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October 15, 2014

 

Canadian economic outlook looks good

Moderate growth and continued low interest rates should keep homeowners and builders happy. Tough luck though for younger Canadians.

 

Recent economic news has been great for Canada’s housing sector stakeholders. Growth has been strong, but not strong enough for the Bank of Canada to raise interest rates. Homeowners and builders thus get the best of both worlds: rising asset values coupled with relatively low ownership costs. Better still indications are that trend will continue.

 

Most of Canada’s top economists are within a few percentage points of the International Monetary Fund’s recent 2.3 percent growth projection for this year and 2.4 percent in 2015. As usual this strength is expected to be driven in large part by the US, its largest trading partner. 

 

However as Stephane Marion, chief economist at National Bank Financial pointed out at a recent panel presentation at the Montreal Council on Foreign Relations, China which Canadian Prime Minister is currently visiting to build trade relations, is also doing well. “Growth is strong and they are trying to rebalance from an export focus to more domestic demand,” said Marion. “Other signs are also positive: particularly attempts to address pollution and to move to a floating currency.”

 

Oil price drop spurs mixed effects

The recent drop in oil prices, sparked by a stronger US dollar, is having mixed effects. While western Canadian producers, developers and explorers will all be hit, the falling “petro-loonie,” whose fate is heavily linked to energy prices, will help exporters in almost all other sectors.

 

However risks abound says Francois Dupuis an economist at Desjardins Group. “There are dangers everywhere.” These include Canada’s housing market, which according to the IMF, is overvalued relative to incomes and rents. However the world’s central bank estimates the gap at just 10 percent, far lower than other forecasters.

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Paul Fenton, chief economist at the Caisse de Dépot et Placements du Québec cites the quality of political functioning as a danger. That particular risk increased significantly earlier this week when the US Republican party took control of the Senate and increased its representation in the House of Representatives. This leaves President Barak Obama’s opponents in full control of Congress, and decreases the likelihood of any significant economic reform legislation being passed.

 

Stock and bond markets, which are however mostly influenced by America’s superior economic performance relative to other Western economies, notably Japan and Europe, don’t appear to be particularly concerned about the impending gridlock. The S&P TSX for example continues to trade near historical highs.

 

The one group in Canada that is particularly feeling the pinch are its youth, who are facing zero percent interest rates, which mean that any money they save will earn them nothing. Record high housing prices for their part, make it almost impossible for many to enter the market. As if that weren’t enough the youth unemployment rate remains high.

 

However if you believe Stephen Poloz even there the news is good. The Bank of Canada’s governor recently told the House of Commons Finance Committee that all Canada’s young need to do is to work for free, in unpaid apprenticeships, until the economy recovers.

 

peter@peterdiekmeyer.com

 

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