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September 1, 2012
CALGARY, AB, Sep 1, 2012/ Troy Media/ – Are Canadian corporations sitting on too much cash? Bank of Canada Governor Mark Carney said as much in a recent speech. Statistics Canada released data this week showing how much Canadian corporate cash and deposit balances have grown. Relative to the second quarter of 2007, cash balances at non-financial corporations have jumped 70 per cent to $458 billion.
Corporations hold cash for a variety of reasons and the financial crisis provided yet another: the pre-cautionary demand for funds, should other funding sources be shut off. In any respect, there is currently over $150 billion more on corporate balance sheets than the trend would normally dictate, so getting even part of it flowing again would be a serious boost to GDP growth in Canada.
One of the most reliable and closely watched indicators of economic activity is the quarterly national accounts, which measures the gross domestic product. Yesterday we learned that the Canadian economy keeps chugging along – slowly but surely.
The total value of all goods and services produced in the Canadian economy grew by 1.8 per cent in the second quarter of 2012 (adjusted for inflation), according to the latest release from Statistics Canada. That slightly exceeded the 1.6 per cent expansion predicted by a consensus of economists.
Speaking to the media yesterday morning, Canada’s Finance Minister, Jim Flaherty, said: ‘We have now witnessed four straight quarters of economic growth. While the growth is modest, it reinforces Canada’s positive economic track relative to other countries. Indeed, Canada continues to have the strongest economic growth of all of the G7 industrialized countries.’
There is no quarterly breakdown available for the provinces, but Alberta’s energy sector may have been one of the contributors to the country’s overall growth. Statistics Canada reports that ‘oil and gas extraction increased 1.0 per cent in the second quarter, as an increase in crude petroleum production was partly offset by a decrease in natural gas extraction.’
The relatively good news for the economy lifted the Canadian dollar yesterday morning, which was up almost half a cent against the U.S. dollar.
However, the growth will not be strong enough to convince the Bank of Canada to raise interest rates. With very little inflation pressure building, and only modest growth, there will be no appetite building at the Bank to hit the button on rate increases until well into 2013.
Canada continued to consume more from the rest of the world than it sold. The current account deficit hit $16 billion in the second quarter of 2012, 60 per cent higher than in the first quarter. The current account measures Canada’s sum balance of trade in goods and services as well as investment income.
The deficit insinuates that Canadians have more demand for foreign currency to conduct trade than foreigners do for loonies. So why, then, is the exchange rate moving above parity? It’s because foreigners still want Canadian debts and assets more than Canadians want foreign debts and assets. Given the state of public finances elsewhere in the world, this is probably not a surprising revelation. The irony, however, is that Canadian GDP, and public finances, will themselves be negatively impacted if Canada doesn’t use those borrowed funds productively.
The C.D. Howe Institute sponsors a panel of economists who take a particular interest in monetary policy, publishing the panel’s recommendations for upcoming Bank of Canada policy rate setting meetings. For the next two meetings the vast majority of panel members recommended keeping the overnight rate at its current 1 per cent. By six months many panel members would expect the central bank to start tightening monetary policy.
U.S. economic update
Economic growth in the United States came in slightly better than expected in the second quarter, at 1.7 per cent. This was down from 2 per cent in the first quarter. Most GDP components were slightly slower in the second quarter, which was expected, but net exports came in more positive and government spending decelerated less than it did in the first quarter.
U.S. housing continues to be a good news story, with the influential Case-Shiller Home Price Index increasing 1.2 per cent on a year-over-year basis in June, the first time the indicator has turned positive since the 2010 home-tax buyer credit. The Case-Shiller index measures the change in home prices that have been sold at least twice.
In other news economic news, U.S. personal consumption expenditures and disposable income for July came in fairly strong, increasing 0.4 and 0.3 per cent, respectively. This was the fastest consumption expenditures increased in five months. On a less optimistic note, new jobless claims benefits have remained relatively flat, indicating that employment has yet to pick up significantly enough to reduce the unemployment rate.
Debating whether or not the housing market is overvalued has dominated the headlines for the past year. The majority opinion has been that, nationally speaking, it might be slightly overvalued (perhaps by as much as 10 per cent), but that no major correction was anticipated. This week a report by Genworth, the nation’s second largest mortgage insurer, in conjunction with the Conference Board, had a decidedly more optimistic take on the market.
According to the report the condominium market is likely to pick up steam in the coming years, especially in Alberta. The condominium market in this province is expected to see prices ticking up 3.2 per cent next year in Edmonton and 2.9 per cent in Calgary. A big reason why the authors are more bullish on condominiums is the affordability option that they provide and the downsizing trend expected by retiring baby boomers.
This week canola prices continued to hover above $630/tonne, well above the golden crop’s level of about $500.tonne it traded at at the beginning of the year. One reason why the crop has jumped of late was a report from Statistics Canada announcing that the yield on this year’s crop would be slightly below expectations. Canada is the world’s largest canola exporter.
Another factor has been very strong soybean prices, which is a close substitute to canola for many uses. Current soybean prices are hovering around $17/bushel, up from about $12/bushel at the beginning of the year. Not only has the American soybean crop been damaged by drought conditions, but it is feared that Hurricane Isaac might cause further damage. Crop sowings in South America, the world’s other major producer of the crop, is also off to a poor start.
| ATB Financial
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