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January 2013

 

Title: Canadian economy off to a strong start in 2013

Subtitle:  Fiscal cliff resolution and strong jobs reports from both sides of the border bode well for housing.

 

Just a few days into 2013, a slew of data is putting pressure on economists who are projecting a weak economy during the coming year. Ironically much of the news comes from the United States, Canada’s largest trading partner.

 

The first good news is US jobs data, which were particularly strong during December. The American economy created 155,000 posts during the month. In addition, the November total was also revised upwards by 15,000 posts. While the country’s unemployment rate remained stable at 7.8 percent, the pace of job creating was strong enough to absorb the natural increase in the labour force. As a result, if this pace continues it should bring down jobless numbers over the longer term.

 

The US numbers are exceptionally important here too, due to the huge percentage of Canadian jobs which are reliant on exports shipped south of the border.

 

The other good news stemming from the United States this year was its avoidance of the so-called “fiscal cliff,” if Congress could not pass a budget deal. However Republicans and Democrats managed to work out a last minute agreement that raised revenues on higher income earners, which thus brought the US budget closer into balance. This should stave off the crisis mood that has pervaded Washington during recent months. 

 

The fiscal cliff resolution was especially good news for Canada, because as Finance Minister Jim Flaherty noted, if the “sequestration”-induced budget cuts that were scheduled to occur in the absence of an agreement had been implemented, the resulting demand loss would have sent Canada into a recession.

 

Canada too got some good news on its labour front. According to Statistics Canada’s Labour Force Survey, the country created 40,000 new jobs during December. That is far more than the number of new entrants into the labour force. This thus brought down the unemployment rate to a four-year low of 7.1 percent. The performance, which comes on the heels of 59,300 new posts created in November, was far better than expected by market watchers, in part because it put a lie to fears that Canadian firms would not hire due to fiscal cliff worries.

 

The jobs and fiscal cliff data are exceptionally good signs for both the economy and the housing sector, both of which are expected to be sluggish this year.

 

Job growth, along with immigration, is one of the two main drivers of Canadian housing sector demand. The new numbers, along with the Bank of Canada’s continued low interest rate policy, thus bode well for both housing starts and existing home sales data, both of which should be released later this month.

 

That said the Canadian economy’s worries are far from over. For example soon after US President Barack Obama is re-inaugurated later this month, a new round of Congressional negotiations is expected to begin, to raise America’s debt ceiling. This could have repercussions in Canada because the last debt ceiling talks also created a crisis mode that led to a cut in the US credit rating.

 

And there is no telling how many crises Americans can take, before they start cutting purchase of Canadian products.

 

peter@peterdiekmeyer.com

 

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