May 2013


Title: Canadian economic indicators turn up

Sub-title: However the new Bank of Canada governor will have to navigate a risky environment.


The last few weeks have been bullish for the Canadian economy. The April jobs numbers were strong, with 12,500 new posts created. The unemployment rate remained stable at 7.2 percent. However the new jobs, which follow a net loss of 3,800 during February and March, bode well for household formation, a key driver of residential real estate demand.


Payrolls in the United States, Canada’s largest customer, also increased. In all 165,000 jobs were created there during April. Just as impressive were the revisions of previous months’ data, which showed that 114,000 more posts were created, than had previously been reported. This is a bullish sign for Canadian exports, which increased by 5.1 percent in March, sparking a surprising $24 million trade surplus that month.


Furthermore as Benoit Durocher, a senior economist at Desjardins Economic Studies notes, real gross domestic project in Canada increased by a faster than expected 0.3 percent in February. “According to our estimates, the first quarter could give us real GDP growth of approximately 2.5%,” he wrote in a recent note to clients. “This forecast is much higher than our initial outlook, which called for an increase of around 1%.”


Yet despite the good news key global risks remain which could spill over into Canada. Growth in China, a key market for Canadian natural resources has been slowing. Europe’s economy contracted for the sixth straight quarter during the first three months of 2013. As if that were not enough, policies in Japan, which is struggling to emerge from what could prove to be a second straight “lost” decade, are causing considerable worry.


The newly-elected Abe regime has recently been fanning a massive currency debasement program, which has been driving down the yen, to make Japan’s exports cheaper in foreign markets. Yet while Japanese stocks have shot up nearly 40 percent since the start of the year, the fear is that the move could spark a series of competitive devaluations and other protectionist measures from countries such as the United States (which already has a considerable monetary easing program in place)  that want to protect their domestic industries.


Stephen Poloz, the newly appointed governor of the Bank of Canada, will have his hands full spearheading the Canadian response. However Poloz, who will be taking over from the highly-regarded Mark Carney (who is moving on to the Bank of England) will have big shoes to fill.


Poloz brings to the table considerable skills and experience to his new role, including a long previous stint at Canada’s central banks, and several years as chief economist and later president and chief executive officer at Export Development Canada. The latter experience in particular will give him a unique perspective on the implications of Japan’s currency devaluation moves on Canadian exports.


Housing sector stakeholders will be watching Poloz’s first moves particularly closely for signs as to how he plans to guide monetary and interest rates during the challenging months ahead.




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