April 28, 2011
Despite nagging worries, the world recovery is becoming entrenched
Alex Carrick
Chief Economist, CanaData
On April 12, to no one’s surprise, the Bank of Canada (BOC) kept its key policy-setting interest rate – the overnight rate – steady at 1.00%. In the press release setting out the rate announcement there were few variations on the outlook as seen by the BOC versus earlier assessments.
The “real” (i.e., inflation-adjusted) GDP growth forecast by the BOC for this year is +2.9%. That will be followed by GDP change of +2.6% in 2012 and +2.1% in 2013. The latter figure is said to represent potential output after post-recession full-capacity is realized again in mid-2012.
Inflation may reach 3.0% in the short term due to the geopolitically-caused run-up in oil prices. Also, new indirect taxes in several provinces will contribute to higher year-over-year price levels until July 2011. The HST was introduced in Ontario and B.C. on July 1, 2010.
By way of comparison, the International Monetary Fund (IMF) is projecting world economic growth this year will be +4.5% and the same again in 2012. There is a wide disparity, however, between developing nations and the advanced economies. Growth in the former is expected to average 6.5% per year in 2011 and 2012, while in the latter it will be around 2.5%.
The very low interest rate regime in Canada is continuing to provide considerable support to the housing sector. Canada Mortgage and Housing Corp. (CMHC) on April 8, announced March residential groundbreakings were 189,000 units annualized. That was the highest level so far this year, exceeding February’s 184,000 units and January’s 171,000.
Average home starts in the first quarter of this year were 181,300 units, a decline of 8.2% from the first quarter of last year at 197,500 units. That was not as big a drop as most analysts had been expecting. CanaData’s forecast of home starts nationally in 2011 stands at 175,000 units.
Single-family starts so far this year have been 29% lower than the same period last year, but multiples have been up 24%. The remarkable increase in multi-unit starts is based primarily in two cities, Vancouver (+49%) and Toronto (+97%). For good or bad and whether long lasting or not, the Toronto housing scene has shifted from the single-family home to a condo lifestyle.
In the first quarter of this year, there were more than three times as many multi-unit housing starts in Toronto as there were single-family starts. Vancouver multiple-unit starts were only half the volume of Toronto’s, but the multiples-to-singles ratio was an even higher five to one.
The Canadian dollar has been rubbing up against $1.05 U.S. This has been one of the factors holding back a more substantial improvement in Canada’s merchandise trade balance. In a Statistics Canada report on the international merchandise trade , in December, the surplus jumped to a healthy $36 billion, but it fell back to only $5 billion in January and then all but disappeared again in February, at only $400 million annualized. The surplus with the U.S., however, was a somewhat more typical +$55 billion in February.
The U.S. dollar reached its strongest value internationally on March 3, 2009. That was during the depths of the financial crisis. Investors scurried for safety, buying up the world’s one true reserve currency. The world recovery has become firmly entrenched over the past three quarters. As a result, money has shifted out of the U.S. dollar and into riskier investments. The value of the U.S. dollar versus a basket of international currencies has declined 17% over the past two years.
This has provided the U.S. with an advantage in export markets. But it has also meant that globally-set food and energy price increases have hit American consumers harder than in some other countries. The biggest impact has been on gasoline prices. This helps to explain the drop in U.S. consumer confidence despite an evident recovery in job prospects, finally.
The U.S. goods and services trade deficit in February fell to $550 billion annualized from $564 billion in February, according to the U.S. Bureau of Economic Analysis. The goods alone deficit was $712 billion, while services were in surplus to the tune of $163 billion. All figures are in U.S. currency. The services surplus in February was an all-time record. The U.S. is also having some success in lowering its foreign oil requirements. The quantity of crude oil imports into the U.S. in February, at 242 million barrels, was the lowest since February 1999.
Trade figures around the world will be influenced over the next many months (well into the fall, probably) by the aftermath of earthquake and tsunami damage in Japan. The most obvious example is in terms of auto parts required by Japanese assembly operations in other countries.
The extent of the radiation problem at the Fukushima plant has just been upgraded from an internationally indexed level of “5” to a “7”. This is a result of the latest assessment of the damage by Japan’s Nuclear and Industrial Safety Agency. The “5” reading had placed the seriousness level on a par with the 1979 Three Mile Island partial meltdown in Pennsylvania. The “7” designation upgrades the amount of likely radiation leakage to 1986’s Chernobyl status.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
Based on seasonally adjusted monthly figures, projected at an annual rate. Analysis of Canada's foreign trade position usually focuses on the Merchandise Trade Balance which is goods exports minus goods imports.
Statistics Canada
Chart: Reed Construction Data - CanaData.
Data source: U.S. Bureau of the Census
Chart: Reed Construction Data - CanaData.
