Economy crawled forward 0.6 per cent in the last three months of the year

By Erica Alini - Friday, March 1, 2013 at 10:27 AM - 0 Comments

To recap:

• As expected, the economy grew a meagre 0.2 per cent in the last three months of the year, roughly on par with the previous quarter, Statistics Canada said today. Annualized growth between October and December was 0.6 per cent.
• In the last six months of 2012 the economy grew at the slowest pace since the financial crisis.
• For the year as a whole, the economy grew 1.8 per cent, down from 2.6 per cent in 2011 and below the Bank of Canada’s forecast of 1.9 per cent.
• Consumer spending was once again the main contributor to growth in the fourth quarter, advancing 0.7 per cent.
• Business investment, governments spending and a small uptick in net trade were also bright spots. The main drag on growth, on the other hand, came from a sharp drop in inventories.
• GDP shrunk 0.2 per cent in December, reflecting weakness in manufacturing and retail sales, despite the holiday season.

What the analysts say:

• After closing 2012 on a flat note, the economy should see a small bounce-back in the first three months of the year on the back of stronger U.S. demand for Canadian exports, writes TD Economics’s Jonathan Bendiner: “nothing jaw dropping, expect a sub +1.5% gain in Q1.” Growth should pick up speed in the latter half of the year, he adds, once a resolution of fiscal troubles in Washington will lift the uncertainty that’s currently weighing on U.S. consumers and businesses.
• Sustained household expenditures, which drove the highest growth in aggregate demand in over a year, was a surprise to to economists, who had expected Canadians to have reined in spending after a recent report showed disappointing retail sales in December, notes CIBC’s Emanuella Enenajor.

Fourth-quarter GDP growth was bad: here’s why

By Erica Alini - Wednesday, February 27, 2013 at 7:14 PM - 0 Comments

Update: As expected, GDP growth in the last quarter of 2012 was a dismal 0.6 per cent annualized, and the economy shrank 0.2 per cent in December. Despite that, Finance Minister Jim Flaherty said today the government might further trim spending in the next budget, as lower-than-expected growth impacts revenue flows the bean counters were banking on. NDP House leader Nathan Cullen called the finance minister’s concern over balance budgets at a time of withering growth “a manufactured crisis.”

Here we explain why the economy stalled in late 2012 and why it might take some time for it to pick up speed again.

—

Canada’s fourth-quarter GDP figures, out on Friday, are expected to show the clearest picture yet of the shift the economy has been undergoing for the per past year or so. For the first time in nearly seven years, monthly GDP numbers have already revealed, Canada underperformed the U.S. in 2012.

In January, the Bank of Canada forecast Octoober-to-December growth would come in at one per cent, but Governor Mark Carney hinted this week he expects the actual number to be lower.

Why the slowdown? Largely, because consumer spending and the housing market, which propelled Canada out of the recession as the rest of the global economy dwindled, are losing steam. And now that the economy can’t run on internal combustion alone anymore, it’s not clear how much of lift it’s going to get from the outside.

Here’s what happened over the past decade:

Source: Statistics Canada - Canada Yearbook 2012, Chapter 9: Economic Accounts.

Exports, Canada’s traditional engine of growth, have been shrinking as a share of the economy: down to around 30 per cent of non-inflation adjusted GDP from a record 46 per cent in 2000. As the chart shows, the 2008-2009 crisis delivered a considerable blow to Canadian exports, which fell faster than GDP and haven’t come close to recovering. But the decline started long before global demand seized up in the wake of Lehman Brothers etc. The long-term trend reflects a loss of competitiveness and failure to diversify away from the U.S. and toward Asian economies, as the Bank of Canada has long been saying.

Consumer spending, by contrast, expanded as a share of the economy during the recession, limiting the magnitude of the contraction and picking up the slack from declining net trade:

Continue…

Economic growth in late 2012 on track to be lower than predicted: Bank of Canada

By Erica Alini - Monday, February 25, 2013 at 4:23 PM - 0 Comments

Economic growth in the last three months of 2012 will likely come in below the Bank of Canada’s short-term forecast.

“In the very near term, more of the elements of the downside risks have materialized than the upside risks,” BoC Governor Mark Carney told reporters after a speech at Western University’s Ivey School on Business in London, Ont. In other words, there have been more bad than good news lately for Canada’s GDP. (You can watch the presser here.)

The governor’s statement is hardly surprising. After a number of disappointing readings on the economy in the past few weeks — showing sharp declines in housing, retail and factory shipments — GDP numbers, due out on Friday, are widely expected to show growth stalling between October and December.

Still, the governor sought to strike a positive note. The rate at which Canadians are piling on debt is slowing, he said, calling it “an intended and welcome development.” The same, he said, goes for the cooling housing market.

And if exports aren’t showing any signs yet of stepping in to substitute consumer spending as the main engine of Canada’s economic growth, there are some positive signs that business investment might be picking up. “We’re seeing in the very short term an uptake in corporate borrowing,” the governor said. If that keeps up, it should give the economy a lift.

Mark Carney to the bankers: the joke is on you now

By Erica Alini - Monday, February 25, 2013 at 2:48 PM - 0 Comments

(Chris Wattie/Reuters)

In the long run, “heads-I-win-tails-you-lose finance” catches up to you. That was the message Bank of Canada Governor Mark Carney delivered to an audience of finance majors at Western University’s Richard Ivey School of Business today. In other words: “don’t you kids try to play that game.”

It’s in the banks’ own interest to embrace stricter regulation aimed at restoring the public’s confidence in the financial system, Carney said in prepared remarks. Lower levels of trust since the financial crisis are harming the economic recovery and  the banks’ own business, the governor noted.

“Most major banks outside Canada are now trading well below their book value, indicating shareholder concerns about a combination of the quality of bank assets and the value of their franchises,” Carney said.

Credit rating downgrades of many big banks are another sign of that lack of trust, not just between financial institutions and the general public but among financial players as well. Even recent credit upgrades are due more to governments guarantees than debt-holders’ confidence in the banks themselves, Carney said. (The governor didn’t mention this, but Canada’s big banks have seen ratings cuts too recently, albeit not as a consequence of the 2008 meltdown.)

The governor also noted that creeping distrust among national bank regulators might lead to a “balkanized” financial system, with governments trying to insulate their country’s banks from the fallout of foreign crisis by restraining cross-border financial flows. Some euro zone countries, in particular, are known to be flirting with such options. These measures, though, tend to exacerbate rather than reduce risk, Carney noted. As Econowatch explained a few months ago (see slide 11):

Governments [are] concerned that they might have to use taxpayers’ money to bail out foreign banks that have a large customer base in their own country (remember the case of Icelandic banks and the U.K. government?). As a result, they are increasingly relying on domestic banks and investors for financing: German banks are lending to the German government, and Italian banks to the Italian government.

Financial institutions in vulnerable countries, in other words, are loading their balance sheets with bonds investors see as increasingly risky. If these banks lose access to credit markets—and some of them are already struggling to borrow— the whole continent would likely experience a banking crisis.

In sum, if money makes the world go ’round, trust is what makes money do the rounds. Money multipliers have fallen by 55 per cent in the U.S. and 40 in the European Union between 2006 and 2012. And while banks lending less is partly by design — in order to ensure they have enough cash at hand to weather emergencies — “the magnitude of the decline indicates the extent to which trust has been shaken,” Carney said.

Continue…

Federal deficit still looking set to come in well under $26bn

By Erica Alini - Friday, February 22, 2013 at 12:45 PM - 0 Comments

The federal deficit was $0.6 bn in December 2012, up slightly from the $0.5 bn recorded in December 2011, the Finance Department revealed today. Still, red ink accumulated since the beginning of the fiscal year, in April, amounted to $13 bn, below the $16.1 registered over the same period in 2011-2012.

Stephen Gordon noted a couple of weeks ago how the monthly deficit data available until then were difficult to square with the government’s estimate of a $26 bn deficit by fiscal year-end. April-to-November spending and revenue patterns, he wrote, would indicate the overall deficit for 2012-2013 will be considerably lower.

Today’s December data show very much the same picture.

December shopping bust: did Black Friday knock out Christmas?

By Erica Alini - Friday, February 22, 2013 at 10:20 AM - 0 Comments

To recap:

• December retails sales were nothing like analysts had expected. In the holiday shopping month par excellence, Canadians actually reined in their spending, sending retail sales down 2.1 per cent from the previous month, well below the consensus forecast of a 0.3 per cent decline.
• Compared to December 2011, sales were down 0.7 per cent, the worst performance since October 2009.
• Weak new auto sales were the biggest drag on the retail sector, dropping 7.7 per cent from November.
• But most stores typically associated with the Christmas shopping frenzy saw meagre activity at the cash register as well. Sales of electronics and appliances, in particular, tumbled 12.1 per cent.
• Regionally, Alberta, Ontario and Quebec recorded the deepest slumps, with sales down about 2.5 per cent in all three provinces from the prior month.

What the analysts think:

• Black Friday cannibalized non-auto December sales, said CIBC’s Emanuella Enenajor. The strongest piece of evidence for that are the dismal sales of electronics, a typical Black Friday purchase.
• A bleak December for merchants bodes ill for Canada’s fourth-quarter GDP (due out next week), noted RBC’s Paul Ferley. Expect a modest 0.5 per cent annualized gain in the last three months of 2012, well below the Bank of Canada’s forecast of one per cent growth.
• Looking at the glass half-full, TD’s Dina Ignjatovic noted that the retail slowdown is likely a sign that consumer spending is falling in line with the Canada’s slower pace of growth.

Some Fed officials ponder slowing down asset purchases ahead of schedule

By Erica Alini - Wednesday, February 20, 2013 at 3:10 PM - 0 Comments

Late last year, the Federal Reserve linked its monetary policy to to the situation in the labour market for the first time. Borrowing costs would stay at rock-bottom, it pledged, until the U.S. jobless rate drops to 6.5 per cent, provided inflation doesn’t  rise past 2.5 per cent.

Well, inflation isn’t anywhere close to 2.5 per cent but several members of the Federal Open Market Committee (which handles purchases and sales of government securities that determine the amount of money in the banking system) are already wondering whether the central bank shouldn’t tighten up its policy before America reaches the magic unemployment number.

The minutes from the January FOMC meeting indicate the committee is split on the issue. Here are the crucial excerpts:

Continue…

House prices have propelled Canadians’ net worth gains for a decade

By Erica Alini - Wednesday, February 20, 2013 at 12:56 PM - 0 Comments

House prices down for fifth straight month: Teranet Index

By Erica Alini - Wednesday, February 20, 2013 at 10:22 AM - 0 Comments

House prices dipped 0.3 per cent in January from December, the fifth straight month of declines, according to the National Bank’s Teranet House Price Index, which tracks repeat sales of single-family homes in 11 Canadian cities. Compared to January of last year, prices were up 2.7 per cent, the smallest yearly increase since November 2009 and the 14th straight month of decelerating year-over-year gains.

Monthly house prices dropped in seven cities, but all urban centres except Vancouver registered gains on a year-over-year basis.

In B.C.’s largest city, prices edged down 0.8 per cent in January from a month earlier and were down a more noticeable 2.5 per cent from January 2012.

In Calgary prices were virtually unchanged (-0.1 per cent) last month from December and up 4.3 per cent from a year ago.

In Toronto prices dipped 0.4 per cent on a monthly basis, but were up a robust 5.3 per cent on a yearly basis.

In Montreal price movements tracked the national average, dipping 0.2 per cent from December and gaining 2.6 per cent from January 2012.

The strongest performance came from Atlantic Canada: prices in Halifax were up 1.7 per cent from a month earlier and 6.6 per cent from year-ago levels.

Continue…

Is the housing cool-down already over?

By Erica Alini - Friday, February 15, 2013 at 10:44 AM - 0 Comments

Nathan Denette/The Canadian Press

To recap:

• Sales of existing homes edged up 1.3 per cent in January from December, the first monthly gain since September 2012, the Canadian Real Estate Association said today.
• Compared to January 2012, non seasonally adjusted sales were down 5.2 per cent.
• Sales activity rose 5.6 per cent from December in Greater Toronto, 4.7 per cent in Greater Vancouver and 10 per cent in Edmonton. Overall, though, monthly sales activity declines in about half of all local markets.
• In year-over-year terms, sales were down four per cent in Toronto and as much as 13 per cent in Vancouver. In general, two thirds of local markets registered lower activity compared to January 2012, with Calgary, Edmonton, Winnipeg and few others, bucking the trend.
• The average price for homes sold last months was $354,754, up two per cent from the same period in 2012.
• On average, the time lag between a new listing and a home sale was 6.6 months in January, virtually unchanged from December.
• Sales of single-family homes and town houses registered gains, whereas condos held roughly steady.
• The MLS Home Price Index, which adjusts for different types of properties sold, rose 3.3 per cent in January on a year-over-year basis. It was the smallest gain since April 2011.

What the analysts are saying:

• The January reading suggests that the housing market may be stabilizing after the cool-down witnessed since tighter mortgage rules took effect in July 2012, writes TD’s Derek Burleton. According to the bank’s research, the impact of new mortgage insurance rules tends to wear out after six to nine months. Burleton expects this to be the case for the latest round of tightening as well, especially since a relatively healthy labour market and interest rates at historic lows should encourage home-buying.
• In a report published yesterday, before today’s release by CREA, the International Monetary Fund warned that Canadian residential real estate prices are 10 per cent overvalued. The Fund also indicated that household debt to disposable income and real estate investment as a share of GDP have reached an all time high in 2012. Though the report predicted a housing correction, it said Canada is unlikely to experience “a house boom-and-bust a la United States.”

Top of the G20 agenda: currency wars

By Erica Alini - Thursday, February 14, 2013 at 3:21 PM - 0 Comments

Japanese Prime Minister Shinzo Abe. (Toru Hanai/Reuters)

The finance ministers and central bankers of the G20 group of advanced and emerging economies meet tomorrow in Moscow. Top of the agenda: currency wars.

Now, grumblings about some countries working to push down their exchange rate to boost exports aren’t new. China’s artificially low renminbi was a hot topic of the last U.S. election. On the other hand, the Fed’s lax monetary policy, which has kept the value of the greenback relatively low since the recession, has been irking emerging economies. Yet, life went on.

Why the big deal about exchange rates now? In a word: Japan. Shinzo Abe is back for a second term as prime minister and he’s vowed to end once and for all the spell of deflation that’s plagued Japan for the last decade and a half — whatever it takes. The plan is for the government to embrace massive spending and the Bank of Japan to target a two per cent inflation rate (that’s the level of inflation deemed ideal here in Canada too but for Japan to get there form its currently negative inflation, the BoJ will have to print money like mad.) All of this will ( and, in fact, already has) push the value of the yen down, helping Japanese exports.

Unsurprisingly, some people suspect Abenomics, as Japan’s new economic agenda is known, is nothing but a cover for currency manipulation. Traders and the media have been crying foul.

Continue…

What Mark Carney told (Canadian) MPs about the state of the economy

By Erica Alini - Tuesday, February 12, 2013 at 4:08 PM - 0 Comments

Bank of Canada Governor Mark Carney was once again answering questions from MPs this morning — not in London this time but in the more familiar setting of the House of Commons finance committee. The conversation spanned household debt, jobs, the Dutch Disease, currency wars, the Bank of Canada’s forecasting abilities and even credit card regulations, which Raymond Côté, NDP MP for Beauport-Limoilou, had strong feelings about but were unfortunately deemed completely outside the BoC’s mandate.

Here’s a what the governor argued, in a nutshell:

Continue…

Tighter mortgage rules might be ‘insufficient’ to curb household debt

By Erica Alini - Tuesday, February 12, 2013 at 7:00 AM - 0 Comments

Targeted rules are often a better way to deal with a buildup of risk in the economy than monetary policy, BoC Deputy Governor Timothy Lane said in his prepared remarks for a speech he gave today at Harvard University. So, for example, if households have gone on a borrowing binge and house prices are inflated, you’d be better off tightening mortgage regulations than raising interest rates. Tougher mortgage rules target the housing market specifically; an interest rate hike would also hit exporters by causing your home currency to appreciate—unless other countries rein in their monetary policy as well (which ain’t happening any time soon in the real world).

This is a well-known policy stance of the BoC. Governor Mark Carney just told all this once again to British MPs last week: Canada is better off curing its household debt problem with a healthy dose of mortgage-rule tightening rather than an rate raise, which would come with serious side effects.

And yet, if the more sophisticated, light-touch treatment doesn’t do the trick, the BoC might have to use its rougher, heavier medicine, Lane told his distinguished Harvard audience today:

“If such targeted prudential measures turned out to be insufficient, monetary policy could also be used, within a flexible inflation-targeting framework, as a complementary instrument to address financial imbalances.“

Canadians have slowed down the pace at which they’re taking on new debt and there’s plenty of evidence the residential real estate market is cooling. But, Lane noted, that could still turn out to be a temporary improvement:

“it is possible … that household spending could regain momentum”

After all, if interest rates stay at rock bottom, borrowing will stay cheap.

California comeback

By Erica Alini - Sunday, February 10, 2013 at 7:00 AM - 0 Comments

RAMIN RAHIMIAN/The New York Times/REDUX

Gabe Essoe is back to his busy self. “It’s eight days a week,” says the 67-year-old real estate broker from Pittsburg, Calif., a Bay Area town of 63,000 northeast of San Francisco. This year, he says, is going to be a good one. “I feel very optimistic in 2013.” Among Californians, Essoe is far from alone, something no one would have believed possible even two years ago.

Few states fell further than California during the great recession. The Golden State’s housing market collapsed amid a storm of foreclosures, but it wasn’t just housing. Public finances—both at the state and municipal level—were a mess. A host of cities, from Vallejo to Stockton to San Bernardino, unable to pay their bills, gave up and declared bankruptcy. But now, against all odds, California is racing back, golden, once again. California is adding jobs faster than any other state. And the state that in 2011 faced a budget hole of US$27 billion, announced in January that it will wipe out its deficit this year. Silicon Valley is booming, with twentysomething entrepreneurs snapping up vertiginously priced Bay Area property. Continue…

Housing starts drop like a stone in January

By Erica Alini - Friday, February 8, 2013 at 11:19 AM - 0 Comments

To recap:

• Housing stars came in at a seasonally adjusted annual rate of 160,577 units in January. That was a 18.5 per cent decline from the previous month and well below the consensus expectation of 195,000 new homes.
• The drop was centred in urban areas, whereas rural starts rose 15.6 per cent.
• Within urban dwellings, the decline was steepest in the condo market, where the rate of construction of new units dropped nearly 29 per cent. Single-family homes were down 11.2 per cent.
• The slowdown was concentrated in Ontario, where the seasonally adjusted annual rate of new home construction plunged nearly 44 per cent. Quebec also registered considerable weakness, with starts down over 29 per cent.

What the analysts are saying:

• January numbers continue a downward trend that’s been evident since August 2012, wrote RBC’s Laura Cooper.
• The drop is hardly surprising, according to TD’s Diana Petramala. The pace of home building is now more in line with the rate of household formation.
• The residential construction sector, which was an engine of economic growth in 2012, will likely be a drag in 2013, predicted CIBC’s Emanuella Enenajor.

Unemployment hits four-year low. But do not cheer.

By Erica Alini - Friday, February 8, 2013 at 10:30 AM - 0 Comments

To recap:

• Unemployment dipped 0.1 per cent to seven per cent in January, the lowest level in four years, but the decline came as more jobless Canadian stopped looking for work.
• Employment decreased by 22,000 jobs in January, in a widely anticipated decline after strong growth in November and December.
• Still, compared to January 2012, employment was up 1.6 per cent, or 286,000 jobs.
• There were fewer jobs in education and manufacturing, whereas employment in construction and public administration saw an uptick — the latter even though public sector employment as a whole fell by 27,000.
• The job losses were concentrated in Ontario, which mostly shed full-time positions, and B.C. Alberta, Saskatchewan and New Brunswick registered increases.

What the analysts are saying:

• Labour force participation dipped to 66.6 per cent in January from 66.8 per cent in the previous month, with 57,500 more Canadians abandoning their job searches. That was the largest monthly decline since 1995, noted TD’s Sonya Gulati.
• The employment dip was to be expected after several months in which job growth outpaced GDP, noted CIBC’s Avery Shenfled.
• RBC’s Dawn Desjardins struck a positive note. With headwinds from the global subsiding and interest rates low for the foreseeable future, she wrote, the economy will likely pick up momentum in the second half of the year. Expect unemployment to gradually decline to 6.7 per cent by late 2014.

Mark Carney on inflation, housing bubbles and how he shook up the Bank

By Erica Alini - Thursday, February 7, 2013 at 5:22 PM - 0 Comments

Besides the Q&A session with British MPs this morning, there was a written part to Mark Carney’s job interview. For you reading pleasure, we’ve uploaded the entire 45-page document here. Below is a selection of intriguing and Canada-relevant bits.

Mark Carney on Mark Carney:

I have experience in risk management in the private sector and crisis management in the public sector. In Canada, I was part of a team, which rapidly assessed the risks and instituted an effective, coordinated response to the global financial crisis, despite Canada’s deep integration with the U.S. economy and financial system.

(…)

Serving as Governor of the Bank of England will mark the pinnacle of my career. I am a strong believer in the value of public service, and I firmly believe that this responsibility offers me the opportunity to contribute where I can make the greatest impact.

On asking for a shorter term (five rather than the customary eight years):

At the end of a five-year the term, I will have served as a Governor of a G7 Governor central bank for over a decade. In my experience, there are limits to these highly rewarding but ultimately punishing jobs. Second, the five year term has advantages given the ages of my children and the disruption that is involved in moving schools and countries.

Continue…

Spotlight on Mark Carney

By Erica Alini - Wednesday, February 6, 2013 at 3:27 PM - 0 Comments

(Chris Wattie/Reuters)

Outgoing Bank of Canada governor and Mark Carney will face British MPs in London tomorrow a few months before taking the helm of the Bank of England on July 1.

The hearing before the British Treasury Select committee is a first in the history of the 319-years old BoE. In part, this reflects increased scrutiny of the central bank by elected officials at a time when it is taking on new, sweeping powers, such as oversight of Britain’s financial institutions.

But the hearing, of course, will also be a chance for British MPs to grill the first foreigner to head what the British affectionately call the “Old Lady of Threadneedle Street.” Is the Canuck really better than any of the smart Britons who were vying for the job? British lawmakers and the media have been wondering since Carney’s appointment in November.

Carney has, if you will, an “Obama problem.” In January 2009, the first African American president of the United States took charge at a time when the country had plunged in the worst recession since the 1930s. In 2013, the first Canadian BoE governor will take the helm of monetary policy in a United Kingdom that is possibly facing a “triple-dip” economic downturn. And we all know what happened to Obama’s halo…

Continue…

The U.S. deficit will shrink… and then explode

By Erica Alini - Tuesday, February 5, 2013 at 7:30 PM - 0 Comments

There are two simple facts about the U.S. deficit that Congress and the media — for all the brouhaha about government debt these days — tend to ignore. The Congressional Budget Office highlighted those two things once again today in its annual forecast on the budget and the economy:

1. The U.S. deficit has been shrinking since 2009.

According to the CBO’s analysis, the deficit in 2013 will be $845 billion, or 5.3 per cent of GDP, which is roughly half the share of GDP it accounted for in 2009.

Now, the actual deficit in 2013 is likely to be larger than that, since CBO projections assume that the enormous spending cuts of the fiscal cliff will actually kick in, whereas it’s likely Congress will choose to cut less. (The cuts are currently set to take effect on March 1 and the CBO always makes its baseline forecasts based on what current law says, not what lawmakers are likely to do.)

That said, the deficit has been declining for the past three years, both in dollar terms and relative to the size of the economy. In 2009, the U.S. deficit was $1.4 trillion. In 2012 it was $1 trillion — still a mind-boggling figure but almost 30 per cent smaller than what it was three years earlier. As a percentage of GDP, last year’s deficit was seven per cent — again very high, but already three percentage points lower than in 2009.

Continue…

U.S. unemployment edges up to 7.9 per cent

By Erica Alini - Friday, February 1, 2013 at 12:10 PM - 0 Comments

To recap:

• The unemployment rate rose a notch in January, up to 7.9 per cent from 7.8 per cent, the Bureau of Labor Statistics said today. Economists had expected the jobless rate to hold steady.
• The number of new jobs created, which is collected in a different survey, came in at 157,000, only narrowly below the consensus forecast of a 165,000 gain.
• On the plus side, though, most of the employment growth came from the private sector and was widespread across industries. Retail topped the charts in terms of new payrolls, but the construction sector also put in a strong showing, with 28,000 new jobs, a sign that the housing market is recovering.
• Public-sector employment, on the other hand, shrunk (-9,000 jobs), especially at the local government level.
• In another bit of good news, job creation estimates for the period between April 2011 and March 2012 was revised up by some 422,000 jobs, higher than the preliminary estimate of 386,000.

What the analysts are saying:

• Hiring in the private sector is a good sign, wrote RBC’s Paul Ferley, but the pace of job creation isn’t yet sustained enough to bring down the unemployment rate.
• With the January jobs report containing both good and not-so-good news, wrote CIBC’s Andrew Grantham, there’s little reason to believe the Fed will scale down its bond-buying program any time soon.
• TD’s Beata Caranci predicts the economy will add two million new jobs in 2013, roughly as many as it created in 2012, but that the first six months will be slow, with a pick-up in the second-half of the year. It would certainly help, she wrote in a note to clients this morning, if Congress and the Administration managed to pass the budget and find a definitive agreement on spending cuts and the debt-ceiling. Fiscal uncertainty is depressing business investment, which in turn slows down private-sector job creation.

The economy in November: still alive, and pretty well

By Erica Alini - Thursday, January 31, 2013 at 10:07 AM - 0 Comments

To recap:

• After three months of zero or near-zero growth, Canada’s GDP expanded 0.3 per cent in November, above analysts’ expectations and up 1.3 per cent from the same period last year, Statistics Canada said today.
• Most of the growth came from the goods-producing industry, which collectively climbed 0.6 per cent, up from 0.2 per cent in October.
• Oil and gas extraction, in particular, was up a healthy 0.8 per cent due to renewed activity after several maintenance-related shutdowns in October.
• The service sector was stagnant for the fourth consecutive month, edging up a mere 0.1 per cent. Gains in wholesale and retail trade were offset by weakness in the accommodation and food services industry and the financial sector.
• Real estate-related services were up 0.2 per cent.

What the analysts are saying: 

• The economy seems to have gained momentum towards the end of the year, although GDP growth for 2012 will still be beneath potential, wrote CIBC’s Emanuella Enenajor.
• TD’s Jonathan Bendiner predicts fourth-quarter growth of one per cent and a sluggish start to 2013, with growth bogged down by uncertainty over U.S. fiscal policy and the current spread between Canadian crude and world oil prices possibly weighing on investment in the oil sands.

The U.S. economy shrank—better news than you think

By Erica Alini - Wednesday, January 30, 2013 at 11:07 AM - 0 Comments

To recap:

• The U.S. economy shrank at an annualized rate of 0.1 per cent in the last three months of 2012, according to the advance estimate of the Bureau of Economic Analysis published today.
• That was well below the consensus expectation of 1.1 per cent annualized growth. It was also in stark contrast with the 3.1 per cent growth recorded in the previous three months.
• Weighing down the economy were an outsized drop in government spending, a slowdown in inventory building, and a decline in net trade (exports minus imports).
• Federal spending decreased 15 per cent in the fourth quarter, a sharp u-turn from the 9.5 per cent increase of the third quarter. Spending on national defense, in particular, plunged 22 per cent from a 12.9 per cent increase in the prior three months. It was the largest single-quarter drop in defense spending since 1972.
• On the other hand, consumer spending, as well as business and residential investment all grew.
• For the year as a whole, GDP grew 2.2 per cent in 2012, a few tacks above the 1.8 per cent recorded in 2011.

What the analysts are saying:

• Watch the federal expenditures pattern closely: the figures suggest the Department of Defense ramped-up spending in the third quarter for fear of the fiscal cliff, leaving very little for the last three months of the year, writes TD’s James Marple. With more austerity to come, the fourth quarter GDP release could be a preview of what 2013 is going to look like, with the governmental hand withdrawing and private spending finally taking the lead in propelling growth.
• Though higher payroll taxes might put a lid on consumer spending for a bit, writes RBC’s Nathan Janzen, the current sales pace should force U.S. producers to start rebuilding their inventories soon. Similarly, the plunge in government spending should be a one-time only affair. There’s good reason to believe the fourth-quarter dip will be short-lived.

Here’s why Moody’s just downgraded six Canadian banks

By Erica Alini - Monday, January 28, 2013 at 2:42 PM - 0 Comments

Credit rating agency Moody’s just downgraded by a notch the long-term ratings of BMO, ScotiaBank, Caisse centrale Desjardins, CIBC, National Bank and TD. RBC was spared.

The decision follows an identical move by Standard and Poor’s in December.

Here’s what Moody’s had to say about the rationale for the downgrade (the full press release is here):

High levels of consumer indebtedness and elevated housing prices leave Canadian banks more vulnerable than in the past to downside risks the Canadian economy faces:

By 30 September 2012, Canadian household debt to personal disposable income reached a record 165%, up from 137% as of 30 June 2007, as debt grew faster than personal incomes. Growth in consumer debt has been driven by rising house prices, which have increased by approximately 20% since November 2007.

Downside risks to the Canadian economy have increased:

Moody’s central scenario for Canada’s gross domestic product (GDP) is for it to grow between 2% and 3% in 2013, but downside risks have increased. The open, commodity-oriented economy is exposed to external macro-economic risks, which if they arise would have significant ramifications for the Canadian economy, and consequently its banks.

NBC, BMO and BNS have sizeable exposure to volatile capital markets businesses:

Moody’s believes that trading and investment banking activities expose financial firms to the risk of outsized losses and risk management and controls challenges, and leave them highly dependent on the confidence of investors, customers and counterparties.

Canadian banks’ have noteworthy reliance on wholesale funding:

The Canadian bank’s noteworthy reliance on confidence-sensitive wholesale funding, which is obscured by limited public disclosure, increases their vulnerability to financial markets turmoil.

Moody’s has removed systemic support from the ratings of all Canadian banks’ subordinated debt instruments that had benefited from support “uplift”:

The rating agency believes the global trend towards imposing losses on junior creditors in the context of future bank resolutions reduces the predictability of such support being provided to the sub-debt holders of the large Canadian banks given the Canadian regulators’ broad legislated resolution powers. The removal of support for subordinated debt is consistent with recent actions we’ve taken elsewhere, including in many European countries, reflecting the increased likelihood that sub-debt holders would be subject to burden sharing in the event support was required.

Mark Carney in Davos: what’s up next for the global economy

By Erica Alini - Saturday, January 26, 2013 at 4:03 PM - 0 Comments

(Photo courtesy of: World Economic Forum)

The job of fixing financial markets is by no means over, and what does or does not happen over the next two years will be crucial, Bank of Canada Governor Mark Carney said at the World Economic Forum annual gathering of the world’s financial elite in Davos, Switzerland.

Here’s a quick summary of the governor’s remarks:

• The global economy isn’t completely out of the woods yet

Bailouts and tighter banking rules haven’t eliminated the “tail risks” to the global economy and the stability of financial markets. The next bit of financial reform will have to increase oversight of the shadow banking sector (that is, institutions that in some ways operate like banks but have so far escaped stricter rules) and over-the-counter-derivatives, which are privately negotiated and have remained unregulated. These have contributed to exacerbating the crisis in 2008, and might do so again if left unchecked, the governor argued. The remarks were interpreted as a warning that the Financial Stability Board, an international financial regulator which Carney currently heads, will be soon tackling these issues.

• Central banks can’t do it all

Central banks, which have aggressively sought to stimulate growth in many advanced economies by keeping interest rates at rock-bottom and pumping money into the economy, can’t restore lasting global growth on their own.“There is not an ability of central banks to take all this risk out or set the seeds for a sustainable recovery,” Carney said. Sensible fiscal policy and structural reforms to eliminate the remaining vulnerabilities that permitted the 2008 crisis are essential parts of the cure, the governor noted.

• But monetary policy hasn’t run out of options

Still, Carney rejected suggestions by co-panelist Angel Gurria, head of the OECD group of rich countries, that central banks have run out of tools to prop-up fledgeling economic recoveries around the developed world. Monetary policy options haven’t been “maxed out,” the BoC chief argued.

The remark also ran counter the position of Sir Mervyn King, current governor of the Bank of England, which Carney will start heading in July. Speaking to reporters this week, King said he believed the bank had run out of means to boost Britain’s economic growth. Carney refused to elaborate on whether the remaining policy options he alluded to include NGDP targeting, a controversial measure the governor praised in a December speech and that has made him the target of some criticism in Britain. (Stephen Gordon explains what NGDP targeting is here.)

Continue…