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Strong U.S. Economy
By Dr. Peter Andersen
The U.S. economy is turning
out to be a lot stronger than expected. It advanced at an annual rate of 3.5
per cent in real terms in the fourth quarter, measured from the previous quarter.
Consumer confidence, an important leading indicator for spending, was running
in January at its highest level since May 2002.
The January purchasing managers index for the services sector points to even
stronger first-quarter GDP growth. Chain stores such as Wal-Mart report stronger-than-expected
January same-store sales. This rules out the March Fed rate cuts that the
financial markets had been hoping for. They are now worried that the Fed might
actually have to begin raising rates again in 2007.
Relative to the U.S., Canada's housing market shows remarkable stability.
Homeowner finances are not being threatened by rate increases and falling
prices. Mortgage rates are still relatively low at the five-year maturity.
In addition, it is hard to find any markets in Canada with falling house prices.
This time around, Canada has been able to avoid the speculative frenzy that
drove U.S. prices so far above sustainable levels. The latest house price
information shows new house prices in Toronto and Oshawa up by only 3.4 per
cent from a year ago. The double-digit percentage increases are all west of
the Ontario-Manitoba border and are the result of true demand stemming from
inter-provincial migration.
High
levels of immigration
Canada plans to admit between 240,000 and 265,000 new permanent residents
in 2007. This is the highest target range in the past 25 years. The final
figure for 2006 is expected to be close to the previous target of 255,000.
There were 262,236 new permanent residents admitted to Canada in 2005.
These are big numbers and they are fuelling the demand for rental accommodation.
This is one of the reasons why Canada's rental vacancy rate has remained relatively
low and has actually declined since 2005. Approximately 52 per cent of the
people immigrating to Canada go to Ontario. Ottawa is planning an increase
of 15,000 in skilled immigrant admissions this year.
Strong
job markets a positive factor
Good employment growth has always been a key prerequisite for healthy housing
markets. The recent performance in Canada's job markets has been very positive.
Canada's seasonally adjusted national unemployment rate stood at a 30-year
low of 6.1 per cent in December, indicating a tight job market. At year-end,
total employment was up by 345,000 from 12 months earlier - an increase of
2.1 per cent. This is the strongest annual increase since 2002.
Alberta accounted for 31 per cent of the national employment increase last
year. It showed the strongest year-over-year percentage employment gain of
any province - an increase of six per cent. Other provinces with above-average
percentage employment gains were Saskatchewan (4.8 per cent), Newfoundland
(3.8 per cent) and British Columbia (2.4 per cent).
Full-time jobs accounted for 80 per cent of the national employment gains
in 2006. In contrast to the national trend, almost two-thirds of Ontario's
2006 employment gain was in part-time work. This is not a good sign for Ontario
new home builders.
Possibility of Bank
of Canada Rate Cuts
The latest figures show the Canadian economy growing at approximately half
the rate of the United States. This divergence in growth performance between
Canada and the U.S. is reviving expectations of a Bank of Canada rate cut.
With a slow economy and a lack of government borrowing, there is room for
Canadian interest rates to move lower, provided that energy price inflation
does not reappear.
The attitude in financial markets has turned negative toward the Canadian
dollar. It has slipped to a 14-month low against the USD, despite the jump
in oil prices. The CAD has severed its link with oil prices for now and is
responding to the Canada-U.S. economic growth gap. We expect this gap to continue
as Canadian consumers appear to have lost their enthusiasm and exports of
manufactured products are struggling as a result of a loss of international
competitiveness.
Outlook for Housing
Starts
Most forecasts show national starts declining modestly in 2007 by 8 to 10
per cent from 227,395 units last year. That was the second highest level for
starts since 1988. However, under the surface there are pockets of serious
weakness. Single-detached starts in Ontario are expected to decline by close
to 20 per cent in 2007 to a level about 35 per cent below their peak in 2004.
Quebec faces a problem in the multiple unit sector, where starts are expected
to decline by about 15 per cent. HB