Blockbuster Canadian Jobs Report for February

Latest News Michelle Foster 11 Mar

Canada Reached Full-Employment in February

Statistics Canada released the February Labour Force Survey this morning, reporting a much more significant than expected 336,600 net new jobs, with the unemployment rate falling a full percentage point to 5.5%. This is the first time the unemployment rate fell below its pre-Covid level and reinforces the expectation for another Bank of Canada rate hike in April and as many as five more increases this year. Last month’s recovery more than offsets the losses that coincided with the Omicron lockdowns in January and points to the continued resilience of the Canadian economy.

The loonie jumped on the news, as did Canadian government bond yields.

Other indicators point to an increasingly tight labour market in February. Total hours worked surged 3.6% to a record high, while the employment rate rose 1.0 percentage points to 61.8%. Gains were most notable in the hard-hit accommodation and food services sector (+114,000; +12.6%), and information, culture and recreation (+73,000; +9.9%) industries. Employment increases were widespread across provinces and demographic groups.

Average wages increased 3.1% from February 2020, significantly faster than the 2.4% rate recorded in January. That could signal that inflationary pressures, already intense, continue to build.

 

Bottom Line 

This Labour Force Survey was conducted in mid-February, before the start of the Ukrainian War. since then, many commodity prices have surged, especially oil, gasoline, aluminum, wheat and fertilizer. This will accelerate CPI inflation worldwide, which dampens consumer and business confidence and reduces family purchasing power. The war has also contributed to continuing supply disruptions, all of which point to increased uncertainty and potentially slower growth.

The Bank of Canada is likely to hike interest rates when it meets again on April 13 by 25 basis points. Any more than that is imprudent given the risk of an economic slowdown. The outlook for the remainder of this year is more uncertain and likely to be volatile, depending on how long the war lasts. Right now, the likelihood for another five or six rate hikes this year and a few more next year. This, however, is subject to change.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Bank of Canada Holds Rates Steady Again

General Michelle Foster 26 Jan

It came as a surprise to many who were forecasting a 0.25% rate increase, but the Bank of Canada chose to maintain the overnight rate at 0.25%. What does this mean for your mortgage? Contact me today to discuss how your mortgage could be affected and what your options are!

Bank Will Hike Rates At Next Meeting
While markets were 70% certain the Bank would hike their overnight target rate today, we remained of the view that the Governing Council would hold off until March or April because of the slowdown in first-quarter growth arising from the Omicron restrictions. The Bank announced today that economic slack in the economy had been absorbed more rapidly than expected in late October when they last met. “Employment is above pre-pandemic levels, businesses are having a hard time filling job openings, and wage increases are picking up. Unevenness across sectors remains, the Governing Council judges the economy is now operating close to its full capacity.” Consequently, the Bank now believes that emergency measures arising from the pandemic are no longer necessary. They clearly state that a rising path for interest rates will be required to moderate domestic spending growth and bring inflation back to target. Being mindful that the increasing spread of Omicron will dampen spending in the first quarter, they decided to keep the policy rate unchanged today and to signal that rates will rise going forward. “The timing and pace of those increases will be guided by the Bank’s commitment to achieving the 2% inflation target.”Notably, the Bank also suggested that another vital policy measure to reduce demand and thereby control inflation is “quantitative tightening” (Q.T.), reducing the central bank’s holdings of Canadian government bonds on its balance sheet. This selling of bonds also raises interest rates. “The Bank will keep the holdings of Government of Canada bonds on our balance sheet roughly constant at least until we begin to raise the policy interest rate. At that time, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing Government of Canada bonds to roll off. As we have done in the past, before implementing changes to our balance sheet management, we will provide more information on our plans.”The Bank of Canada is very concerned about maintaining its hard-won inflation-fighting credibility. Remember that while Canadian inflation is at a 30-year high–as it is in the rest of the world–at 4.8%, Canadian inflation pales compared to the 7.0% rate in the U.S. and 6.8% rate in the U.K. (see chart below). It is also below the pace of the Euro area. The Bank stated that “CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.”
Bottom LineIt surprises me that economists in Canada would expect the Bank to hike interest rates during a Covid lockdown without properly measured signalling beforehand. Bay St’s hysteria about inflation seems to have muddied thinking. The Bank will be taking out the big guns to get inflation under control. Overnight rate hikes begin at the next policy meeting on March 2 and then Quantitative Tightening shortly after that. The downsizing of the Bank’s balance could have even more dramatic effects on the shape of the yield curve, hiking longer-term interest rates. In today’s policy statement and Monetary Policy Report, the Bank emphasized the strength of the housing market and the impact on inflation of the more than 20% rise in Canadian house prices last year. The MPR suggests that housing market activity strengthened again in recent months, led by a rebound in existing home sales.” Low borrowing rates and high disposable incomes continue to contribute to elevated levels of housing activity in the first quarter. At the same time, other factors that support demand, such as population growth, are also now picking up.”Traders continue to bet that the Bank of Canada will hike interest rates by 25 basis points five or six times this year. This would take the overnight rate from 0.25% to 1.5% to 1.75%. It was 1.75% in February of 2020 before the pandemic easing began. Markets also expect two more rate hikes in 2023, taking the overnight rate to 2.25%. Volatility in financial markets has surged this year. The FOMC, the US policy-making body, announces its decision at 2 PM ET today. No rate hike is expected yet, but the Fed will undoubtedly commit to serious rate hikes and balance sheet contraction in the coming months.
 

Written by:

Dr. Sherry CooperChief Economist, Dominion Lending Centresdrsherrycooper@dominionlending.ca

Bank of Canada Holds Rates Steady – June 9 2021

General Michelle Foster 9 Jun

Bank of Canada Holds Rates and QE Steady–Asserting That Both the Upside in Inflation and the Downside in GDP is Temporary
The Bank of Canada left the benchmark overnight policy rate unchanged at 0.25% and maintained its current pace of GoC bond purchases at its current pace. The Governing Council renewed its pledge to refrain from raising rates until the damage from the pandemic is fully repaired. The $3 billion weekly pace of bond-buying–known as quantitative easing–will decline as the recovery proceeds. In April, at their last meeting, the Bank reduced the pace of GoC bond buying from $4 billion to $3 billion per week. The central bank was among the first from advanced economies to shift to a less expansionary policy in April when it accelerated the timetable for a possible interest-rate increase and pared back its bond purchases.

The Bank’s view regarding the domestic economy appears to be little changed despite the April Monetary Policy Report (MPR) overestimating Q1 GDP growth by 1.4 percentage points. Indeed, today’s Policy Statement notes that Q1 GDP growth was “a robust 5.6 percent” and that the details of the report point to “rising confidence and resilient demand.” Concerning Q2, the third wave lockdowns are “dampening economic activity…largely as anticipated.” Note that the April MPR projected 3.5% growth in Q2 GDP, while the consensus forecast currently sits at 0% for Q2, with downside risk.

The Bank also noted that “Recent jobs data show that workers in contact-sensitive sectors have once again been most affected. The employment rate remains well below its pre-pandemic level, with low-wage workers, youth and women continuing to bear the brunt of job losses.” The chart below shows that the labour market is still below the Bank’s target for a full recovery.

Bank of Canada Upbeat Over the Medium Term

“With vaccinations proceeding at a faster pace, and provincial containment restrictions on an easing path over the summer, the Canadian economy is expected to rebound strongly, led by consumer spending. Housing market activity is expected to moderate but remain elevated.”

On the inflation front, there were no surprises. The Statement says that inflation has risen to the top of the 1-3% control range due to base effects and gasoline prices. The rise in the core measures is blamed on temporary factors as well. The Bank anticipates headline inflation will stay around 3% through the summer before pulling back later in the year.On the cautious side, the BoC highlights that the labour market still has a way to go before healing. There’s also uncertainty surrounding COVID variants.

The concluding paragraph didn’t change much. It reiterates that there “remains considerable excess capacity” and that policy rates will stay at the lower bound until “economic slack is absorbed,” which the April MPR said was in 2022H2. Concerning further tapering, the “assessment of the strength and durability of the recovery” will guide that decision.

The C$ barely garnered a mention yet again, with the Statement noting the recent gains and accompanying rise in commodity prices. The market might view the lack of concern here as a green light for further strength.

Bottom Line

The Bank of Canada is looking through “transitory” ups in inflation and downs in GDP. With vaccination rates continuing to ramp up significantly, and provinces beginning a gradual reopening process, the economy will rebound substantially beginning in June.

Indeed, with the near-term growth outlook increasingly bright, concerns have shifted to rising production input prices and the prospect for a sharp recovery in consumer demand to stoke inflation pressures. For now, the BoC is positing that near-term increases in consumer price growth rates will prove ‘transitory.’ But there have also been signs of harder-to-dismiss firming in most measures of underlying price growth gauges, including the BoC’s own preferred core measures edging up towards or above the 2% inflation target.

July’s meeting will likely be a bit more interesting with the Bank issuing more details in another Monetary Policy Report. We don’t see any need for dramatic forecast revisions at this stage, and the BoC’s guidance that rates might have to start increasing in the second half of next year remains appropriate. It looks like the main question will be around further tapering of the BoC’s asset purchases. The BoC didn’t signal an imminent taper (we didn’t think it would) but said decisions regarding the pace of purchases would be guided by its assessment of the strength and durability of the recovery. If incoming data aligns with the BoC’s forecasts, we could see it reduce weekly bond-buying again in July to $2 billion per week from $3 billion. If not, September might serve as a backup as the bank seeks to prevent its footprint in the bond market (nearly 44% at the end of May) from becoming too large while at the same time setting itself up to shift QE to reinvestment only well in advance of the first interest rate hike.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca

Bank of Canada Holds Rates and Bond-Buying Steady

General Michelle Foster 10 Mar

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.

Longer-Term Yields are Rising Despite Central Bank Inaction

General Michelle Foster 23 Feb

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.Blog post by Sherry Cooper

Canadian Jobs Market Tanks in December

General Michelle Foster 12 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).

Please Note: The source of this article is from SherryCooper.com/category/articles/

Canadian Home Sales and Prices Set Records Again in September

General Michelle Foster 16 Oct

Canadian Home Sales and Prices Set Another Record High in September

Today’s release of September housing data by the Canadian Real Estate Association (CREA) shows national home sales rose 0.9% on a month-over-month (m-o-m) (see chart below). This continues the rebound in housing that began five months ago amid record-tight market conditions.

“Along with historic supply shortages in a number of regions, fierce competition among buyers has been putting upward pressure on home prices. Much of that was pent-up demand from the spring that came forward as our economies opened back up over the summer,” said Costa Poulopoulos, Chair of CREA.

According to Shaun Cathcart, CREA’s Senior Economist, “Reasons have been cited for this – pent-up demand from the lockdowns, Government support to date, ultra-low interest rates, and the composition of job losses to name a few. I would also remind everyone that sales were almost setting records and markets were almost this tight back in February so we were already close to where things are now, as far away from Goldilocks territory as we had ever been before. But I think another wildcard factor to consider, which has no historical precedent, is the value of one’s home during this time. Home has been our workplace, our kids’ schools, the gym, the park and more. Personal space is more important than ever.”

The modest uptick in home sales nationally reflected diverse results regionally with about 60% of local markets seeing gains. Increases in Ottawa, Greater Vancouver, Vancouver Island, Calgary and Hamilton-Burlington sales were mostly offset by declines in the Greater Toronto Area (GTA) and Montreal; although, activity in the two largest Canadian markets is still historically very strong.

Actual (not seasonally adjusted) sales activity posted a 45.6% y-o-y gain in September. It was a new record for the month of September by a margin of  20,000 transactions, the equivalent of a normal month of September with an entire month of December tacked on. Sales activity was up in almost all Canadian housing markets on a year-over-year basis.

New Listings

The number of newly listed homes declined by 10.2% in September, reversing the surge to record levels seen August. New supply was down in two-thirds of local markets, led by declines in and around Vancouver and the GTA.

With sales edging up in September and new supply dropping back, the national sales-to-new listings ratio tightened to 77.2% – the highest in almost 20 years and the third-highest monthly level on record for the measure.

Based on a comparison of sales-to-new listings ratio with long-term averages, about a third of all local markets were in balanced market territory, measured as being within one standard deviation of their long-term average. The other two-thirds of markets were above long-term norms, in many cases well above.
There were just 2.6 months of inventory on a national basis at the end of September 2020 – the lowest reading on record for this measure. At the local market level, a number of Ontario markets are now into weeks of inventory rather than months. Much of the province of Ontario is close to or under one month of inventory.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1.3% m-o-m in September 2020. Of the 39 markets now tracked by the index, all but two were up between August and September.

As buyers are moving further away from city centres, CREA added a large number of Ontario markets to the MLS® HPI this month. The list includes Bancroft and Area, Brantford Region, Cambridge, Grey Bruce Owen Sound, Huron Perth, Kawartha Lakes, Kitchener-Waterloo, the Lakelands (Muskoka-Haliburton-Orillia-Parry Sound), London & St. Thomas, Mississauga, North Bay, Northumberland Hills, Peterborough and the Kawarthas, Quinte & District, Simcoe & District, Southern Georgian Bay, Tillsonburg District and Woodstock-Ingersoll.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 10.3% on a y-o-y basis in September – the biggest gain since August 2017. The largest y-o-y gains in the 22-23% range were recorded in Bancroft and Area, Quinte & District, Ottawa and Woodstock-Ingersoll.

This was followed by y-o-y price gains in the range of 15-20% in Barrie, Hamilton, Niagara, Guelph, Brantford, Cambridge, Grey Bruce-Owen Sound, Huron Perth, the Lakelands, London & St. Thomas, North Bay, Simcoe & District, Southern Georgian Bay, Tillsonburg District and Montreal.

Prices were up in the 10-15% range compared to last September in the GTA, Oakville-Milton, Kawartha Lakes, Kitchener-Waterloo, Mississauga, Northumberland Hills, Peterborough and the Kawarthas, and Greater Moncton.

Meanwhile, y-o-y price gains were around 5% in Greater Vancouver, the Fraser Valley, the Okanagan Valley, Regina, Saskatoon and Quebec City. Gains were about half that in Victoria and elsewhere on Vancouver Island, as well and in St. John’s, and prices were more or less flat y-o-y in Calgary and Edmonton.

The actual (not seasonally adjusted) national average home price set another record in September 2020, topping the $600,000 mark for the first time ever at more than $604,000. This was up 17.5% from the same month last year.

 

Bottom Line

Housing strength is largely attributable to record-low mortgage rates and pent-up demand by households that have maintained their level of income during the pandemic. The hardest-hit households are low-wage earners in the accommodation, food services, and travel sectors. These are the folks that can least afford it and typically are not homeowners.

The good news is that the housing market is contributing to the recovery in economic activity.  

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

Throne Speech: Canada’s Response to COVID-19

Latest News Michelle Foster 28 Sep

Throne Speech: Canada’s Response to COVID-19

Prorogation on August 18, following the resignation of Finance Minister Morneau, a new session of Parliament, and a new speech from the throne was meant to allow the government to hit the reset button. And for Prime Minister Justin Trudeau, to try and move past the summer of controversy involving WE Charity and the Canada Student Service Grant.

THE FISCAL PICTURE

There was little opposition earlier this year when the federal government backstopped nearly every economic sector through emergency benefits, wage subsidies, and other programs. But with the federal deficit approaching $400 billion, there are growing calls to temper new spending.

The new Finance Minister, Christia Freeland, has consulted with former prime minister Paul Martin, who erased deficits as finance minister more than 20 years ago. And she claimed this week to be “well aware” of concerns about federal spending and the fiscal balance but said getting more people back to work was a top priority, along with managing a second wave of COVID-19 infections.

“The single most important economic policy of our government and the best thing we can do for our economy is to keep coronavirus under control,” Freeland said. “I can’t emphasize that too much. Some people sometimes like to talk about a trade-off between good health policy and good economic policy. I could not disagree more strongly.”

Today’s throne speech is one of the most highly-anticipated throne speeches in recent memory–amid a slowing economic recovery and rising COVID case counts. Though not an economic blueprint, it lays out Ottawa’s vision for what policy supports it believes are needed to carry the country through the next phase of recovery.

Measures already floated include improved permanent support for the unemployed–building on exceptional levels of policy support delivered over the spring and summer. Estimates for how much all of that will cost will await a fall fiscal update and subsequent budget.

COVID-19 CASE COUNTS TICK HIGHER AS THE ECONOMIC RECOVERY SLOWS

A barrage of reports issued in the past week reinforced what will probably be a historically large, and yet still only partial, bounce-back in economic activity over the summer in Canada. Home resales surged again in August. Reports on retail, wholesale, and manufacturing trade for July left GDP still on track to rebound 40% (at an annualized rate) in the third quarter. But that would only retrace only about 57% of the decline over the first half of the year. And early data – including Royal Bank’s tracking of credit card purchases–continue to flag a slowing pace of recovery.

Meantime, virus case counts are being watched more closely again in Canada, given a faster uptick in recent weeks, particularly in Ontario, Quebec, British Columbia, and Alberta. This latest wave of infections has been more concentrated among less vulnerable age cohorts, meaning fewer hospitalizations. Still, easing in containment measures has already been paused, and in some spots, reversed. At a minimum, the increased spread is another reminder that there are limits to how much the economy will recover while the virus threat remains.

In today’s speech from the throne, the Governor General was expected to lay out the government’s vision for the pandemic recovery. It won’t be easy, with COVID-19 cases on the rise and investor confidence wobbling. While the economy has improved since April lows, the recovery continues to be fragile–especially in the face of a possible second wave. Where should the government focus its investments? And if it survives the confidence vote, what could we expect in its next budget?

Trudeau insisted that he does not want a campaign soon — but would be ready if necessary. “I think it’s irresponsible to say that an election would be irresponsible,” Trudeau told reporters. “Our country and our institutions are stronger than that, and if there has to be an election, we’ll figure it out.”

“I don’t think that’s what Canadians want. I don’t think that’s what opposition parties want, and it’s certainly not what the government wants.”

A MATTER OF CONFIDENCE

Regardless of how many specifics or dollar figures are in the speech from the throne, it will be a confidence test for the Trudeau government, 15 seats shy of a majority in the House of Commons.

Without support from one major opposition party, an election is likely. But it’s not clear if that’s the kind of reset button opposition leaders are ready to press.

NDP Leader Jagmeet Singh wants a pledge to extend the Canada Emergency Response Benefit while the Employment Insurance system is reformed. And he wants a clear pledge to extend access to paid sick leave.

Singh told CPAC he heard no specific commitments from Prime Minister Justin Trudeau when the two spoke last week. But he will be watching for signals from the government, not just in the speech itself, but in the debate and legislation that follows.

From new Conservative leader Erin O’Toole, recently given a positive COVID-19 diagnosis: “Let’s see the plan, and if it’s for the betterment of the country, we’ll support parts of that plan. If we don’t see it, we’ll put forward our own vision”.

The Bloc Quebecois, meanwhile, has threatened to try and force an election over the WE affair unless Trudeau steps down. And the party wants increased health care transfers to the provinces, more support for seniors, respect for Quebec jurisdictions, and support for supply-managed farmers.

But their leader will not be on Parliament Hill as the House of Commons resumes; Yves-François Blanchet has tested positive for COVID-19 and tweeted Tuesday that he and O’Toole would wait to give their formal replies to the speech until after their isolation periods had ended.

ACTUAL MEASURES IN THE THRONE SPEECH

Overcoming pandemic is the key theme of the speech. COVID-19 has been incredibly hard for parents, especially women, young people, older adults, and Black and racialized Canadians. Low wage earners have been hardest hit.

Fight the pandemic and save lives

  • Faster testing, short-term closure orders in high-case areas
  • Help businesses in those areas
  • Additional PPE funding
  • More funding to keep schools safe
  • Vaccine strategy
  • Immunity task force led by scientists

Supporting Canadians Through this Crisis

  • Emergency Wage Subsidy extended
  • Job loss supports
  • Government creates jobs, assists training, youth employment strategy,
  • CERB recipients now supported by EI system–broadened to include self-employed and gig workers
  • Action Plan for women–child care services, create a Canada-wide early childhood education system, after school programs, support for women entrepreneurs.
  • Aid to small businesses
  • Improve business credit, assistance to sectors hardest hit

Build back better to create a more resilient Canada

  • Stimulus for recovery that is done prudently
  • Reduce income inequality by raising taxes stock options and wealth
  • Increase taxes on the digital giants that do business in Canada
  • Defend the strength of the middle class
  • Fighting climate change and commitment to sustainable growth
  • Long-term care homes assistance, new standards for care
  • Increase Old Age Security at age 75
  • Primary care physicians for every region
  • Mental Health resources increased
  • National Universal Pharmacare
  • Telemedicine
  • Limiting firearms
  • National Action Plan on gender-based violence
  • Affordable housing growth
  • All Canadians have access to highspeed internet
  • Affordable regional air services
  • Eliminate chronic homelessness
  • Enhance First-time homebuyer incentive
  • Address food insecurity and enhance local food supply chains, protect food workers
  • Support farmers
  • Introduce the most extensive training and education and accreditation programs in Canadian history
  • Create good jobs in climate action sectors
  • Exceed Canada’s 2030 climate goals
  • More transit options, zero-emissions vehicles and batteries, electric charging stations
  • Cut corporate tax rate in half for clean technology companies
  • Support natural resource and oil companies as they move towards zero-emission and clean-energy goals
  • Ban single-use plastics next year
  • Clean water and irrigation plans

Stand up for who we are as Canadians–welcoming and fights discrimination

  • We take care of each other, welcome newcomers, embrace two official languages
  • Address systemic racism
  • Help Indigenous, First Nations, and Mate peoples
  • Take action on online hate, support employment of Blacks and racialized people
  • Reform criminal justice system and law enforcement
  • Encourage immigration and family unification
  • Invest more in developing economies
  • Support human rights, bring detained Canadians home

BOTTOM LINE

This is an ambitious agenda. Many of these proposals are sweeping commitments. Spending details will come later, likely in a fiscal update in November or December.

The speech did not extend the CERB, which the NDP said was a condition of support. Also, the NDP asked for paid sick leave, which was not mentioned.

Quickly following the speech,  the Conservatives’ initial response was that they could not support this proposal. Among other things, they berated that there was no fiscal framework or anchor to prevent further downgrades of Canadian credit ratings. According to deputy leader Candice Bergen, Conservatives will not support a speech from the throne filled with “buzzwords” and “grand gestures” that ignores the ailing energy sector, farmers, the unemployed, and struggling small business owners.

The political posturing will continue.

In the next week, the speech will be debated, during which time, the government can make changes.

 

Original Post by:

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

Canada’s Economy is Outperforming the US

General Michelle Foster 5 Aug

Canadian Economy Recovers Almost Half Its COVID-Induced Loss in May and June

The Canadian economy bounced back sharply in May and June as Canadian provinces eased lockdown measures.

GDP expanded 4.5% in May, and activity in June was even more robust at an estimated 5% rise. Cumulatively, GDP rose 10% in May and June, after plummeting more than 18% in March and April. These figures are calculated on a month-over-month basis.

These figures point to about a 40% annual rate decline in second-quarter GDP in Canada, which is roughly in line with economists’ projections. South of the border, the US posted a 33% contraction in GDP for the second quarter, the most massive plunge on record (see details below). It’s not surprising that Canada’s economy tanked by more than the US in Q2, as Canada enacted more aggressive restrictions earlier than the US and eased them more slowly. These public health restrictions were well worth it, as Canada has had far greater success at flattening the curve of new cases and deaths. Moreover, Canada’s economy will likely outpace the US in Q3, showing the benefit of allowing the public health considerations to dominate.

Canadian output was up in most sub-sectors in May, with double-digit monthly gains by retailers coinciding with the reopening of many stores. Construction, too, recorded a strong rebound, with activity up 17.6% month-over-month in the sector.

Activity at food services and bars rose 35.1% in May as dining rooms and patios began to open in certain parts of the country, while other restaurants continued relying exclusively on take-out and delivery. Meanwhile, accommodation services dropped 2.3%, as ongoing restrictions on international and interprovincial travel kept most Canadians at home.

Real estate and rental and leasing increased 1.5% in May following a 3.4% decline in April. Activity at the offices of real estate agents and brokers jumped 57.1% in the month, as home resale activity in nearly all major urban centres increased in conjunction with a substantial increase in the number of newly listed homes. Nevertheless, the output of real estate agents and brokers remained 44% below February’s level.

Arts, entertainment, and recreation declined another 2.9%. We expect some of these services industries to continue to lag the recovery as demand will be slow to rise due to remaining safety protocols and concerns about virus spread.

Oil production remained sluggish in May, down another 2.7% from April and drilling activity has yet to show signs of a significant rebound into the summer.

US ECONOMY SHRINKS AT A RECORD 32.9% PACE IN Q2

US gross domestic product shrank 9.5% in the second quarter from the first, a drop that equals an annualized pace of 32.9%, the Commerce Department’s initial estimate showed on Thursday. That’s the steepest annualized decline in quarterly records dating back to 1947. The drop in GDP in the quarter was close to expectations but was still alone more than twice the total 6-quarter peak-to-trough decline in the 2008/09 recession.

Consumer spending, which makes up about two-thirds of GDP, slumped an annualized 34.6%, also the most on record. While employment, spending and production have improved since reopenings picked up in May and massive federal stimulus reached Americans, a recent surge in infections has tempered the pace of the recovery.

US Jobless Claims

A separate report Thursday showed the number of Americans filing for unemployment benefits increased for a second straight week. Initial claims through regular state programs rose to 1.43 million in the week ended July 25, up 12,000 from the prior week, the Labor Department said. There were 17 million Americans filing for ongoing benefits through those programs in the period ended July 18, up 867,000 from the prior week.

While the economic restart has helped put 7.5 million Americans back to work in May and June combined, payrolls are down more than 14.5 million from their pre-pandemic peak.

“We have seen some signs in recent weeks that the increase in virus cases, and the renewed measures to control it, are starting to weigh on economic activity,” Fed Chairman Jerome Powell said at a news conference Wednesday after the central bank’s two-day policy meeting. “On balance, it looks like the data are pointing to a slowing in the pace of the recovery,” though it was too soon to say how extensive — or sustained — this period would be, he said. This is a reminder that there are limits to how much the economy can rebound to a ‘new normal’ in the absence of a vaccine or more effective treatments.

According to Bloomberg News, The US economy has stalled for the fourth consecutive week as new virus cases continue to surge and some lockdown measures have been reinstated. In the week ending July 24, we saw a decline in US public transit ridership, airline passengers, mortgage applications, consumer confidence, and same-store sales.

With the election only three months away, American voters will have to decide whether to re-elect President Donald Trump to a second term against a backdrop of the virus-induced recession and his response to the health crisis. Not surprisingly, Donald Trump floated the idea of delaying the election in a tweet yesterday morning, suggesting once again the false claim that widespread mail-in voting would make the election “inaccurate and fraudulent.” The president has no power to postpone or cancel an election on his own, and his comment triggered a hugely negative response from both his own party and the Democrats. 

In the meantime,a $600 weekly supplement to unemployment benefits that has provided a key economic lifeline for millions of Americans ends today with Republicans and Democrats still quarrelling over a path forward. This, while US coronavirus deaths now top 152,000, hitting records in Texas and Florida and Dr. Anthony Fauci warns that the disease is spreading rapidly to the Midwest.

BOTTOM LINE

The Canadian economy is outpacing the US in the early recovery period.

Some of the initial bounce-back in Canada – particularly in the housing market – probably reflects the release of pent-up demand generated during the lockdown. Unprecedented income supports have also helped prop up near-term household purchasing power. Payments from CERB alone looked larger than total wage losses through the downturn in April, and we expect to see more of the same in May payroll employment and wage numbers in the week ahead.

The threat of a resurgence in virus spread will still limit the amount that the economy can recover over the second half of this year – and activity in the oil and gas sector still looks exceptionally soft. We still expect GDP to be more than 5% below year-ago levels, and the unemployment rate elevated, in Q4. But there is some scope for Canada to outperform the US in the very near-term, provided virus spread can remain relatively well contained.

According to early advance data for July published by RBC economics, retail and recreation activity in Canada continues to recover more quickly than in the US states suffering surging COVID cases (see chart below).

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

Bank Of Canada Holds Rates Steady and Continues QE Program

Latest News Michelle Foster 17 Jul

Bank of Canada Holds Target Rate Steady Until Inflation Sustainably Hits 2%

The Bank of Canada under the new governor, Tiff Macklem, wants to be “unusually clear” that interest rates will remain low for a very long time. To do that, they are using “forward guidance”–indicating that they will not raise rates until capacity is absorbed and inflation hits its 2% target on a sustainable basis, which they estimate will take at least two years. As well, they indicate that the risks to their “central” outlook are to the downside, which would extend the period over which interest rates will remain extremely low. The Bank also made it clear that they are not considering negative interest rates. The benchmark interest rate remains at 0.25%, which is deemed to be its the lower bound.

The Bank is also continuing its quantitative easing (QE) program, with large-scale asset purchases of at least $5 billion per week of Government of Canada bonds. The provincial and corporate bond purchase programs will continue as announced. The Bank stands ready to adjust its programs if market conditions warrant.

With the benchmark rate at its effective lower bound, the Bank’s quantitative easing is the way it is lowering mid- to longer-term interest rates, reducing the borrowing costs for Canadian households and businesses. The Bank assumes that the virus will be with us for the entire forecast range, which is two years.

The Bank released its new economic forecast in today’s July Monetary Policy Report (MPR). The MPR presents a central scenario for global and Canadian growth rather than the usual economic projections. The central scenario is based on assumptions outlined in the MPR, including that there is no widespread second wave of the virus in Canada or globally.

The Canadian economy is starting to recover as it re-opens from the shutdowns needed to limit the virus spread. With economic activity in the second quarter estimated to have been 15 percent below its level at the end of 2019, this is the most profound decline in economic activity since the Great Depression, but considerably less severe than the worst scenarios presented in the April MPR. Decisive and necessary fiscal and monetary policy actions have supported incomes and kept credit flowing, cushioning the fall and laying the foundation for recovery.

Mincing no words, the MPR acknowledged that the COVID-19 pandemic has caused a “worldwide health-care emergency as well as an economic calamity.” The course of the pandemic is inherently unknowable, and its evolution over time and across regions remains highly uncertain.

In Canada, the number of new COVID-19 cases has fallen sharply from its April high, and the economic recovery has begun in all provinces and territories and across many sectors. Consequently, economic activity is picking up notably as measures to contain the virus are relaxed. The Bank of Canada expects a sharp rebound in economic activity in the reopening phase of the recovery, followed by a more prolonged recuperation phase, which will be uneven across regions and sectors (Figure 1 below). As a result, Canada’s economic output will likely take some time to return to its pre-COVID-19 level. Many workers and businesses can expect to face an extended period of difficulty.

There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output. In the central scenario, roughly 40 percent of the collapse in the first half of the year is made up in the third quarter. Subsequently, the Bank expects the economy’s recuperation to slow as the pandemic continues to affect confidence and consumer behaviour and as the economy works through structural challenges. As a result, in the central scenario, real GDP declines by 7.8 percent in 2020 and resumes with growth of 5.1 percent in 2021 and 3.7 percent in 2022. The Bank expects economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures.

Bottom Line

Governor Macklem said in the press conference that what he wants Canadians to take away from today’s Bank of Canada’s actions is “Canadian interest rates are very low and will remain very low for a very long period”. The reopening of the Canadian economy is well underway. Economic activity hit bottom in April and began expanding in May and accelerated in June. About 1.25 million of the 3.0 million jobs that were lost in March-April, were added in May and June.

Some activities, including motor vehicle sales, have already seen a strong pickup since April. Likewise, housing activity fell sharply during the lockdown but is beginning to recover quickly. In contrast, some of the hardest-hit businesses, such as restaurants, travel and personal care services, have only just started to see improvements in recent weeks and are expected to continue to face significant challenges.

The chart below, from July’s MPR, shows that household spending patterns have shifted since the onset of the pandemic. Some of these shifts might last. In the central scenario, the effects of the downturn and lower immigration hold down housing activity over the next few years. After a near-term boost from pent-up demand, residential investment slowly increases as income and confidence recover.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

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