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June 2008

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Construction Activity Declines Again - June 30, 2008

Construction activity decreased 0.7% in April according to a report on Canada's GDP released by Statistics Canada earlier this morning. Both residential and non-residential building construction receded, while engineering and repair construction remained virtually unchanged. Within the residential sector, construction of new single dwellings declined for a fifth consecutive month. In contrast, the construction of apartments rose for a third consecutive month.

Non-residential building construction of all types (industrial, commercial and institutional) declined in April. However, the nominal value of building permits issued for non-residential buildings increased significantly, notably in the case of commercial buildings. This should translate into higher construction activity in the coming months.

Real estate agents and brokers recorded a fifth consecutive monthly decline, as the home resale market continues to soften. Their activities were well below their most recent peak reached in the summer of 2007.

Should Home Buyers Opt for Long Term Mortgages - June 18, 2006

A report published today by TD Economics states the Canadian economy is already showing signs of distress from the U.S. economic downturn, and will continue to feel its affect throughout 2008 and 2009. Specifically, Canada has direct exposure to the U.S. housing fiasco via the spillover of tightened credit conditions, and faces collateral damage to the export sector from a stagnating U.S. economy. Fortunately, this is occurring in an otherwise healthy domestic demand environment.

According to Chief Economist, Don Drummond, "Canadians would be best advised to buckle up for the ride." The path of the Canadian economy will be greatly influenced by how the shocks surrounding oil, the credit crunch and the plunging housing market evolve in the United States. TD Economics believes the U.S. economy will not experience the snap-back that typically follows an economic downturn. Rather, the number and severity of the shocks occurring simultaneously in the economy argue for an extended period of economic weakness.

The greatest forecasting uncertainty centers around the credit crunch, for which there is little historical precedence. TD Economics believes the impact from tight credit conditions will linger on the U.S. economy, and weigh down investment and consumer spending intentions through 2009.

"When financial firms pay more or profit less in their lending activity, the knock-on effects to non-financial firms and consumers can be quite long lasting. The combination of rising lending rates, tightening credit conditions and a dwindling share of internal funds available for investment spells trouble," said Drummond. Credit problems of today can act as a financial accelerator, whereby a shock is amplified or becomes long lasting by restricting firms through swings in their balance sheets and spending intentions.

Mounting job losses will put downward pressure on household income in the year to come. Meanwhile record deterioration in home prices alongside record oil and gasoline prices makes for a less inviting environment for consumer spending, especially now that the Federal Reserve is showing reluctance to provide any additional monetary stimulus due to inflationary pressures.

"Our belief is that instead of getting the traditional pent-up demand pop in consumer spending that typically follows a downturn, we will see a muted pace of spending through the end of 2009. The non-traditional number and magnitude of economic shocks assaulting the consumer don't suggest a traditional recovery," said Drummond.

The U.S. government will be sending out $117 billion in rebate cheques, which will boost real consumer spending by $60-70 billion annualized in each of the second and third quarters. However, this is a one-time impact. Once the cheques are spent, consumer spending will drop back to the status quo level, which means a negative quarter. The short-lived tax rebate won't change the view that annual growth in real personal income less government transfers will still be treading water at -0.4% by the final quarter of this year and remaining in the red through the first quarter of 2009.

Canada and BC to be pulled along with the ride

Canadian exporters, including the BC forest industry, will continue to feel the pain from the lingering U.S. economic weakness. Real GDP will expand at a 1.0% pace in 2008 and a 1.8% pace in 2009. Both of these estimates are at the low end of consensus estimates because of a more pessimistic U.S. outlook, and hence greater secondary effects to the Canadian market. Meanwhile, domestic demand growth will gear down in response to the tighter credit conditions and a softer job market.

Specifically, like the U.S., the cost of funding has risen dramatically. The Libor-OIS spread was blown out for Canadian banks following the credit turmoil that began last August. The wound has been healing, but slowly. The spread remained high at 20-40 basis points in June compared to a low and steady 3-5 basis point range in prior years. A sharp increase in medium-to-longer term funding costs has caused a tightening in credit conditions on this side of the border, which will have knock-on effects to investment and spending.

However, Drummond noted one critical distinction between Canada and the United States: "Canadians households have one good leg to stand on. They will not have to face deterioration in real estate wealth or a sharp slowdown in income growth. The same cannot be said of their American counterparts."

In particular, Canadian employers continue to churn out new job opportunities, providing a solid foundation beneath income growth. With five months of employment data already on the books, the dye has largely been cast on this front. Employers have been averaging 24,000 new workers per month, with hourly wage growth of permanent employees averaging 4.6% - the highest on record since 1997. With inflation holding below 2%, workers have had the benefit of a tidy real wage gain. Even with the expectation for softer job creation in Canada going forward (averaging about 5,000 positions per month), it will merely serve to restore wage growth to historical norms. As such, consumer spending should prove more resilient in Canada, averaging a quarterly annualized pace of 2.7% over the forecast horizon.

Drummond also said that "Although inflationary pressures are the 'flavour of the month' worrying financial market participants, we see the continued weakness in the U.S. and Canada containing inflation pressures. Nevertheless, the next move by both central banks will be to hike rates, but only after a long pause." The Bank of Canada and Federal Reserve are both expected to begin a tightening cycle in the second half of 2009.

Co-op Housing Needs Mean Construction Opportunities - June 13, 2008

The Co-operative Housing Federation of Canada celebrates its 40th anniversary with the publication of a new history of co-operative housing in Canada. Under Construction: A History of Co-operative Housing in Canada is a success story, built on the principles and perseverance of people who just wouldn't take no for an answer in their pursuit of a place for housing co-ops in Canada.

"A small but determined group got together to lobby for co-operative housing in 1968, and that has given birth to a powerful movement," says Nicholas Gazzard, CHF Canada's executive director. "It is an extraordinary fact that the calls for more co-operative housing in Canada are heard loudest from housing co-op members, who seek nothing for themselves but rather the advantage for others of what they already enjoy."

The official launch will take place at CHF Canada's annual general meeting in Toronto, on June 14, at the Westin Harbour Castle. Author Leslie Cole will speak to more than 700 housing co-op members from across Canada. There are more than 93,000 co-op homes in Canada, providing affordable housing for a quarter of a million Canadians. But the number of co-ops cannot meet the demand for affordable housing. Most co-ops have long waiting lists and the problem will become more acute as the government funding programs that help house low-income residents come to an end.

"Not only is there a need for more affordable housing but a new initiative to build these types of accomodations will provide continuing work for our members," said Mark Green, V.P. of Operations for the BCdex, the BC Construction and Landscaping Network. Green said that the single family dwelling boom at the turn of the century had become a multi-family dwelling boom as housing costs increased. He said it wouldn't be long before that market is satiated by those who are able to afford condos. "There is a growing number of low paid workers in our province who all need accomodation and government funding of co-op housing can go a long way towards solving this problem."

CHF Canada members are working with other organizations and calling on all levels of government to help the 4 million Canadians in core housing need. Delegates will not only celebrate 40 years of success, but examine current housing needs and make plans for the future.

No Change in Interest Rates - June 10, 2008

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3 1/4 per cent.

Since the April Monetary Policy Report (MPR), economic developments have been broadly in line with expectations. However, the balance of risks to the Bank's April projection for inflation in Canada has shifted slightly to the upside. Although the composition of U.S. growth has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected. At the same time, many of the downside risks to inflation identified in the April MPR have eased, while the evolution of credit conditions has been in line with expectations. The risk remains that potential growth will be weaker than assumed.

With the decline in first-quarter GDP, the Canadian economy is judged to have moved into excess supply, which is expected to increase this year. Consistent with the April MPR, the Bank continues to project that economic growth will pick up this year and accelerate in 2009, owing in part to a firming of U.S. demand and accommodative monetary policy in Canada.

If current levels of energy prices persist, total CPI inflation will rise above 3 per cent later this year. However, with the Canadian economy operating in excess supply, core inflation is expected to remain below 2 per cent through 2009. Both total and core inflation should converge on 2 per cent in 2010 as the economy returns to balance.

Against this backdrop, the Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target. There continue to be important downside and upside risks to inflation in Canada, which the Bank will monitor closely.

Housing Starts Up in May - June 9, 2008

The seasonally adjusted annual rate of housing starts was 221,300 units in May, up from 213,900 units in April, according to Canada Mortgage and Housing Corporation (CMHC).

“Housing starts in May moved up from the strong level posted in April. Most of the increase reflected a rise in single starts, which in April had reached their lowest level since May 2001,” said Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre.

In May the seasonally adjusted annual rate of urban starts edged up by 4.0 per cent to 192,800 units compared to April. Urban multiples rose 1.9 per cent to 116,100 in May, while singles increased 7.3 per cent to 76,700 units.

The seasonally adjusted annual rate of urban starts went up in all regions of Canada, except Ontario, which saw a decrease of 7.4 per cent to 67,600 in May. Urban starts increased to 8,900 units in Atlantic Canada, 44,100 units in Quebec, 36,800 units in the Prairies, and 35,400 units in British Columbia. In terms of single urban starts, all regions were up in May.

Rural starts were estimated at a seasonally adjusted annual rate of 28,500 units in May2.

For the first five months of 2008, actual starts in rural and urban areas combined were up an estimated 0.7 per cent compared to the same period last year. Year-to-date actual starts in urban areas have increased by an estimated 5.6 per cent over the same period in 2007. Actual urban single starts for the five months of this year were 14.8 per cent lower than they were a year earlier, while multiple starts increased by 22.7 per cent over the same period.

 

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