August 2010 Canadian Economic Fundamentals

[Ally]

Canadian leading indicator slows in July

OTTAWA — A key barometer of Canada`s economic performance slowed in July, due mainly to declines in the housing sector, Statistics Canada said on Thursday.

The federal agency`s composite leading indicator advanced 0.4 per cent during the month, following a revised gain of 0.7% in June. Most economists had expected a rise of 0.6% in July.

The housing index fell 4.1% last month, as both housing starts and sales declined.

"The slump in house sales was reflected in a 0.6% drop in furniture and appliance sales," the agency said. "Demand for other durable goods posted a fifth straight decline."

Manufacturing continues to "gain steadily," the agency said. New orders for durable goods rose 2%, the sixth straight increase.

The growth in manufacturing is consistent with continued growth in the U.S. leading indicator, the agency said.

Read the full article here.

 

[Ally]

Quebec lags in prosperity, wealth creation

MONTREAL - Quebec ranks last among Canada`s four largest provinces in several key areas of wealth creation and desperately needs to reverse the situation ahead of a coming demographic time bomb, the province`s main employer group is warning.

The Quebec Employers Council on Monday released its inaugural report card on Quebec prosperity and concludes that the province receives a C grade overall based on measures of quality and availability of labour, cost of human capital, regulation, public finances and the general business environment.

More troubling for the province`s corporate class and political elite, the research found that Quebec scored dead last against Ontario, Britsh Columbia and Alberta in several crucial indicators.

For example, it has the highest percentage of young adults lacking a high school diploma and not attending school, at 11.9%. B.C. had half that rate as of 2009.

It has the more burdensome regulatory regime, with companies supplying 29 administrative documents on average per year compared to 23 per year in Ontario.

It also has the lowest entrepreneurial intensity, as measured by the ratio of business owners and self-employed workers to total employment as well as the ratio of the number of companies to population.

Read the full article here.

 

[Ally]

Employee commutes sending businesses away from downtown: Survey

Traffic and demand for public transit is leading businesses to consider locating in so-called "B" class office buildings outside of Toronto`s downtown core, says a new study.

The survey from Evton Capital Partners, an investment and property management firm focused on acquiring B-class commercial properties, found 43% of Torontonians would likely change their place of employment to cut their commute. Another 45% rank the ability to take public transportation to work as an important factor in accepting a job.

Office space is generally divided into A, B and C class buildings with A considered the highest quality and most desirable to locate in and usually located in the central core.

"As the city`s population continues to experience burgeoning growth, there is an increasing need for employers to consider where their employees live, and how they commute to their workplace," said Bill Evans, co-founder of Evton Capital Partners.

Read the full article here.

 

[Ally]

Hard times for stimulus skeptics

New York Times columnist David Brooks has a tough job these days. A conservative who is skeptical of government efforts to manage the economy, he has to write about economic issues on the same page as Paul Krugman, a liberal who is not at all skeptical about such efforts and who also happened to win the Nobel Prize in economics in 2008.

Krugman believes the U.S. economy won`t emerge from the doldrums without further fiscal stimulus, an argument he put to the Canadian Bar Association last weekend in Niagara Falls, where he also attributed Canada`s shallower recession to our old-fashioned banking regulation and generally more humane economy.

More government economic stimulus essentially means more government debt. So how about it? Would more debt help or hurt a recovery that seems well established but lacks oomph.

Maybe you saw Brooks`s July 5 column analyzing the views of "the Demand Siders." The name "Krugman" appeared nowhere but it was impossible not to see who the column was about: "These Demand Siders have very high IQs, but they seem to be strangers to doubt and modesty. ... [They] write as if everybody who disagrees with them is immoral or a moron ..."

Read the full article here.

 

[Ally]

Dismal data cloud North American outlook

Investors hoping for a reprieve from the steady drip of dismal North American economic news didn`t find it Thursday.

A rash of weak numbers out of Canada and the United States had markets focused once again on the frailty of the U.S. economic recovery and its potential impact on Canada.

Equities quickly turned tail on what had so far been a strong week, and the Canadian dollar lost more than a cent, as data suggested slower rate hikes ahead.

In the U.S., there was no relief on the jobs front -- and prospects for improved consumer spending -- despite hopes the number of initial weekly claims for jobless benefits would ease.

Read the full article here.

 

[Ally]

Canada wins over Basel

OTTAWA - Canada`s push to have bank debt converted into equity in the event of a government rescue has won over global banking regulators, who yesterday said it could be part of a suite of financial reforms up for approval by Group of 20 leaders at their summit in November.

The so-called Basel Committee on Banking Supervision endorsed the idea of embedded contingent capital in documents published yesterday, and asked stakeholders to comment on its possible implementation by Oct. 1.

Under contingent capital, banks would insure themselves against failure through the issue of debt that could be converted into equity at the time of any possible failure. The conversion would occur at the behest of federal authorities, on the belief the company cannot be saved without government intervention. The underlying idea is that bank equity and debt holders have an added incentive to monitor lending practices.

The Basel Committee concurred, and is prepared to include the idea in its list of banking reforms that G20 leaders will be asked to endorse at a summit in Seoul.

"The increased downside risk will provide an incentive for the investors in capital instruments to monitor the risks taken by the issuing bank," said the committee, which represents central banks and regulators in 27 countries and sets capital standards for banks worldwide. "If a bank takes more risk, and the risk of loss to investors increases, buyers of existing instruments ... will demand a higher coupon. This sequence of events should help impose additional market discipline on banks."

Read the full article here.

 

[Ally]

Slow pace of inflation puts another rate hike in question

OTTAWA — Canada`s annual rate of inflation climbed in July on higher energy costs and the introduction of new harmonized sales taxes in two provinces — but at a slow-enough pace to prompt traders to scale back expectations of a Bank of Canada rate hike in September.

The overall inflation rate climbed 1.8 per cent in July on a year-over-year basis, but the key core inflation rate — which strips out the effect of volatile-priced items and the effect of the new HST in Ontario and British Columbia — fell slightly to 1.6 per cent in the month, from 1.7 per cent.

"Like a candy, Canada`s (inflation data) in July was crunchy on the outside but soft at the core," said Krishen Rangasamy, economist at CIBC World Markets.

The core reading is below the Bank of Canada`s latest forecast for the third quarter — of 1.8 per cent.

"Overall, these results are milder than expected," said Douglas Porter, deputy chief economist at BMO Capital Markets. "Given that Canada just had one of the bigger price `events` for quite a few years — the HST — and overall inflation remained below two per cent, is quite remarkable."

Read the full article here.

 

[Ally]

As U.S. economy sputters, China`s importance to oil producers grows

You could sense some angst last week in the United States and Japan when China overtook the latter as the world`s second largest economy.

No one who follows the numbers was really surprised, because the momentum to pull China into second place was inevitable, the only question was, when? Surprise was also muted among those who follow the energy business, because creating wealth and guzzling fuel go hand-in-hand. Remember, only a few weeks ago China officially nudged ahead of Japan in total energy consumption, so the Middle Kingdom was effectively guaranteed a silver medal for economic growth too.

So what? Economy and energy aren`t the Olympic Games. A coach`s lecture that "Second place is first place for losers," would seem inappropriate when talking about consumption. But in fact there is some validity to playing down second place. Markets, like sports commentators, still have a strong affinity for first place institutions. All of which is to say that when it comes to crude oil consumption the United States is still in first place by a wide margin, and what happens there is still most influential to global oil prices.

A yellow flag has been dropped in the oil arena. US inventories of crude oil, heating oil, diesel fuel, and gasoline have reached record or near-record levels in the United States. The volumes are trending up and when inventories get too high price is the first thing that`s taken hostage (as anyone in the natural gas business knows all too well.)

Read the full article here.

 

[Ally]

Mortgage fraud fallout working way through courts

Mortgage fraud may no longer be on the front pages, but the fallout from hundreds of past fraud cases is still wending its way through Ontario courts.

The most recent decision in this area of law was released in June by the Ontario Superior Court of Justice, and involved a mortgage fraud perpetrated on the Royal Bank of Canada.

The story begins in a Tim Hortons back in October, 2004. Angela Isaacs was having a coffee with her then-common law husband, Dexter Abrams, discussing the sorry state of their finances. Another customer overheard their conversation and introduced himself as Mike. He said he could help them and left his phone number if they wanted more information.

A couple of weeks later the couple contacted Mike, who offered to pay $4,000 if one of them would co-sign a mortgage for an acquaintance who had trouble getting financing on a house.

Read the full article here.

 

[Ally]

Bank of Montreal, CIBC lower mortgage rates

OTTAWA — Bank of Montreal and Canadian Imperial Bank of Commerce on Monday announced a series of reductions to their regular mortgage rates, including a 10-basis-point cut to the benchmark five-year, fixed rate.

This puts the interest rate for these terms at 5.39% as of Tuesday for both banks. Last week, BMO, CIBC and other major Canadian banks reduced their key mortgage rates 10 basis points to 5.49%.

Read the full article here.

 

[Ally]

Retail sales edged up in June

OTTAWA — Retail sales edged up less than expected in June, with gains in the auto sector offset by declines in gasoline prices, Statistics Canada said Tuesday.

Sales rose 0.1 per cent during the month to $35.9 billion, the federal agency said, after two consecutive monthly declines.

"When price changes are factored in, retail sales in volume terms were up 0.9 per cent," it said. "Lower prices were observed at gasoline stations and new car dealers."

Most economists had expected sales to rise by between 0.3 and 0.4 per cent in June.

Statistics Canada said retail sales rose in five of 11 sub-sectors tracked by the agency.

Read the full article here.

 

[Ally]

Realtors launch ad campaign to buff up their image

Under the gun from the federal Competition Bureau and from consumers who say they are overpaying for commissions, Canadian realtors are pushing back with a fall advertising campaign touting the merits of professional real estate agents.

"When I was selling my place, my realtor helped with all the paperwork. You would think I had a paper allergy or something," begins the 30-second spot that started airing on national television Monday.

The face of the woman then morphs into a man who says, "I`m not a real people person either, so my realtor helped with my negotiations, too."

The commercial, shot in high definition, uses morphing technology to show a seamless transition of different faces, ages and races.

"All that back and forth…yuck. And when it came to finding qualified buyers or a house with a park next door, my realtor had all the answers," says the spot

Read the full article here.

 

[Ally]

There are two million reasons for high prices in Vancouver

What drives Vancouver`s house prices so relentlessly to levels four times higher than Winnipeg`s, and more than half again what Torontonians pay?

It`s simple, says Tsur Somerville of UBC Centre for Urban Economics and Real Estate.

"If you want Winnipeg-level house prices here, all you have to do is tear down the mountains and fill in the ocean."

Well, that puts slow or stop to the steady influx of people — though the massive loss of amenities if our landscape were to be suddenly levelled might do that automatically.

"Depending where you draw the circle," Somerville says, "70 per cent of the land isn`t developable. It`s mountains or water or the United States."

Then, on top of this insurmountable geographic limitation, add the relentless population growth that, in good years and in bad, ranges from 1.3 to 1.5 per cent a year.

Read the full article here.

 

[Ally]

U.S. home sales dive record 27%

WASHINGTON -- Sales of previously owned U.S. homes took a record drop in July to their lowest pace in 15 years, suggesting further loss of momentum in the economic recovery.

As the National Association of Realtors issued the report, Chicago Federal Reserve President Charles Evans warned that the risk of a double-dip recession was higher than six months ago although he did not think output would contract, describing the recovery as ongoing but modest.

Existing home sales dropped a record 27.2% from June to an annual rate of 3.83 million units, the lowest since May 1995. June`s sales pace was revised down to a 5.26 million-unit pace from a previously reported 5.37 million.

Analysts polled by Reuters had expected sales to fall 12% to a 4.70 million-unit rate last month.

"This is a worrisome report and while it reflects the volatility caused by the end of the (government home-buyer) tax credits, it also indicates a deterioration in the underlying trend for housing demand," said Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch in New York.

Read the full article here.

 

[Ally]

Government-imposed costs are just the tip of the iceberg in home ownership

With taxes, levies, fees and restrictive rules adding nearly $80,000 to the cost of an average new home in Metro Vancouver, it`s easy to finger governments as a bad guy in driving housing costs sky-high.

But that`s just the obvious. Government influence on house prices — not all of it for wrong reasons — is far greater than that. It includes:

• Maintaining ownership of a great deal of park and other public land, which drives up the price of what`s left to develop.

• Requiring owners to withhold from development countless thousands of additional acres through policies from the ALR to provision of parking to subdivision amenities.

• Limiting density in many residential neighbourhoods.

• Subsidizing people to choose bigger homes than they might otherwise afford through residential property tax rates set far lower than the cost of service, government mortgage insurance that lets people borrow more money more cheaply than they otherwise would, homeowner grants that pay up to half the property tax bill, and tax-exempt capital gains, which makes a home (at least, one in the right place at the right time) a savvy investment as well as place to live.

Read the full article here.

 

[Ally]

The high cost of bank capital rules

Government regulations come with costs, a point made clearly last week by the Bank of Canada in a series of assessments of possible new financial regulation. But would the benefits of those new regulations -- imposing higher capital and liquidity requirements on banks -- make those costs worthwhile?

After reporting on some complex economic modelling exercises, the bank`s answer to the question is yes. By adopting new capital rules in conjunction with other countries, Canada would suffer economic costs -- higher interest rates, tighter credit and less growth -- but these costs would be overcome by the greater economic benefits that would flow from reduced risk of another financial crisis.

The summary numbers, as described in the bank`s report -- Strengthening International Capital and Liquidity Standards: A Macroeconomic Impact Assessment for Canada-- seem compelling enough. Looking at the long-run cumulative benefit of new rules, "the Bank calculates the potential benefit from a reduced incidence of crises to be approximately $½-trillion" --or $500-billion. Then it said: "Even after subtracting the estimated long-run and transition costs...the net gains to Canada in present-value terms would still be approximately 13% of GDP, equivalent to about $200-billion." By implication, the costs of the new rules would roughly total $300-billion -- a burden apparently easily overcome by the benefits.

A quick attempt last week in this column to reconcile these numbers and other parts of the bank`s studies on the costs of new capital rules failed miserably (The High Cost of Bank Regulation, Aug. 19). Several statistical errors were produced, along with some faulty definitions. A correction was published. However, a bank official also wrote to say that the column contained "misrepresentations" of the bank`s analysis of the new capital rules and their impact.

Read the full article here.

 

[Ally]

Rising resale home prices set to stall: Teranet report

OTTAWA— Resale home prices rose 1.5% in June, the largest monthly gain since last August and the fourteenth straight monthly increase, according to the Teranet-National Bank house price index, released Wednesday.

On an annual basis, prices were up 13.6%, driven higher by gains in Vancouver, up 16.3%, and Toronto, up 16.2%.

The monthly advance comes after resale home prices rose 1.3% in May, 0.8% in April and 0.3% in March.

But the report stated that series of gains may be about to stall.

"We do not believe that acceleration in the Teranet-National Bank index will be sustained," said Marc Pinsonneault, economist with National Bank Financial.

"The number of existing homes sold has declined in each of the four months ending last July, and it did so to a proportionally larger extent than the number of new listings,"he said.

Read the full article here.

 

[Ally]

Loonie keeps falling, reducing chances of a September interest rate hike

OTTAWA — Signs of an ever-weakening North American recovery have sent the loonie to its fifth day of losses and slashed the odds of a September rate hike by the Bank of Canada almost in half over the past week.

The dollar slipped to 94.27 cents US on Tuesday, producing a loss of more than four per cent in the past three weeks. During that time, economic data have softened markedly, sending the price of oil — Canada`s biggest export — down more than $10 US to $72.52 US a barrel as expectations for global growth have been ratcheted down.

The loonie could quickly slip even further, hitting 90 cents US by the end of September, Scotia Capital chief currency strategist Camilla Sutton said in an interview.

The economic numbers have been decidedly worse out of the U.S., where the housing market — vital to any U.S. economic recovery — has fallen decidedly into a "full-fledged double-dip," according to Douglas Porter, deputy chief economist at BMO Capital Markets.

Read the full article here.

 

[Ally]

Economic slowdown appears priced in: CIBC

The robust North American stock market rally at the beginning of 2010 may seem like nothing more than a fond memory these days as waves of disappointing economic data hammer away at investor confidence, but this does not necessarily mean excess downside risk, a new report from CIBC World Markets said Friday.

Avery Shenfeld, chief economist with CIBC, said investors have likely already priced in an economic slowdown as their confidence never truly recovered to pre-recession levels.

"The various surveys climbed from the abyss set at the heights of the financial crisis, but thereafter remained mired in normal recession territory in the U.S. and little better in Canada," he said. "Individuals have already pulled out of stocks and flooded into safer bonds at a breakneck pace."

The situation is certainly more dire in the United States, where economists have been wondering aloud about the possibilities of a double-dip recession.

Decade-low home sales and consistently disappointing jobless figures have forced the U.S. Federal Reserve to maintain historically low interest rates to keep the debt-ridden economy going.

Read the full article here.

 

[Ally]

Ottawa`s deficit shrinks to $2.8 billion in June

OTTAWA — The federal deficit continued to shrink in June as revenue was bolstered by the goods and service tax, but the government cautioned Friday that it was too early to predict a final tally for the year given the "considerable uncertainty" about the strength of the global recovery.

The shortfall totalled $2.8 billion during the month, compared with $5-billion deficit in June 2009, according to preliminary estimates by Finance Department.

Total revenue was down $500 million, or 2.5 per cent, in June "reflecting lower personal and corporate income tax revenues and other revenues, partially offset by higher goods and services tax revenues," the department said in its report.

Program expenses fell 12.9 per cent to $2.7 billion during the month on lower transfer payments.

For the first two months of the government`s fiscal year, estimates put the shortfall at $4.4 billion versus a $7.5-billion deficit in the comparable period a year ago.

Read the full article here.