Canadian Monthly GDP Growth (January 2014)

The Canadian economy grew 0.5 per cent in January, bouncing back from a largely weather induced dip in output in December. At the industry level, growth was led by rising output in the manufacturing industry as well as lesser contributions from mining, oil and gas, and construction.  Economic growth was expected to slow in the first quarter of 2014, and with today's release, our quarterly tracking estimate is indicating that real GDP will slow to about 2 per cent from 2.9 per cent in the previous quarter. The stronger than expected start to the year has sent Canadian bond yields modestly higher, though not enough to put any pressure on mortgage rates.

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Canadian Manufacturing Sales

It was a strong start to the year for the Canadian manufacturing sector as sales rose 1.5 per cent in January.  The increase in sales was the largest since February of 2013. Sales were higher in 12 of 21 manufacturing sub-sectors.

In BC, manufacturing sales rose 3.3 per cent from December and were 4.2 per cent higher than in January 2013.  The durable goods sector, which includes wood products, mineral products and machinery and equipment manufacturing, posted a 5.3 per cent monthly increase. Non-durable goods like paper, clothing, and food manufacturing, rose 2.4 per cent. The increase in manufacturing sales was the highest since March 2011. The strong start to the year may be early signal that the economy is on better footing in 2014, following two years of lackluster growth.

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February Home Sales Edge Lower

The British Columbia Real Estate Association (BCREA) reports that a total of 5,578 residential sales were recorded by the Multiple Listing Service® (MLS®) in February, up 24.9 per cent from February 2013. Total sales dollar volume was $3.4 billion, an increase of 43.1 per cent compared to a year ago. The average MLS® residential price in the province rose to $611,688, up 15.4 per cent from the same period last year.

  

"Consumer demand was much stronger in February compared to a year ago, but edged lower compared to January,” said Cameron Muir, BCREA Chief Economist. “Weak employment growth in 2013 has limited home sales so far this year to long-term average levels."

"Record low mortgage interest rates and population growth continue to underpin the housing market and most regions of the province are at or near balanced market conditions,” added Muir.

Year-to-date, BC residential sales dollar volume was up 10.1 per cent to $36.7 billion, compared to the same period last year. Residential unit sales were up 6 per cent to 68,510 units, while the average MLS® residential price was up 3.8 per cent at $535,411.

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The March issue of Mortgage Rate Forecast is now available on BCREA Online.

Highlights:

·         Five-year qualifying mortgage rate at record low

·         Canadian economy set to post stronger growth

·         Lower loonie helping to spur inflation

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Canadian Housing Starts

Canadian housing starts registered 192,094 units at a seasonally adjusted annual rate (SAAR) in February, a 6.4 per cent increase from January.  The trend in Canadian new home construction also increased slightly to 192K units SAAR over the past six months, a rate that is close to the level that demographic demand suggests is needed.  

New home construction in BC urban centres dipped almost 12 cent in February to 22,730 units SAAR. However, on a year-over-year basis, housing starts rose 7 per cent compared to February 2013. Single-family starts rose 9 per cent while multiple units were up 6 per cent.

Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA were up 6 per cent year-over-year in February, led by a 10 per cent increase in multiple units. In the Victoria CMA, total starts were just half the level observed in February 2013 due to relative inactivity in the multiple sector. New home construction in the Kelowna CMA was up 64 per cent year-over-year on broad strength in both single and multiple unit starts.   Housing starts in the Abbotsford-Mission CMA were sharply lower on a year-over-year basis in February, though the large year-over-year decline was due to an unusually strong month for multiple units last February.

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Canadian and US Employment

Total employment in the Canadian economy was little changed in February following a strong January that saw growth of 29,000 jobs. Total employment was up 0.5 per cent compared with February of 2013 and the Canadian unemployment rate remained at 7 per cent.

After a positive start to the year, BC gave back January's job gains and then some. Total employment fell by 10,400 jobs in February. The losses were evenly split between full-time and part-time employment.  The provincial unemployment rate was unchanged at 6.4 per cent.

In the United States, payrolls grew by 175,000 jobs, while December and January job gains were revised higher by a combined 25,000 jobs. The US unemployment rate moved up a tick to 6.7 per cent.  Over the past three months, job growth has averaged 130,000 in the United States. While not robust, that pace of job growth is probably not enough to dissuade the Fed to slow or pause its tapering of bond purchases. As the Fed continues to pull back, we anticipate modestly higher long-term interest rates in both the US and Canada.

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Canadian Building Permits

Canadian building permits rose 8.5 per cent in January to a total of $7 billion. The increase was led by higher residential construction intentions, which offset a decline in the non-residential sector.

Construction intentions in BC recovered from a weak December, jumping 32 per cent month-over-month and 21 per cent year-over-year in January. Residential permits rose 29.6 per cent on a monthly basis and 19.2 per cent year-over year while non-residential permits were up 43.2 per cent over December and 26.2 per cent year-over-year.

Building permit activity was up in all of BC's four major census metropolitan areas (CMA) in January. In the Abbotsford-Mission CMA, permits increased 63.9 per cent on a monthly basis and 34.5 per cent year-over-year.  Construction intentions in the Victoria CMA more than doubled from December lows and were up 16.3 per cent year-over-year. In the Kelowna CMA, permits increased 12 per cent from December and were 68.2 per cent higher than January 2013.  Finally, in the Vancouver CMA  a sharp increase in building permits erased last months decline, as construction intentions rose 30.5 per cent cent month-over-month and 19.8 per cent year-over-year.

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Bank of Canada Interest Rate Announcement

The Bank of Canada announced this morning that it is maintaining its target for the overnight rate at 1 per cent. In its accompanying statement, the Bank noted that the economy is preceding largely on the path the Bank projected in its January Monetary Policy Report. While inflation and growth were slightly higher than expected in the fourth quarter of 2013, the Bank expects slack in the economy to keep inflation below the Bank's 2 per cent target this year. The Bank does not view the risks associated with elevated household imbalances as materially changed and judges the current stance of monetary policy, with the overnight rate at 1 per cent, as appropriate.

Speculation of an impending rate cut by the Bank of Canada has receded in recent weeks following a modest acceleration of inflation and stronger than expected economic growth. The uptick in inflation and growth is in part due to a sharply lower Canadian dollar and, while not explicitly targeting a lower value of the loonie, policymakers at the Bank have welcomed the decline in the dollar. A depreciation in the currency tends to be inflationary and impacts consumer prices in fairly short order while traditional monetary policy, through adjusting the overnight interest rate, impacts inflation only with a significant lag of 12 to 18 months.  With the lower loonie helping to pull inflation higher, we expect the Bank will likely maintain its target rate at 1 per cent until 2015 when economic conditions may require a gradual increase in the overnight rate.

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Canadian Real GDP Growth

The Canadian economy grew 2.9 per cent at an annual rate in the fourth quarter, and 2 per cent for all of 2013. Growth was led by strong household consumption expenditures and an uptick in exports of goods and services. However, an accumulation of business inventories also contributed significantly to growth in the fourth quarter, which may reverse to start 2014.

The Canadian economy grew at a robust average rate of 2.8 per cent in the second half of 2013. Stronger growth, along with the recent acceleration in inflation and a steep decline in the loonie, will likely quiet speculation of a Bank of Canada rate cut. We are forecasting that the Canadian economy will further improve in 2014 growing 2.5 per cent with the Bank of Canada on the sidelines until 2015.

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