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Canada’s economy just came through the roughest patch since the recession, but still has “underlying momentum,” Bank of Canada Governor Mark Carney says.
The recovery in Canada is in “a very different spot” than that of the United States, Mr. Carney said Wednesday after releasing a report that said the third quarter was weaker than previously expected, and the next four quarters will also lag projections made in July. While acknowledging that the rebound has turned out to be more modest than the central bank anticipated, he urged households and businesses to stick to the long view and position themselves for when conditions in Canada, and around the world, pick up.
For households, that means remembering that today’s interest rates are far from normal and continually assessing whether their debt loads will be manageable once borrowing costs rise. For businesses, it means investing aggressively in machinery and equipment that will help them become more productive and competitive, to mitigate the fact weaker demand around the world and a strong currency could impede Canadian exports for years.
“The underlying momentum in the economy is there,” Mr. Carney later told reporters, adding it would be wrong to obsess about his estimate of 1.6-per-cent growth in the third quarter, the worst showing since the recovery started late last year.
“What we need to focus on, I would suggest, in Canada is the medium term, and getting productivity up, getting investment in place, making sure that household balance sheets are in a sustainable position.”
With many cash-strapped households already spending less as they trim their debt loads, and the U.S. economy too sluggish to put a dent into U.S. unemployment, the central bank said Canada’s economy won’t be operating at full tilt until the end of 2012 and the bank’s preferred gauge of inflation won’t be at its 2-per-cent target until then either.
The economy is expanding at a considerably slower pace than earlier this year, when output was buoyed by billions in government stimulus spending, companies were rebuilding depleted inventories, and newly confident consumers were buying homes and other big-ticket items.
Consumers piled up debt as they took advantage of record-low borrowing costs and rushed to get ahead of federal changes to mortgage rules and the onset of the harmonized sales tax in British Columbia and Ontario. First-quarter growth, for instance, came in at an annual pace of 5.8 per cent.
“People brought purchases forward, in particular in the housing market,” said Benjamin Reitzes, an economist with BMO Nesbitt Burns. “You’re getting the payback for that now.” For the entire year, the economy will grow 3 per cent, the bank said in its outlook, followed by 2.3 per cent in 2011 and 2.6 per cent in 2012. Those figures compare with the bank’s July forecast of 3.5 per cent this year, 2.9 per cent in 2011 and 2.2 per cent in 2012.
The central bank also cut its forecasts for the United States in each of those three years, and for the global economy as a whole in 2011 and 2012.
As a result, export growth will be slower than the central bank had anticipated, making it all the more pressing for companies to do what they can to increase their competitiveness. There is mounting evidence that companies now recognize this and are acting accordingly after business investment was a soft spot earlier in the recovery, Mr. Carney said.
“It is a difficult external environment,” Mr. Carney told reporters. “The renewed emphasis that Canadian businesses are putting on investment, on improving productivity, is absolutely appropriate, and that needs to continue through the next several years.”
As for household debt, the growth of credit taken out by Canadian families has already started to slow, but everyone from borrowers to authorities must “remain vigilant” so people don’t get too overstretched, Mr. Carney said.
“That responsibility starts with the individual; it starts with the household, it extends to the lender, and then ultimately goes to policy makers,” he said.
“We’re still living in relatively abnormal times, with respect to interest rates.” Indeed, Mr. Carney left his benchmark interest rate at a still-very low 1 per cent Tuesday after three consecutive increases.
Economists pointed to language in the quarterly outlook, which said the projections incorporate a gradual increase in borrowing costs, as a reminder that the central banker maintains a tightening bias and will raise rates as quickly as conditions allow.
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Economy too fragile for rate hike, bank says
October 19, 2010 09:10:00
Madhavi Acharya-Tom Yew
Business Reporter
The Bank of Canada sees slower growth on the horizon and has no plans to raise mortgage interest rates in the short term.
The central bank left its trend-setting policy Edmonton mortgage rate at one per cent today, which means that consumers will not be paying more for car loans and credit.
Canada’s economy will likely grow by only 3 per cent this year, the bank said, mostly due to a strong start in the first three months of 2010. That’s down from the 3.5 per cent projection it made in July.
It forecast growth of 2.3 per cent for 2011, down from 2.9 per cent.
“This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending,” the bank said.
Bank of Canada governor Mark Carney has the difficult task of balancing a fragile economic recovery with mounting household consumer debt. Economists worry that prolonging lower interest rates could prompt even more borrowing.
The recovery in the U.S. will also be weaker than initially projected, while growth in emerging market economies will also slow to a more sustainable pace.
“Heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted and difficult global recovery,” the bank said.
Inflation in Canada has been slightly below the Bank’s July projection.
The bank also revised its language about when to expect future Edmonton mortgage rate hikes, a signal it may stay put for some time.
“The message is in line with our thinking that the Bank of Canada is now on pause until the middle of next year,” CIBC World Markets economist Krishen Rangasamy wrote in a research note.
TD overhauls mortgage program as housing market slows
TD Bank (TD-T74.330.520.70%) is revamping its mortgage program, making it easier for homeowners to tap into their equity and harder for them to switch to another lender when their mortgages come up for renewal.
At the heart of the overhaul is a switch to collateral-charge mortgages, which are similar to lines of credit. The bank is encouraging employees to approve customers at 125 per cent of a home’s actual value under certain circumstances, so the homeowner can easily borrow more money if their property increases in value.
Unlike traditional mortgages, the collateral mortgages are difficult to transfer from one lender to another, because they must be paid in full to be cancelled. That means if someone wants to change lenders, they need to renegotiate from scratch.
While other banks offer variations on the collateral mortgage, TD is the first to switch exclusively as of Oct. 18. Existing mortgages aren’t affected by the change.
The bank’s move comes as the housing market cools and fewer Canadians apply for mortgages. It’s an attempt to entice buyers who expect to tap into rising values and don’t plan to shop around for better rates in the future.
Competition for new business is intensifying; record low mortgage rates weren’t enough to stop a slowdown of new buyers in the market during the summer. Sales fell by more than 30 per cent in Toronto and Vancouver, sending lenders scrambling to secure new business with innovative products and even lower rates.
Bank of Montreal currently offers the least expensive five-year fixed term at 3.59 per cent, although only its best applicants are likely to qualify at the special rate. Bank of Nova Scotia offers its customers the ability to split mortgages into two or three different components, each with its own terms.
TD said its new offering will ensure customers don’t pay additional charges to tap into their rising equity, which it called “great news for both you and your customer” in an internal memo to its mortgage brokers.
“Customers may under many circumstances choose to register their collateral charge for more than the approved principal amount of the mortgage, up to 125 per cent of the property value,” the e-mail stated. “This will allow them to borrow additional funds in the future without having to re-register … eliminating any solicitor and in-house registration fees.”
A homeowner can’t simply call the bank and access the extra money they were approved for, however. The deal is dependent on values rising, and in each instance the bank said it would need to inspect the home.
“Part of our credit approval includes an assessment of the current value of the property – an appraisal of the property – to ensure the existing value can support the increased borrowing,” said spokesperson Kelly Hechler.
The move has sparked anger among the country’s independent mortgage brokers, who see the change as a direct shot at an industry that has been gaining market share from the big banks by competing fiercely on mortgage rates.
“Credit unions have always gone this route so it’s not like they are reinventing the wheel,” said Mike Averbach of Vancouver’s Averbach Mortgages. “People literally have to cash out if they want to change over, so it’s just another way for them to be handcuffed to the bank.”
Bank of Canada governor Mark Carney signaled Thursday a slowing of the bank’s recent effort to tighten monetary policy.
In a speech in Windsor, Ont., Carney said that given the risks of a renewed U.S. slowdown and amid slow consumption and housing activity in Canada, “any further reduction in monetary policy stimulus would need to be carefully considered.
Bank of Canada governor Mark Carney says ‘any further reduction in monetary policy stimulus would need to be carefully considered.’(Sean Kilpatrick/Canadian Press)
“The unusual uncertainty surrounding the outlook warrants caution.”
Carney’s remarks came the same day new data showed Canada’s gross domestic product shrank by 0.1 per cent in July, the first time it has contracted in 11 months.
The Bank of Canada has raised interest rates — described as tightening monetary policy — three times in the past four months, most recently on Sept. 8. The bank’s key overnight lending rate is currently 1.0 per cent.
Carney pointed out that during the same time in the United States, the Federal Reserve has held the policy rate at almost zero.
“While Canada’s circumstances and the discipline of the inflation target dictate a different stance than in the United States, there are limits to this divergence,” he said.
The recession may be over, he warned, but it’ll still a long road back to a strong economy.
Domestically, Canada’s relatively strong bounce-back from recession has been supported by housing expansion and personal consumption, two factors that can’t continue, Carney said.
Externally, he said, the world is facing a restructuring that could take 10 years and subdue growth in the advanced economies.
Even Canada’s supposedly strong jobs recovery is not as shining as it looks, he said.
The unemployment rate remains high at 8.1 per cent and many of the jobs created since July have come in the public service and what he called involuntary part-time work.
GDP decline predicted
The decline in the gross domestic product, which was announced Thursday, was in line with what economists were expecting, as the economy has been showing signs of a slowdown since the early stages of the government stimulus-led recovery in late 2009.
“The Canadian economy has lost much of its forward momentum, reflecting sluggish U.S. demand for the stuff we make and the payback for having home renovation activity and home sales pulled forward earlier in the year,” BMO economist Michael Gregory noted.
The Bank of Canada is expecting two per cent growth for the July-to-September period as a whole, but the central bank is set to update those forecasts at its next policy meeting on Oct. 21.
Speaking at an event in Ottawa, Finance Minister Jim Flaherty said he was neither surprised nor overly concerned by the negative showing.
“The month of July had a very small negative showing,” he said. “From time to time, there will be ups and downs in any economic recovery.”
He blamed the decline, in part, on the impact of the HST in Ontario, B.C. and to a lesser extent Nova Scotia. He also said Ottawa is confident the third quarter will show growth overall.
Finance Minister Jim Flaherty says July’s GDP drop was largely expected and not cause for undue alarm.(Sean Kilpatrick/Canadian Press)
“We’ve always said the recovery is fragile,” Carney said.
Manufacturing, retail and wholesale trade, construction and forestry all posted decreases.
“Consistent with faltering domestic demand and weak U.S. demand, manufacturing shipments fell the hardest in the month,” TD Bank economist Diana Petramala wrote in a note to clients.
Increases were recorded in the mining sector and, to a lesser extent, in some financial industries and the public sector.
“Although the GDP result comes as no surprise, that doesn’t make it feel any better,” Gregory noted.