This post is a guest contribution by Rebecca Wilder*, author of the of the News 'n' Economics blog, July 15, 2009.
I have been pretty "positive" about Canada. Compared to the U.S., the Canadian economy simply sits on a firmer (financial) foundation: housing fundamentals were stronger going into this mess; unemployment created a migration pattern toward work; saving rates are rising as in the US, but on a smaller wealth effect; and the overall GDP loss in the current cycle is expected to fall short of a recent time-series of Canada's recession.
But the standard policy response, lowering the policy target to stimulate consumption and investment, has been the same: the Bank of Canada (BoC) lowered its policy rate, the overnight rate, to 0.25%. It did not (correctly) engage in quantitative easing measures - and I believe that it has not officially announced that such measures have been taken off the table - because it is becoming evident that the economy is responding to the massive monetary stimulus already in place.
And Merrill Lynch's new chief strategist and economist for Canada, Sheryl King, criticized the BoC for being too aggressive. From the Globe and Mail:
In her report, Ms. King actually upgraded Mr. Wolf's Canadian gross domestic product forecast for 2009 (she's now calling for a decline of 2 per cent versus 2.7 per cent in the old forecast) and 2010 (growth of 2.7 per cent versus 2.3 per cent). She also suggested that the improved growth prospects over the next 18 months are policy makers' own doing – the flood of fiscal and monetary stimulus “will produce growth.”
And she warned that the Bank of Canada “overreacted to the downside risks” and may have positioned itself to do the same on the upside. She fears that the short-term growth fuelled by policy-driven economic stimulation could artificially boost inflation and output, fooling the bank into tightening its policy too soon.
“It's hard to get monetary policy right at the best of times,” she said. “The probability that [the Bank of Canada's current policy] is exactly the right tonic for the economy is so infinitely small, it's laughable.”
She might be right. Canada doesn't have the strong productivity growth to offset inflation pressures coming from the demand side. And it is becoming quite clear, especially in the housing market, that low interest rates are stimulating some economic activity.
The Canadian Real Estate Association reported a surge in Q2 existing home sales:
National resale housing market activity bounced back strongly in the second quarter of 2009 above levels reported for the same period last year. Demand continues to rebound sharply in some of the most expensive markets in the country, skewing the national average price upward.
According to statistics released by The Canadian Real Estate Association (CREA), actual (not seasonally adjusted) home sales, via the Multiple Listing Service® (MLS®) of Canadian real estate boards, totaled 147,351 units in the second quarter of 2009 – the fourth strongest quarterly sales figure ever. Up 1.4 per cent from the second quarter of 2008, this marks the first year-over-year increase in quarterly activity since the fourth quarter of 2007.
...
The national average home price also scaled new heights on a monthly basis, climbing 3.6 per cent year-overyear to $326,613 in June 2009. However, only 13 local markets posted new average price records in June, less than a handful of which are among the most active or expensive. The strong rebound in sales activity, not price, in Canada’s most expensive markets is skewing average prices upward nationally and in some provinces, just as a sharp decline in activity in these markets skewed the average lower in late 2008.
Although the re-sale market is really heating up, especially in the high income bracket, new home prices are still falling, -3.1% over the year in May 2009. From Statistics Canada:
Contractors selling prices decreased 0.1% in May following a 0.6% decline in April.
Between April and May, prices declined the most in Saskatoon (-1.2%) followed by Hamilton (-1.1%) and Edmonton (-0.9%). In Saskatoon, a number of builders reported reduced material and labour costs while other builders have lowered their prices to be more competitive and to encourage sales.
And building permits are growing in the single-family home sector, rising for three consecutive months in May. This is usually a leading indicator of new construction in the residential space.
And other types of big-ticket items are likely responding to low financing rates. Auto sales, driven by a surge in truck sales, are stabilizing and actually grew in May. However, preliminary reports indicate a drop in June.
Overall, the economy is stabilizing on the heels of big monetary and fiscal stimulus. And unlike in the US, we are starting to see first-derivative signs of growth. The housing market will (and always) plays a significant role in the early stages of an economic recovery.
When the recovery starts to firm a bit more (Q3 growth is projected to be weak, 0.0% by the Bank of Montreal), we will see if King is right - whether or not the BoC was indeed too aggressive. I wouldn't be surprised if they were.
* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.
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