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June 2, 2012
EDMONTON, AB, Jun 2, 2012/ Troy Media/ – The good news is the economy is still expanding. The bad news is the economy is not expanding as fast as many had hoped.
According to Statistics Canada, the Canadian economy grew by 1.9 per cent in the first quarter of 2012. In most European countries right now 1.9 per cent would be greeted enthusiastically, but this is well below the 2.5 per cent expansion expected by the central bank in its most recent forecast.
Contributing the most to the expansion was higher investment by business in both inventories and new capital equipment which, between them, contributed well over half of total growth in the quarter. The remainder came from household consumption.
Government spending and Canada’s worsening trade position, the two other components of GDP, both acted as drags on economic growth.
Higher levels of business investment is exactly what government officials have been calling for as it lays the groundwork for future growth and prosperity. But some caution should be exercised in reading too much into the numbers. Residential construction counts as business investment, not household consumption – so a pretty big chunk of the increase in business investment represents condo towers and not machinery and equipment.
Monthly data was also released yesterday by Statistics Canada. Of interest to Alberta was the slowdown the numbers showed in the oil and gas industry, which was down 2.4 per cent in March relative to February. The decline largely reflects seasonal effects, however, such as maintenance and break-up.
Canada’s changing demographics
Canada’s getting older, according to Statistics Canada’s latest data on age and sex, released this week. The 2011 census also highlighted how the demographic shift is impacting the provinces differently.
A common way to look at the aging profile in Canada is to compute the dependency ratio. This is the ratio of people too young to work and retired divided by the working age population. An increasing ratio indicates that the taxes being raised are spread over fewer workers.
Alberta has, by far, the most favourable dependency ratio in the country. This means that the per capita tax burden is lower. Manitoba and Saskatchewan have fairly high ratios, but a relatively high proportion of the population in these provinces is under 15 (about 19 per cent). In Atlantic Canada and B.C., the situation is reversed, with a higher per centage of the population being over 65 than being under 15.
It looks like Canadians are planning to pay off their mortgages sooner – rather than later. And they’re also locking into fixed mortgage rates. This news came from the spring 2012 annual survey of Canadian homeowners sponsored by The Canadian Association of Accredited Mortgage Professionals (CAAMP).
According to the CAAMP survey, 23 per cent of Canadian mortgage holders planned to make voluntary payments, averaging about $400 to 450/month. When the data was broken down, it showed that a disproportionate amount of households who were voluntarily making higher payments, were households which purchased their home more recently and tended to have extended mortgage amortization periods. With respect to fixed versus variable interest rates, the survey found 65 per cent of mortgage holders chose fixed, of which a substantial proportion locked-in to their fixed rate recently (about 14 per cent over the past 12 months).
The data indicates that households may have been ignoring all of the debt warnings as the ever rising debt to income ratio would indicate. A nice thing about longer amortization periods and making additional payments when you can is that a household can absorb a shock when higher interest payments do arrive. That said, debt levels remain elevated despite our professed aspirations of being prudential in our borrowings, meaning it will continue to be the number one economic stability risk in Canada for the coming years.
Many of the American housing market indicators have been looking fairly bullish over the past couple months. This month, however, there was a bit of a hiccup. Pending home sales data declined for April, with the index dropping 5.5 per cent from March. Pending home sales are homes that are under contract to be sold. It’s a leading indicator for future sales figures and the health of the industry.
The drop in activity wasn’t entirely unexpected, as many analysts believed the warm weather had caused many buyers to bring purchases forward. That is to say, it was widely believed that some sales that otherwise would have occurred in April or May were occurring in March instead. It’s also worth noting that, despite the drop in activity in April over March, if we compare the activity to the spring of 2011, April’s numbers came in strong.
Canada’s trade situation worsens
Statistics Canada released Canada’s balance of payments data this week, showing that the current account deficit expanded by $0.6 billion in the first quarter of 2012. Canada hasn’t had a positive recording on the current account since the third quarter of 2008. For all the talk of energy and commodity shipments being sent to the rest of the world, the fact of the matter is that Canada’s trade in goods only offsets the level of imported goods. When it comes to trade in services (like royalty payments and engineering services) Canada records rather large deficits.
Countries can live beyond their means for a surprisingly long time, but they can’t do so indefinitely. At a certain point, surpluses have to be recorded and sometimes this is facilitated by a weakening of the exchange rate.
Much of the economic news coming out of the United States has been relatively positive, but May’s weak employment numbers provided a shock. According to the Department of Commerce, the U.S. economy added only 69,000 jobs last month. The unemployment rate remained unchanged at 8.2 per cent.
Given the dysfunction in Europe and a slowing Chinese economy, a lot was riding on the U.S. economy rebounding. Three consecutive months of poor employment numbers is beginning to cast some cold water on that hope.
Rail: Western Canada’s transportation
As a commodity producer, Canada needs to get its product to market and rail transportation is a pretty efficient way to do that for many industries. According to Statistics Canada, the western industries that are most dependent on railway transportation are wheat, coal, canola and potash – between them they account for 50 per cent of all rail car loadings.
According to Statistics Canada, March’s car loadings for all of Canada were up slightly by 5 per cent, over February, but they were down marginally (1.1 per cent), over March of 2011. There were noteworthy increases in the exports of wheat and canola out of Western Canada, however, which were up 37.7 per cent and 26.5 per cent over this time last year.
April’s Teranet housing price index was released this week. The latest housing price index showed home prices across the country still growing at a healthy clip. Across the country prices increased 5.9 per cent year over year, mostly as a result of the 10.2 per cent jump in prices in Canada’s largest city, Toronto. Price increases were far more modest in other regions of the country.
The Teranet Survey shows that home prices in Alberta’s major centres, Edmonton and Calgary, are both flat. In both Edmonton and Calgary, prices were up 1.9 per cent year over year in April, yet since January the price of homes in both cities are down – 0.22 per cent down in Calgary and 0.75 per cent in Edmonton. In both cities, the price of a typical single detached home, which is what the index is tracking, hasn’t really changed much since 2009.
| ATB Financial
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