Tuesday, June 10, 2014

Monday, June 9, 2014

Canadian Real GDP Growth

The Canadian economy expanded at a disappointing 1.2 per cent at an annual rate in the first quarter or 2014. Growth was dragged lower by a slowing in household consumption as well as a decline in business investment and exports. The latter was at least in part caused by a sharp slowdown in the US economy in the first quarter.

In spite of a weak start to 2014, we expect the Canadian economy will accelerate this year.  The setback in the US economy in the first quarter was largely the result of severe winter weather, and recent job growth and other indicators point to a sharp reversal in growth in the second quarter.  As the US economy expands, the Canadian economy should gain momentum, fueled by higher exports and business investment. For now, weakness in first quarter economic growth likely offsets the recent rise in inflation in the minds of policymakers at the Bank of Canada.

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Bank of Canada Interest Rate Announcement

The Bank of Canada announced June 4, 2014 that it is maintaining its target for the overnight rate at 1 per cent.  In its accompanying statement, the Bank noted that total CPI inflation has reached its 2 per cent target sooner than the Bank had forecast due to higher energy prices and a lower Canadian dollar. On economic growth, the Bank expects an improvement in exports in the second half of the year as well as strengthening business investment and a soft landing in the housing market. The Bank judges that the balance of risk in the Canadian economy is weighted modestly to downside risk to inflation.

Inflation in Canada has started to move materially higher in recent months, driven by a substantial increase in energy costs.  At the same time, the Canadian economy has posted disappointing growth due to slowing household spending and a drag on exports from weakness in the United States.  However, as the Bank noted in its statement, there are good reasons to believe that both of these trends will prove temporary.  Much of first quarter economic weakness was due to unusually severe winter weather which kept consumers at home and construction projects delayed.  As the weather warms up, we anticipate a rebound in growth in the second quarter. As for inflation, the impact of higher energy prices on headline CPI should fade in coming months and the Bank has already suggested it will look past the transitory increase in inflation. However, there does seem to be some underlying momentum in core CPI, which if sustained will be much harder for the Bank to ignore. For now, we anticipate the Bank will remain in neutral, leaving rates unchanged until 2015.

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Canadian Building Permits

Canadian building permits broke a string of two monthly declines, rising 1.1 per cent in April.  The increase was the result of higher construction intentions in the residential sector, which offset a decline in non-residential permits. 

Construction intentions in BC tumbled 20 per cent month-over-month and close to 31 per cent year-over-year in April. The dollar value of residential permits fell 14 per cent on a monthly basis and 32.5  per cent year-over year while non-residential permits were down 32 per cent from March and 26  per cent year-over-year. In unit terms, residential permits fell 26.5 per cent due to weakness in multiple unit permits. 

Building permit activity was down in most of BC's four major census metropolitan areas (CMA) in April. After more than doubling last month, permits in the Abbotsford-Mission CMA moderated 7.8 per cent in April and were down 21 per cent year-over-year.  Similarly, construction intentions in the Victoria CMA fell 53 per cent in April following a large increase in March. In the Kelowna CMA, permits increased 8.5 per cent on a monthly basis and but were down 35 per cent compared to April 2013.  Finally, in the Vancouver CMA, permits fell 25  per cent on a monthly basis and were down 41 per cent year-over-year.

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Canadian Housing Starts

Canadian housing starts rose about 1 per cent in May to 198,324 units at a seasonally adjusted annual rate (SAAR).  The six-month trend in Canadian new home construction is more or less stable at 184,400 units SAAR. That level of construction is approximately in-line with Canadian household growth.

New home construction in BC urban centers increased 12 per cent on a monthly basis to 27,950 units SAAR. On a year-over-year basis, housing starts were up 32 per cent compared to May 2013. Single-detached starts rose 20 per cent while multiple units were up 37 per cent.

Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA were up 34 per cent year-over-year in May. The increase was driven by a 47 per cent rise in multiple units over last year while single-detached units rose 5 per cent. In the Victoria CMA, total start jumped 151 per cent year-over-year as multiple unit construction was over five times the rate of construction in May 2013. New home construction in the Kelowna CMA was also sharply higher, rising 90 per cent year-over-year due  to strong gains in both single and multiple unit starts. Housing starts in the Abbotsford-Mission CMA rose 9 per cent year-over-year in May as singles rose 17 per cent and multiple unit starts were up 8 per cent.

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