by the index, prices were up on a m-o-m basis in 36.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 13.5% on a y-o-y basis in January – the biggest gain since June 2017.

The largest y-o-y gains – above 30% – were recorded in the Lakelands region of Ontario cottage country, Northumberland Hills, Quinte & District, Tillsonburg District and Woodstock-Ingersoll.

Y-o-y price increases in the 25-30% range were seen in Barrie, Niagara, Grey-Bruce Owen Sound, Huron Perth, Kawartha Lakes, London & St. Thomas, North Bay, Simcoe & District and Southern Georgian Bay.

Y-o-y price gains followed this in the range of 20-25% in Hamilton, Guelph, Oakville-Milton, Bancroft and Area, Brantford, Cambridge, Kitchener-Waterloo, Peterborough and the Kawarthas, Ottawa and Greater Moncton.

Prices were up 16.6% compared to last January in Montreal. Meanwhile, y-o-y price gains were in the 10-15% range on Vancouver Island, Chilliwack, the Okanagan Valley, Winnipeg, the GTA and Mississauga. Prices rose in the 5-10% range in Victoria, Greater Vancouver, Regina and Saskatoon. Home prices were up 2% and 2.2% in Calgary and Edmonton, respectively.
Bottom Line

The rollercoaster that was 2020 left Canada’s housing market more or less where it started the year: full of bidding wars, escalating prices and exasperated buyers unable to find a home they can afford. The pandemic changed some dynamics—it drove many buyers to the suburbs, exurbs and beyond, ground immigration to a virtual halt, triggered a downturn in big cities’ rental markets and caused households to build up their savings—but it didn’t dial down the market’s heat.

The marked shift in housing strength from urban centres–Toronto, Vancouver, Montreal–to perimeter cities is ongoing. For example, Toronto’s prices are up ‘only’ 11.9% y-o-y, but Barrie (+27%) and London (26%) have far outpaced these gains.

Condo price growth has slowed to just 3.1% y-o-y, or a record 14.3 percentage points below the price gains in single-detached homes. That’s by far the widest gap in 20 years and reflects the hunt for space and social distancing.

Housing starts (reported yesterday by CMHC) surged to 282,428 annualized units in January, the second-highest monthly posting since 1990. This figure could be distorted upward by the unseasonably mild January weather in much of the country. But the new high in starts is in line with record sales and solid building permits.

For policymakers, it doesn’t appear that there’s much interest in leaning against a sector that is helping to prop up the economy, especially with years of tightening mortgage rules already in place.

There appears to be little on the horizon to stop sales or prices from reaching new heights in 2021. Yet, cooling signs will emerge as the year progresses, which will come into fuller view next year. The foremost restraining factors will be a rise in new listings, waning pandemic-induced market churn, a modest creep-up in interest rates and an erosion of affordability. Call it a 2022 soft landing.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Bank of Canada Still Expects No Rate Increases Until 2023

General Bob Rees 20 Jan

Bank of Canada Still Expects No Rate Increases Until 2023
The Bank of Canada, this morning, released its January Monetary Policy Report (MPR), showing they expect to keep overnight interest rates at its “effective lower bound” of 0.25% until 2023 (see chart below). To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its Quantitative Easing (QE) program–buying $4 billion of Government of Canada bonds every week until the recovery is well underway. The central bank indicated it could pare purchases once the recovery regains its footing.

According to the Bank’s press release, “The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our projection, this does not happen until into 2023.” Officials are apparently optimistic about the economy’s prospects once the vaccine is sufficiently distributed and injected. There is no indication that they are planning additional measures to ease monetary policy.

This is particularly noteworthy for two reasons: 1) some economists had been speculating that the Bank would lower the overnight rate by 10-to-15 basis points to help mitigate the impact of continued and broadening lockdowns; and, 2) others thought the early development of the vaccine would trigger sufficient growth to warrant a rate hike in 2022. In the Bank’s current view, neither is likely to be the case. Why mess with a minute cut in already record-low interest rates when mortgage lending is still strong? The slow rollout of the vaccine and the mounting second wave of cases assure weak economic activity in Canada at least until the second half of this year.

As well, inflation remains surprisingly muted. In a separate release today, Stats Canada revealed that price pressures in Canada unexpectedly slowed in December as the country endured a new wave of lockdowns. After climbing to the highest since the pandemic in November, the latest reading shows price pressures are still well below the Bank of Canada’s 2% target. That’s consistent with the view from policymakers that inflation will remain subdued for some time.
The pandemic’s second wave has hit Canada very hard, and the vaccine rollout has been disappointing (see chart below). Today’s MPR predicts that the economy will contract in the first quarter of this year. Economic weakness could be exacerbated by the Canadian dollar’s strength, which moved to above 79 cents US following today’s BoC announcement. Ten-year yields edged up modestly as well.
Bottom Line

For the year as a whole, economic growth is expected to be around 4% in 2021, compared to a contraction of -5.5% last year. As the inoculated population grows, the Bank forecasts an acceleration in growth to just under 5% in 2022 and a more-normal 2.5% in 2023. According to the January MPR, “The medium-term outlook is stronger than in the October Report because of vaccines’ positive effects, greater fiscal stimulus, stronger foreign demand and higher commodity prices. Meanwhile, potential output has also been revised up, reflecting an improved projection for business investment and less scarring effects on businesses and workers. There is considerable uncertainty around the medium-term outlook for GDP and the path for potential output. Thus, while the output gap is expected to close in 2023, the timing is particularly uncertain.”

Concerning housing activity, the report said, “Demand for housing has continued to show resilience, despite increasing case numbers and tightening restrictions. Housing activity should remain elevated into the start of 2021, supported by low borrowing rates and resilient disposable incomes. Changes in homebuyers’ preferences have also played a role. For example, price growth has been strongest for single-family homes and in areas outside city centres,” shown in the chart below.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres 

2020 Was a Blockbuster Year for Housing

General Bob Rees 15 Jan

2020 Was a Blockbuster Year for Housing
Despite the fears leading into the pandemic last Spring, 2020 marked a record number of home resales as new listings lagged and prices climbed. December housing data released by the Canadian Real Estate Association (CREA) today shows national home sales surged 7.2% month-over-month (m-o-m) at a time of the year when housing is normally slow. The chart below shows that resales were impressively above their 10-year average. The seasonally adjusted activity was running at an annualized 714,516-unit pace in December 2020 – the first time on record that monthly sales (at seasonally adjusted annual rates) have ever topped the 700,000 mark.  It was a new record for December by a margin of more than 12,000 transactions. For the sixth straight month, sales activity was up in almost all Canadian housing markets compared to the same month in 2019.

The increase in national sales activity from November to December was driven by gains of more than 20% in the Greater Toronto Area (GTA) and Greater Vancouver.

On a year-over-year basis (y-o-y), activity rocketed upward by 47.2% as interest rates hit record lows, housing needs changed owing to the pandemic, and supply was insufficient to meet demand. The housing boom occurred despite the fall in population growth, reflecting the dearth of new immigration. The yearly change in population growth in Canada nosedived in 2020 after climbing powerfully in the prior four years. Despite this headwind, for 2020 as a whole, 551,392 homes traded hands over Canadian MLS® Systems – a new annual record. This is an increase of 12.6% from 2019 and stood 2.3% above the previous record set in 2016.
New Listings

“The stat to watch in 2021 will be new listings, particularly in the spring – how many existing owners will put their homes up for sale?” said Shaun Cathcart, CREA’s Senior Economist. “We already have record-setting sales, but we know demand is much stronger than those numbers suggest because we see can see it impacting prices. On New Year’s Day, there were fewer than 100,000 residential listings on all Canadian MLS® Systems, the lowest ever based on records going back three decades. Compare that to five years ago, when there was a quarter of a million listings available for sale. So we have record-high demand and record-low supply to start the year. How that plays out in the sales and price data will depend on how many homes become available to buy in the months ahead. Ideally, we’d like for households to be able to find and acquire the homes that best suit their needs and for housing to remain affordable, but the fact is we’re facing a major supply problem in 2021.”The number of newly listed homes climbed by 3.4% in December, led by more new listings in the GTA and B.C. Lower Mainland, the same parts of Canada that saw the biggest sales gains in December.

With sales up by more than new supply in December, the national sales-to-new listings ratio tightened to 77.4% – among the highest levels on record for the measure. The long-term average for the national sales-to-new listings ratio is 54.2%.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about 30% of all local markets were in balanced market territory in December, measured as being within one standard deviation of their long-term average. The other 70% of markets were above long-term norms, in many cases well above.

There were just 2.1 months of inventory on a national basis at the end of December 2020 – the lowest reading on record for this measure. At the local market level, 29 Ontario markets were under one month of inventory at the end of December.
Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1.5% m-o-m in December 2020. Of the 40 markets now tracked by the index, only one was down between November and December.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 13% on a y-o-y basis in December – the biggest gain since June 2017 (see chart below).
Home price activity largely reflected the desire of home purchasers to move away from city centres to a greener, less-expensive suburbs and exurbs now that telecommuting appears to be a sustainable option, at least part-time.

The largest y-o-y gains – above 30% – were recorded in Quinte & District, Simcoe & District, Woodstock-Ingersoll and the Lakelands region of the Ontario cottage country (see the table below for details).

Y-o-y price increases in the 25-30% range were seen in Bancroft and Area, Grey Bruce Owen Sound, Kawartha Lakes, North Bay, Northumberland Hills and Tillsonburg District.

This was followed by y-o-y price gains in the range of 20-25% in Barrie, Hamilton, Niagara, Brantford, Cambridge, Huron Perth, Kitchener-Waterloo, London & St. Thomas, Southern Georgian Bay and Ottawa.

Prices were up in the 15-20% range compared to last December in Oakville-Milton, Peterborough and the Kawarthas, Montreal and Greater Moncton.

Meanwhile, y-o-y price gains were in the 10-15% range in the GTA and Mississauga, Quebec City, and the 5-10% range across B.C., and in Regina, Saskatoon, Winnipeg and St. John’s NL.

Alberta still lagged owing to the still-negative oil market scene, where home prices were up only 1.5% and 2.7% in Calgary and Edmonton, respectively.

The MLS® HPI provides the best way to gauge price trends because averages are strongly distorted by changes in sales activity mix from one month to the next.

The actual (not seasonally adjusted) national average home price was a record $607,280 in December 2020, up 17.1% from the same month last year.
Bottom Line

Housing strength is largely attributable to record-low mortgage rates and strong demand for more spacious accommodation by households that have maintained their income level during the pandemic. The hardest-hit households are low-wage earners in the accommodation, food services, non-essential retail and tourism-related sectors. These are the folks that can least afford it and typically are not homeowners.  

We end 2020 with the national average home price up 17.1%–a dramatic surge rather than the 9-18% decline forecast by CMHC last March. Moreover, 2021 is likely to be another strong year for housing.  It would not surprise me if annual sales reached a new high in 2021, especially in the first half of the year. There will, however, be cooling signs as the year progresses and especially into 2022. Firstly, supply constraints are a major factor as new listings remain low relative to demand. As well, the pandemic-induced changes in housing needs will have a waning effect over time. As vaccine injections rise across the country and we return to a new normal, interest rates will creep up moderately. This along with higher home prices will slow the pace of activity as affordability erodes.

There will be mitigating factors in 2022: the number of new immigrants is slated to rise to roughly 500,000 that year and demand for short-term Airbnb rentals will rise sharply as tourism revives.
Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Canadian Jobs Market Tanked in December

General Bob Rees 8 Jan

Canadian employment fell 62,600 last month, a bit weaker than expected, following seven months of recovery (see chart below). The rapid rise in COVID cases and the ensuing lockdown measures in many key regions caused the net loss in jobs in the mid-December survey.  Especially hard hit were workers at restaurants and hotels who suffered a hefty 56,700 employment loss.

The jobless rate rose a tick to 8.6%–well below the peak of 13.7% in April–but still three percentage points above its pre-pandemic level.

However, there were some bright spots as several sectors churned out small gains (see second chart below).  Among them were finance, insurance and real estate, as well as scientific and tech services. Manufacturing rose 15,400, and public administration reported solid gains.

On a positive note, full-time jobs actually rose 36,500, and average wages pushed back up and are now 5.6% higher than one year ago. This outsized gain, in part, reflects the loss in so many low-wage jobs.

Part-time jobs were down sharply in December, led by losses among workers aged 24 and under and those aged 55 and older. Also, the number of self-employed workers fell by 62,000, its lowest point since the pandemic began.

The December loss of jobs left employment down 571,600 (or -3.0%) from year-ago levels, the deepest annual decline since 1982–but far better than the April reading of -15% y/y. The 2020 job loss in Canada of -3.0% is also a relatively mild downturn compared to today’s US job market release for December, which reported a -6.2% y/y drop in employment. In Canada, the 332,300 y/y loss in accommodation and food services employment alone accounted for 58% of our annual job loss.
Employment was down in nine out of ten provinces last month. The lucky exception was British Columbia. None of the provinces stood out on the low side. The table below shows the unemployment rate by province. Jobless rates rise and fall with labour force participation rates. You are not considered unemployed if you are not seeking work. The number of people counted as either employed or unemployed dropped by 42,000 (-0.2%) in December, the first significant decline since April. Core-aged women and young males were largely responsible for the fall.
Bottom Line 

It certainly doesn’t appear that the lockdowns will be lifted anytime soon. We keep hitting new records in the number of Covid cases, and the more contagious Covid variant is upon us. What’s more, the rollout of the vaccine has been disturbingly slow. So until winter is behind us, there is unlikely to be a meaningful opening of the economy. All things considered, Canada’s economy has been relatively resilient. That’s not surprising given the government income support–the most generous in the G7 countries. Moreover, financial conditions are extremely accommodative.

Although no one is coming through the pandemic unscathed, most of the employment losses have been lower-paying jobs. Many higher-income earners continue to work from home. And even though the pandemic is worsening, many of Canada’s housing markets recorded their strongest December ever. Rock-bottom interest rates, high household savings and changing housing needs turned 2020 into a spectacular year for housing activity.

According to local real estate boards, December resales were surprisingly strong for what is typically a quiet month. Existing home sales surged between 32% y/y in Montreal, Ottawa and Edmonton and 65% y/y in Toronto based on early results. More distant suburbs attracted many families looking for more space with less concern about long commutes when jobs can be conducted at home. Property values continued to appreciate at accelerating rates in most markets. Downtown condo prices still bucked the trend due to ample inventories in Canada’s largest cities—the downturn in the rental market has prompted many condo investors to sell. That said, softer condo prices are now drawing more buyers in. Existing condo sales soared virtually everywhere in December.

Housing is likely to continue to cushion the blow of the pandemic on the overall economy. And while not everyone is sharing in this windfall, it will ultimately help pave the way to better employment gains in the spring.

However, no question that the bright light at the end of the very dark pandemic tunnel is a widely dispersed vaccine. PM Trudeau reasserted this week that the vaccine will be available to all who want it by September 2021. At the pace, it is now getting into people’s arms, that will not happen. Just over 0.6% of Canada’s population was vaccinated as of Thursday, January 7. By comparison, the US had vaccinated 1.8% of its population by that date, and Israel had inoculated nearly 20%, according to Our World in Data, a nonprofit research project at the University of Oxford. The U.K. had vaccinated about 1.9% of its population by Jan. 3, the latest date for which vaccination numbers were available (see the chart below).
Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Bank of Canada will maintain current level of policy rate until inflation objective is achieved, continues its quantitative easing program

General Bob Rees 9 Dec

The next Bank of Canada meeting is January 20, 2021, below is the summary of todays (Dec 9, 2020) meeting.

 

The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program, which continues at its current pace of at least $4 billion per week.

The rebound in the global and Canadian economies has unfolded largely as the Bank had anticipated in its October Monetary Policy Report (MPR). More recently, news on the development of effective vaccines is providing reassurance that the pandemic will end and more normal activities will resume, although the pace and breadth of the global rollout of vaccinations remain uncertain. Near term, new waves of infections are expected to set back recoveries in many parts of the world. Accommodative policy and financial conditions are continuing to provide support across most regions. Stronger demand is pushing up prices for most commodities, including oil. A broad-based decline in the US exchange rate has contributed to a further appreciation of the Canadian dollar.

In Canada, national accounts data for the third quarter were consistent with the Bank’s expectations of a sharp economic rebound following the precipitous decline in the second quarter. The labour market continues to recoup the jobs that were lost at the start of the pandemic, albeit at a slower pace. However, activity remains highly uneven across different sectors and groups of workers. Economic momentum heading into the fourth quarter appears to be stronger than was expected in October but, in recent weeks, record high cases of COVID-19 in many parts of Canada are forcing re-imposition of restrictions. This can be expected to weigh on growth in the first quarter of 2021 and contribute to a choppy trajectory until a vaccine is widely available. The federal government’s recently announced measures should help maintain business and household incomes during this second wave of the pandemic and support the recovery.

CPI inflation in October picked up to 0.7 percent, largely reflecting higher prices for fresh fruits and vegetables. While this suggests a slightly firmer track for inflation in the fourth quarter, the outlook for inflation remains in line with the October MPR projection. Measures of core inflation are all below 2 percent, and considerable economic slack is expected to continue to weigh on inflation for some time.

Canada’s economic recovery will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our October projection, this does not happen until into 2023. To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its QE program until the recovery is well underway and will adjust it as required to help bring inflation back to target on a sustainable basis. We remain committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.

Information note

The next scheduled date for announcing the overnight rate target is January 20, 2021. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.

Subsequent to the Bank’s previously announced review of the publication time of its interest rate announcements, the Bank re-confirms that it will remain at 10:00 (ET). As announced, starting in January the target for the overnight rate will take effect on the business day following each rate announcement.

Q3 GDP Growth Hits Record High–Albeit Shy of Expectations

General Bob Rees 1 Dec

 

 

Rebounding Q3 Canadian Economy Stalls in Q4
The Canadian economy rebounded sharply in the third quarter, posting its most rapid expansion ever. Still, it was a lower than expected gain, and early data show that momentum is quickly fading in the face of a second wave of the pandemic.

Gross domestic product rose by a massive 40.5% annual rate in Q3, reversing much of the historic 38.1% plunge in Q2 (revised from -37.8%). No matter how impressive the Q3 bounce was, it fell short of well-telegraphed expectations—even yesterday’s Fall Fiscal Statement assumed a 47.5% surge, reflecting the widespread reopening of the economy. Still, thanks to the magic of upward revisions to prior quarters (stretching back years), it appears that the economy is headed for roughly an annual decline of about 5.7% this year. The rebound brings total output to 95% of pre-pandemic levels.

With the huge second wave in COVID cases, renewed restrictions have been implemented across the country in recent weeks, assuring that the Q3 rebound has stalled in the fourth quarter. Today’s news that September’s monthly GDP growth was a solid +0.8% and October’s first estimate is +0.2% is moderately encouraging. Even so, economic activity is likely to flatten in November and decline in December, holding Q4 growth to a 0-to- 2% annual pace.

The big bounce in Q3 left GDP down 5.2% from a year ago for the quarter. But the gain in October brings the latest monthly tally to down less than 4% y/y.

As shown in the table below, the big “miss” in Q3 GDP growth was mostly attributed to the decline in inventories. Otherwise, the picture was one of a massive snap-back in activity from the spring shutdowns. There were triple-digit annualized rebounds in housing, capital spending on machinery & equipment, and imports. Housing grew at a record 187.3% q/q annual rate, the strongest component of the economy. Housing was also up 9.5% year-over-year. 

 

Consumers Led the Way

 

Consumption, which led to the contraction in the second quarter, rose 63% (annualized) as consumers rushed to spend after being shutout from most stores during the lockdown period. Shifts in spending patterns due to health concerns and ongoing restrictions on businesses most affected by the pandemic (i.e. restaurants, travel, tourism) resulted in consumers spending lavishly on durable goods (+263%). Non-durables also saw strong growth for the quarter (+19%). The level of durables and non-durables spending was 7.7% and 3.7%, respectively above pre-pandemic levels. On the other hand, with the pandemic weighing on demand for high-contact services, total spending on services was still well below pre-pandemic levels (-12.4%), despite growing quickly in the third quarter (44.3%).

There has been intense focus on household finances through the pandemic, and while the savings rate pulled back in Q3, it remained at very high levels at 14.6% (versus the record 27.5% in Q2). Compared with pre-virus trends, household savings have swelled at least $150 billion above where they may have expected to have been in more normal times (i.e., excess savings). While disposable incomes dropped last quarter, they were still up a towering 10.6% y/y, compared with a modest 3.8% rise in 2019.

On top of that, overall consumer spending is still down 3.7% y/y in nominal terms, as services spending remains heavily constrained by circumstances. That yawning gap between an income spike and constrained spending has lifted savings massively, reflecting the government programs to cushion the pandemic’s blow, including mortgage and other deferrals and income support programs.

Yesterday’s federal fiscal update confirmed that the government support would be enhanced, taking the federal budget deficit to over $381 billion this year. Canada has already provided the largest COVID-related fiscal stimulus among the industrialized nations. We started the period with the lowest government-debt-to-GDP ratio in the G7 at 31%, but it is expected to rise to over 50% next fiscal year.

Like consumption, business investment also rebounded sharply, growing 82.4% annualized in the third quarter. Machinery and equipment (+91.8%) and intellectual property products (+30.8%) contributed to the pick-up, while investment in non-residential structures continued to decline (-1.2%). The main factor, however, fueling the increase was residential investment (+187.3%). The housing market ran red-hot as pent-up demand, low interest rates, and pandemic-induced shift in preferences sent sales and prices to record-levels this summer.

The upturn in housing investment was led by ownership transfer costs (+109.5%, q/q) and, to a lesser extent, renovations (+17.7%, q/q). The increase in ownership transfer costs was widespread, as home resale activities resumed across the country, with sharp increases in resale units and prices. New construction increased 9.7% q/q, after a 7.6% q/q decline in the second quarter. The increases coincided with low mortgage rates, improved job market conditions, and higher employee compensation in the third quarter.

In terms of trade, exports and imports grew strongly (exports: 71.8%; imports: 113.7%). Given that imports grew faster than exports, net trade weighed on the GDP calculation for the quarter.

Canada’s labour market regained almost a third of the jobs lost during March and April in the third quarter, and as such, compensation of employees rebounded for the quarter (+35.5%). Government transfers through employment insurance benefits, which supported income through the second quarter, declined by 91.9% but remained historically elevated. On the whole, household disposable income declined by 12% in the third quarter. However, the savings rate remained at 14.6% as the rebound in consumption was offset by the bounce back in compensation and still-high government transfers. Finally, the gross operating surplus, a measure of corporate profits, improved by 59.3% for the quarter.
Bottom Line

The Canadian economy will decline roughly 5.7% this year before rebounding 5.5% in 2021 (yesterday’s Fall Fiscal Statement was based on a 5.8% drop for 2020 and a 4.8% rise next year). The prior largest yearly decline was a drop of 3.2% in 1982, while the anticipated growth next year would be the best since 1984. And lest anyone doubt the ability of the economy to recover at that pace, consider: a) some of the growth rates seen in Q3, which could be a taste of what could lie ahead later in 2021; b) the added fiscal stimulus still on its way; and c) the degree of excess savings that households now have at their disposal to unleash in the coming year.

 

Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

 

 

 

 

 

Federal Fiscal Update–Finance Minister Freeland’s Debut // ” ……. the biggest Covid-19 fiscal response in the industrialized world” … is that a handle that Canada wants to be known for?

General Bob Rees 30 Nov

” ……. the biggest Covid-19 fiscal response in the industrialized world” … is that a handle that Canada wants to be known for?

 
Federal Fiscal Update–Finance Minister Freeland’s Debut

Justin Trudeau’s government, which has delivered the biggest Covid-19 fiscal response in the industrialized world, announced plans for another dose of stimulus and vowed to continue priming the pump as long as needed.

Finance Minister Chrystia Freeland unveiled $51.7 billion of new spending over two years in a mini-budget Monday, led by an enhanced wages subsidy for business. Freeland also pledged, without detailing, another $70 billion to $100 billion of additional stimulus over three years to spur the recovery.

But the finance minister clearly heeded calls for fiscal prudence. She put off any major structural spending announcements, promised any additional stimulus will be temporary and introduced new taxes on digital giants including Netflix, Amazon, and Airbnb, to help pay for it all.

“Our government will make carefully judged, targeted and meaningful investments to create jobs and boost growth,” Freeland said. It will provide “the fiscal support the Canadian economy needs to operate at its full capacity and to stop Covid-19 from doing long-term damage to our economic potential.”

Freeland revised higher the nation’s projected deficit this year to $381.6 billion, or 17.5% of GDP. That’s up from a deficit of 1.7% of GDP last year. According to estimates from the International Monetary Fund, no major economy will show a bigger fiscal swing in 2020.
The budgetary red ink is projected at $121 billion next year, before any additional stimulus. In total, spending linked to the government’s COVID response accounted for C$75 billion of this year’s deficit, and C$51 billion next year.

Based on Monday’s projections, the deficit is seen gradually narrowing to about $51 billion in two years and $25 billion by 2025.

The planned stimulus over the next three years will total no more than 4% of GDP, which the document said is in line with the Bank of Canada’s estimate of the level of slack in the economy. Freeland said, “fiscal guardrails” tied to the labour market would help determine the extent of the additional stimulus.

Among the measures announced today, Freeland boosted the government’s wage subsidy program (Canada Emergency Wage Subsidy, CEWS) to cover as much as 75% of payroll costs for businesses and extended its commercial rent subsidy and lockdown support top-ups until March. Both were slated to run out on December 20. The current cap on CEWS was 65%.

The federal government plans to create a new funding program to help restaurants, tourism companies and other businesses in industries hardest hit by COVID-19.

The Highly Affected Sectors Credit Availability Program (HASCAP), which was announced in the government’s fiscal update Monday, will offer eligible businesses loans of up to $1 million, with a 10-year term.

The money will be lent by banks or other financial institutions, but guaranteed by the federal government.

“We know that businesses in tourism, hospitality, travel, arts and culture have been particularly hard-hit. So we’re creating a new stream of support for those businesses that need it most — a credit availability program with 100-per-cent government-backed loan support and favourable terms for businesses that have lost revenue as people stay home to fight the spread of the virus,” Finance Minister Chrystia Freeland said in her prepared speech to the House of Commons.
Establishing a national childcare plan is a key long-term goal, with Freeland vowing a detailed plan in next year’s budget. In her forward to the fiscal update, she described the daycare strategy as “a feminist plan” that also “makes sound business sense.”

As a start, the Liberals are proposing in their fiscal update to spend $420 million in grants and bursaries to help provinces and territories train and retain qualified early childhood educators.

The Liberals are also proposing to spend $20 million over five years to build a child-care secretariat to guide federal policy work, plus $15 million in ongoing spending for a similar Indigenous-focused body.

The money is designed to lay the foundation for what will likely be a big-money promise in the coming budget.

Current federal spending on child care expires near the end of the decade, but the Liberals are proposing now to keep the money flowing, starting with $870 million a year in 2028.

There is also money for action on climate change. The government allocated C$2.6 billion in grants for homeowners to improve efficiency and $150 million over three years for electric vehicle charging stations.

The government also detailed some help for the hard-hit tourism sector, including funding for airports. But with Transport Minister Marc Garneau’s negotiations with airlines underway, there is no specific money for carriers including Air Canada and WestJet Airlines Ltd.

Bottom Line

There will continue to be great concern about the largest budget deficits since World War II. Does Canada really need the proportionately largest COVID fiscal response in the industrialized world?  The outlook is somewhat less dire than when the government released a fiscal snapshot in July. The unemployment rate at 8.9% is down materially from May’s 13.7% high but well above February’s 5.6%. The economy recovered ground through the third quarter, although the second wave of pandemic and ensuing restrictions undoubtedly will topple economic activity this quarter.

There is little worry that the government can sustain a massive deficit this year. It can, given low debt levels entering the crisis and historically low interest rates. But now that it has no fiscal guardrails, there’s a risk debt-to-GDP will continue to rise in the medium term if it continues to spend ambitiously.

The government is adding a new revenue source by taxing large digital companies. Still, in time, with this level of spending, they will be tempted to raise taxes on domestic sources, for example, hikes in the GST and higher capital gains taxes. This would be misguided, given the fragility of the recovery.

There is a greater risk that the government is overdoing the stimulus with vaccines on the horizon than undergoing it. Canada’s programs have been generous and household-focused compared to our G7 peers. The government must be strategic in assuring that new program spending is focused on future growth, beyond the pandemic, so that our debt-to-GDP will resume its downward trend. The risk is that once created; it is difficult to rein in spending.
By: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres
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