No Surprises From the Bank of Canada

As expected, the Bank of Canada refrained from cutting interest rates at today's policy meeting. The recent economic news has shown a marked improvement, precluding the Bank from following on the previous two rate cuts this year. The key policy overnight rate is only 50 basis points (one-half of one percentage points) and another 25 basis point (bp) cut would only reduce the Bank's ability to take action, if needed, in the future. The slowdown in the Canadian economy in the first half of this year had nothing to do with interest rates and had everything to do with the massive decline in oil prices. As the Bank has noted, "financial conditions are accommodative and provide considerable support to economic activity". In addition, a 25 bp rate cut would only translate into a 12-to-15 bp cut in mortgage and other consumer and business borrowing rates, as we have seen with the January and July cuts. The reason is the cost of funds for the lenders has risen relative to risk-free government five-year bond yields--normally linked to mortgage rates--as investors risk appetites have declined. This rise in so-called credit spreads reduces the stimulative effect  of any rate cut by the Bank of Canada.  Moreover, the interest-sensitive sectors of the Canadian economy--housing, autos and other durable goods purchases--are already booming. Business investment has declined sharply, but only in the oil patch, which would not be reversed by lower interest rates. Another rate cut would only encourage increased household indebtedness and, at the margin, make little difference.  The good news is that the U.S. economy has rebounded sharply from the first quarter slowdown, with second quarter growth of 3.7 percent surprising on the high side. This has helped to boost Canadian exports, particularly for autos and aircraft. As the Bank expected, the weaker Canadian dollar has spurred the demand for Canadian products in the U.S. and elsewhere. To be sure, the Chinese economy has slowed, putting downward pressure on certain commodity prices important to Canada's exports, but the pick up in the U.S. has finally provided a meaningful offset. The Bank of Canada is at last seeing the stimulative effects of its earlier rate cuts and is confident that the five-month decline  in economic activity has halted with the stronger-than-expected 0.5 percent growth in June. The increase in June was broad-based. Also, more recent data show a strong uptick in employment growth. Third quarter GDP growth is in train to meet or exceed the Bank's forecast of 2.5 percent, a welcome reversal of the first-half slide.  While core inflation has been about 2 percent, the Bank judges that the underlying trend in inflation remains at about 1.5 to 1.7 percent.  To be sure, the heightened volatility in financial markets, the slowdown in emerging economies and the potential further decline in oil prices will keep the Bank ever watchful. If the rebound in economic activity peters out later this year, which I doubt, the Bank will act quickly to cut rates once again. The next policy announcement date is October 21, just two days after the Federal election.

Dr. Sherry Cooper Chief Economist, Dominion Lending Centres drcooper@dominionlending.ca

Bank of Canada Interest Rate Decision

 The Bank of Canada announced this morning that it is maintaining its target for the overnight rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that inflation continues to evolve in-line with the Bank of Canada's forecast while economic activity continues to be underpinned by solid household spending and strong demand from the US economy. 

With the economy seemingly improving and core inflation still holding firm near the Bank's 2 per cent target, policymakers opted to stay the course and allow recent loosening of monetary policy to work its way through the system.  We expect that growth will pick-up in the second half of the year, helped out by an acceleration of the US economy and stable oil prices.  That should translate to no further action by the Bank of Canada in 2015, though recent volatility in global financial markets could prompt a shift in thinking.  That said, central banks prefer to avoid bringing interest rate close to the so-called zero lower bound. Therefore, in the absence of a major financial or economic shock, the Bank will likely hold rates constant until a healthy and sustainable rate of economic growth resumes. 

Copyright BCREA - reprinted with permission 

Economic Uncertainty Prompts Modest Decline in CLI

The BCREA Commercial Leading Indicator (CLI) declined in the second quarter by 0.4 points to 120.6, the first decline in the index since the beginning of 2014. However, due to strong gains over the past four quarters, the trend underlying the CLI continues to push higher.

“Uncertainty in the global economy roiled financial and commodity markets in the second quarter,” said BCREA Economist Brendon Ogmundson. “However, BC’s nation leading economic growth should help to sustain commercial real estate activity through the end of the year.”

The CLI trend smooths the often noisy economic data that comprises the CLI index and is therefore a more reliable indicator of future growth in investment, leasing and other commercial real estate activity. Therefore, the continued rising trend in the CLI still points to positive growth, despite this quarter’s slight downturn in the index.

Copyright BCREA - reprinted with permission

Canadian Economic Growth

As was widely expected, the Canadian economy contracted in the second quarter, declining 0.5 per cent on an annualized basis following a 0.8 per cent contraction in the first quarter. A second consecutive quarterly decline fits what some call the technical or statutory definition of a recession.

While some may quibble over whether the economy was in recession, technical or otherwise, economic growth was undeniably weak for the first five months of the year. However, the downturn was quite modest compared to the severe recessions of the early 1990s or the 2008 financial crisis.

On a positive note, monthly GDP for June posted its strongest growth in over two years, breaking a string of 5 straight monthly contractions and surging 0.5 per cent on a monthly basis. Moreover, export growth contributed positively to GDP in the second quarter after posting a sharp decline to start the year and consumer spending continues to be robust. We expect that the Canadian economy will continue to accelerate into the third and fourth quarter with real GDP growth for the year registering just over 1 per cent.

Copyright BCREA - reprinted with permission

Canadian and US Employment

Canadian employment increased by 12,000 jobs in August, following essentially flat employment in July. The national unemployment rate ticked higher by 0.2 points to 7 per cent as more people actively searched for work. Total hours worked, which is strongly correlated with economic growth, increased a strong 2.1 per cent compared to August 2014.  In BC, employment rose by 3,100 jobs including 16,900 full-time positions while part-time work declined by13,900.  The provincial unemployment rate held steady at 6 per cent. Year-to-date, employment in BC is up 0.7 per cent compared to 2014 but has accelerated to 1.3 per cent over the past three months. 

In the United States, payroll employment continues to trend a a relatively strong rate, rising by was up by 173,000 jobs while the unemployment rate held steady fell 0.2 points to 5.1 per cent, its lowest level since 2008. Over the past three months, US job growth has averaged a robust 221,000 jobs per month.

Copyright BCREA - reprinted with permission 

BC Home Sales to Reach 100,00 Units in 2015

The British Columbia Real Estate Association (BCREA) released its 2015 Third Quarter Housing Forecast Update today.

For only the third time in BC, Multiple Listing Service® (MLS®) residential sales are expected to reach 100,000 units in 2015. Housing demand has not been this robust since 2007 when 102,800 homes traded hands. A record 106,300 MLS® residential sales were recorded in 2005.  

“While rock-bottom mortgage interest rates and BC’s nation leading economic growth are underpinning demand, consumer confidence is the key driver of the near record activity,” said Cameron Muir, BCREA Chief Economist.  

Strong consumer demand has drawn down the inventory of homes for sale to their lowest level in nearly eight years. As a result, sellers’ market conditions are prevailing in many communities and causing home prices to be pushed higher. The average MLS® residential sales price in the province is forecast to climb 10 per cent to $626,000 this year.  An increase in new construction activity and a higher proportion of condominium purchases is expected to limit growth in the average home price to 2.5 per cent in 2016.

Copyright BCREA - reprinted with permission 

Canadian Housing Starts

New home construction in Canada dipped 4.5 per cent from June to July to 193,000 units at a seasonally adjusted annual rate (SAAR).  The six-month trend in Canadian housing starts of 185,500 units SAAR was up slightly and is in-line with Canadian household growth. 

Housing starts in BC continued at a robust rate in July, rising to 36,500 units from an already strong 35,000 units SAAR in June.  On a year-over-year basis, housing starts increased 36 per cent with single-detached starts 3 per cent higher while multiple unit starts were up 54 per cent compared to this time last year. Year-to-date, total housing starts in BC are up 19 per cent. 

Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA were up 44 per cent year-over-year in July due to a 60 per cent surge in multi-unit starts. In the Victoria CMA, the rate of new home construction more than doubled compared to July 2014. Total housing starts in the Kelowna CMA were up 63 per cent year-over-year as strength in multiple unit starts overcame a second consecutive month of declining construction of single units. Housing starts in the Abbotsford-Mission CMA jumped 47 per cent compared to this time last year on broad strength in both single unit and multiple starts.

Copyright BCREA - reprinted with permission 

Canadian and U.S. Employment

Canadian employment was essentially unchanged in July as the economy created just 6,600 new jobs. The national unemployment rate remained unchanged for the sixth consecutive month at 6.8 per cent and total hours worked, which is strongly correlated with economic growth, increased 1.2 per cent compared to July 2014.  Employment is up 161,000 or 0.9 per cent compared to 12 months earlier. In BC, while employment was flat compared to June, full-time employment dropped by 15,700 jobs while part-time employment rose by a nearly equal number. The provincial unemployment rate ticked 0.2 points higher to 6 per cent. 
 
In the United States, payroll employment was up a healthy 215,000 jobs while the unemployment rate held steady at 5.3 per cent. Over the past three months, US job growth has averaged a robust 235,000 jobs per month. 

Copyright BCREA - reprinted with permission 

Canadian Retail Sales

Canadian retail sales rose 1 per cent in May, the third increase in the past four months. Strength in retail sales was broad based with rising sales in 9 of 11 retail subsectors.  In BC, retail sales were also up 1 per cent on a monthly basis and were up 8.3 per cent compared to May 2014.

Solid consumer spending could help push May's GDP report into positive territory, though growth in the Canadian economy is still tracking at negative 0.6 per cent for the second quarter. In BC, however, economic growth is tracking at a healthy rate of 2.5 per cent.

Copyright BCREA – Reprinted with Permission 

Canadian Consumer Price Inflation

The Consumer Price Index (CPI) rose 1 per cent in the 12-months to June, a slight acceleration from the 0.9 per cent inflation registered in May. Excluding  a 9 per cent decline in energy prices, CPI was up 2.1 per cent year-over-year. Inflation measured by the Bank of Canada's core CPI index, which excludes fuel, food and other volatile components, continued to trend above the Bank's 2 per cent target, posting and increase of 2.3 per cent in June.  In BC, inflation registered just 0.8 per cent in the twelve months to June.

Copyright BCREA – Reprinted with Permission