June 11, 2012


Title: Canada continues to march to its own drummer

Sub-title:  Job creation fell last month, as did housing starts.  Is that a coincidence?


The global economy continued to bounce in fits and starts during recent weeks, trying to gain its footing in a turbulent and increasingly uncertain environment. Financial markets anxiously await the outcome of the June 17th Greek elections, which many feel will be decisive regarding that country’s use of the euro. America is rebounding from a second consecutive weak jobs report and China, long the bulwark of global growth, just cut its key policy interest rate, a signal that things there are even worse than expected.   


But Canada continues to march to its own beat. The country created 7,770 new posts in May; and though experts say this is not that great, when taken in context with the 140,500 jobs created in March and April, is actually quite good says one expert. “This paints a very positive picture of the Canadian economy, which is quite astounding compared with the deteriorating economic conditions observed in other parts of the world,” said Benoit Durocher, an economist at Desjardins Economic Securities.


True, as Durocher points out, the Canadian jobs numbers did coincide with other bad news. For example merchandise exports recently fell. And Canadian unit labour costs jumped significantly (+2.6% in US dollar terms) relative to those in the United States, which makes it harder for Canadian exporters to compete there. However all things considered Canada seems to be holding out well.


Housing starts tied to job creation

That’s particularly true in the housing sector, where building activity remains strong. Although housing starts fell to 211,400 units during May, compared to 243,000 in April, those numbers are exceptionally strong both on a per capita basis relative to other countries, and compared to what would be implied by demographic changes.


In addition, there is a bit more to the drop than meets the eye. In fact, as Robert Kavcic, an economist at BMO Financial Group points out, the strong numbers since the start of the year were likely partly a result of builders taking advantage of favourable weather to move up production. If that is true, then the drop in May starts could merely be the beginning of a move to more normal levels.


It should however also be noted that the exceptionally strong housing start numbers of recent months, arrived almost concurrently with those strong job creation numbers. That too is likely no coincidence as household formation (which as any parent who has seen a kid move out after getting his first real job) along with immigration, are the key drivers of housing demand.


Central bank continues to be one of the few talking of raising rates

Another area in which Canada seems to be marching to its own beat is in monetary policy. Most major central banks, like Canada’s, have long kept their policy interest rates at extremely low levels to the point where they effectively cannot be cut much further. However the Bank of Canada recently signalled that a withdrawal of the “considerable monetary stimulus currently in place,” was in the cards, a statement that it repeated in its June 5th policy announcement.


As Marie-Claude Guillotte, an economist at Laurentian Bank Securities notes, the reason for that relates at least partially to Canada’s strong housing sector. “We continue to believe that Governor Carney intends to increase the (policy) rate this year by 25 basis points in December followed by another 25 basis points in January, mainly …to appease the heating housing market,” wrote Guillotte in a recent note to its clients. “However in these increasingly uncertain times we must be cautious in our predictions.”


One factor that will remain on everyone’s’ minds in coming weeks will be the possibility that Greece’s problems will spread to other European countries. That’s particularly true of the large economies of Spain and Italy, where financing rate have risen to exceptionally high levels in recent weeks. In an interview held at The International Forum of the Americas this week, Terry Campbell, president of the Canadian Bankers Association, noted that Canada’s banks’ exposure to the two countries, currently amounts to only about 2.0 percent of their Tier one capital.


However if Spain and Italy slip further into trouble and they drag their trading partners economies down with them, the indirect “contagion” effects that this could have on the Canadian economy could be far worse than the direct ones.




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