January 23, 2007

 

Blurb: With economic data coming out weekly, it’s sometimes hard for ordinary Canadians to grasp the big picture.

 

The Canadian economy is humming along

 

By Peter Diekmeyer • Bankrate.com

 

This week a flood of economic data is being put out by governments, business organizations and research groups. Canadian inflation numbers, retail sales statistics and the measure of the leading economic indicator will all be published. In the United States, Canada’s primary trading partner, initial jobless claims, existing and new homes sales, as well as durable goods orders figures will be released.

 

Some of those numbers will be good, some bad and others pretty much in the middle.  The problem is that although economists can often make some sense out arcane statistics such as “productivity growth,” or “output gap,” Canadians as a group, don’t have a very good grasp of these concepts.

 

Sadly, the economic information that Canadians are provided on an almost daily basis in general media such as television, radio and even many newspapers,  typically provide with little context as to what this all means. 

 

That’s too bad. Because despite the mixed news Canadians get, due to inevitable fluctuations in weekly data, in fact, their economy is doing extremely well. For several years, growth has been slow, but consistent. Employment has been strong. Interest rates and inflation have been low in historical terms. Furthermore both equities and residential real estate markets are performing well. What’s more, there is good reason to believe that these trends will continue through 2007.

 

Strong economic fundamentals

The Canadian economy, while not booming, continues to benefit from strong fundamentals. The Bank of Canada expects growth to average about 2.5 percent in real terms during the first half of 2007. That may not sound impressive, but according to the Bank of Canada, that’s about as fast as it can grow without triggering a significant bout of inflations. Furthermore, the Canadian economy has maintained that steady pace of growth, without incurring a major recession, since the early 1990s.

 

With all that growth, it should come as no surprise that companies are hiring a lot of people. During 2006, 344,800 new jobs were created in Canada, 61,600 in December alone. In fact last month, the Canadian unemployment rate fell to 6.1 percent, a return to the 30-year low it hit in the middle of last year. 

 

Not only are more Canadians finding better jobs, their wages are better maintaining purchasing power. Canadian inflation, which ran in the double digits up until to the mid-1980s, has been hovering below 3.0% for several years now. In fact this week, Statistics Canada released data showing that core inflation (excluding the more volatile food and energy components) is actually falling on an annualized basis.

 

Canadian borrowers have also been doing well. Although interest rates have been drifting upwards for more than two years, the increases have been moderate and remain low in historical terms. For example the Bank of Canada announced last week that it was maintaining its overnight rate at just 4.25%, the fifth straight time the central bank has declined to change course.

 

Average house prices set to pass the $300,000 mark

The strength of the Canadian economy can be easily seen in the surprisingly durable strength of its housing market. In 1999, the average existing home sold via the Canadian Real Estate Association’s Multiple Listing Service was just $158,145. However last year that figure shot up to $294,270. Furthermore during 2007, many experts believe that the average price of a home sold in one of the 30 major market tracked by CREA, will edge past $300,000. 

 

Strong housing demand has led to a slew of new home construction. The Canada Mortgage Housing Corporation estimates that housing starts hit 277,400 during 2006. Not only was that an increase from 2005 levels, it represented the second strongest showing in close to 20 years. Family homes tend to be Canadian families’ biggest asset. That means the strong performance on residential real estate front has had a major effect on average household wealth.  Equities, another major source of Canadian wealth have also been doing well. In recent week the S&P/TSX has been hovering near its all-time high. 

 

More of the same?

With the Canadian economy growing slowly but surely, job growth strong, interest rates low and inflation too, could there be any better news? Well yes. Because it looks like Canadians are in for more of the same. This week, the leading indicators of economic activity for both Canada and the U.S. rose. Furthermore, the Bank of Canada continues to predict low inflation during coming months and is indicating that it will not raise interest rates anytime in the near future.

 

The upshot is that while weekly statistics tend to bounce around, the broad Canadian economic trends have been surprisingly positive. That could change, particularly if America’s economy slows faster than experts expect and Canadian exports suffer as a result. But for now, times are good.

 

 

Recent Bank of Canada rate moves:

 

January 16, 2007, No change

December 5, 2006, No change

October 17, No change

Sept. 6, No change

July 11, 2006, No change

May 24, 2006, +1/4%, 4 ¼% 

April 25, 2006, +1/4%, 4.0%

March 7th, 2006, + 1/4%, 3 3/4%

January 24, 2006, + 1/4%, 3 1/2%

December 6, 2005 + 1/4%, 3 1/4%

October 18, 2005 + 1/4%, 3.0%

Sept. 7, 2005 + 1/4%, 2 3/4%

October 19, 2004 +1/4% 2 1/2%

September 8, 2004 +1/4% 2 1/4%
April 13, 2004 -1/4% 2%

 

The Bank of Canada’s rate announcement schedule:

 

March 6, 2007
April 24, 2007
May 29, 2007
July 10, 2007
September 5, 2007
October 16. 2007
December 4, 2007

 

 

Peter Diekmeyer (www.peterdiekmeyer.com) a freelance business and economics writer.

 

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