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Economy

Survey: US business executives’ outlook on global economy Improving, inflation and personnel issues top concerns

by Bailey Amber March 14, 2023

According to the latest first-quarter AICPA & CIMA Economic Outlook Survey, US business executives still have significant concerns about the economy, but there has been a notable increase in optimism regarding revenue and profit expectations and other key performance indicators for the coming year.

This survey collected responses from chief executive officers, chief financial officers, controllers, and other certified public accountants who hold executive and senior management accounting roles in US companies.

Although there has been progressed, with 23% of business executives expressing optimism about the US economy’s prospects over the next 12 months, there are still many concerns.

Only 12% felt optimistic in the previous quarter, which was the lowest level since early 2009. Factors such as inflation, rising interest rates, and geopolitical concerns continue to weigh heavily on the US outlook. Additionally, 90% of those surveyed expressed concerns about the potential impacts of a recession, with 15% of respondents indicating that they were significantly concerned.

The survey indicates that business executives are more optimistic about their companies’ financial performance despite these concerns. The results show that many expect revenue and profits to increase in the coming year, which is a positive sign for the US economy.

This quarter, there are several positive indicators:

Business executives are anticipating a slight profit growth of 0.6% over the next 12 months, which is a significant improvement from the negative or zero growth projections over the past two quarters. Additionally, 12-month revenue growth projections have increased from an expected rate of 2.1% last quarter to 2.6%.

Furthermore, the number of business executives expressing optimism about their own organisations’ prospects over the next 12 months has increased from 35% to 47% quarter over quarter. This positive trend suggests business leaders are more confident in their companies’ abilities to weather economic uncertainties.

Additionally, more business executives are expecting their companies to expand at least somewhat over the next 12 months, with 52% of respondents indicating expansion plans, up from 47% last quarter. Among businesses with over a billion dollars in revenue, the proportion expecting expansion is even higher, with 68% indicating plans to expand.

The survey also revealed other important findings:

U.S. business executives’ outlook on the global economy for the next 12 months has improved, with the proportion expressing pessimism decreasing from 72% in the previous quarter to 48% currently.

For the sixth consecutive quarter, inflation remains the top concern for business executives. However, the challenges of “Availability of Skilled Personnel” and “Employee and Benefit Costs” have switched places and are now the second and third most significant challenges, respectively.

“While hiring demands may be cooling a bit, we’re not seeing widespread layoffs – most companies are looking to interim strategies to protect their workforce options. In fact, a third of business executives say they’re looking to hire immediately, while ‘availability of skilled personnel’ continues to be a top concern from the survey.” said Tom Hood, the AICPA & CIMA’s executive vice president for business engagement and growth.

“This illustrates the unique pressures companies have been under the past year, with so much uncertainty clouding financial modeling,”

he full report can be downloaded in the below link: https://www.aicpa.org/professional-insights/download/1q2023-aicpa-business-and-industry-economic-outlook-survey

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March 14, 2023 0 comment

Real Estate

A single word from the Federal Reserve chair fuels hopes of lower mortgage rates in Canada

by Bailey Amber February 3, 2023

written by Bailey Amber

This section is

by HSBC

‘The disinflationary process has started,’ says Jerome Powell

Published Feb 02, 2023 • 2 minute read

8 Comments

United States Federal Reserve chair Jerome Powell. Photo by Elizabeth Frantz/Reuters files

U.S. Federal Reserve chair Jerome Powell only had to say one word in his Feb. 1 news conference to raise hopes that mortgage rates in Canada may be heading lower.

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“We can now say, I think for the first time, that the disinflationary process has started,” Powell said following the Fed’s decision to hike its benchmark rate by 25 basis points to 4.75 per cent on Wednesday afternoon.

The key word — “disinflation” — was all markets needed. Stocks soared and bond yields tumbled as markets around the world anticipated that the Fed’s hiking cycle would end sooner rather than later, and might even kick into reverse, as the inflationary threat abates.

Mortgage strategist Robert McLister noted in a Mortgage Logic newsletter Thursday morning that Canadian five-year yields — a market closely traced in the setting of mortgage rates — quickly shed 10 basis points after Powell’s comments.

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“That’s exactly what Canada’s mortgage market needs if there’s any hope of lower fixed rates by spring,” McLister wrote.

While he said it was too soon to see Wednesday’s decline show up in mortgages, he noted that sliding bond yields over the past three months have already been tugging down five-year fixed rates.

McLister said it would likely take longer than usual for those falling yields to work their way into mortgage rates given the current macroeconomic environment, as banks pocket some of the improvement to buttress against downside risks.

“As we head into recession, lenders will keep their spreads wider than usual to account for perceived risk and other factors,” he said by email. “They may have to deal with higher default rates, less liquidity in funding markets, and more rate volatility (which increases hedging costs).”

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He said short-term fixed rates will edge down as the Bank of Canada comes closer to cutting rates, while variable rates won’t drop “materially” until a cut becomes official.

And he added that there is no doubt markets expect rates to come down.

“If you looked at the bond market, specifically things like overnight index swaps, forward rates and futures, there’s no question that financial markets expect lower rates by the end of this year,” he said.

“As we speak, markets expect five-year bond yields — a key driver of five-year fixed rates — to be 42 bps (basis points) lower in 12 months.”

The Federal Reserve chair’s comments were interpreted as dovish even though he also indicated more rate increases were coming, and that cuts were unlikely this year.

Last week, the Bank of Canada lifted its key policy rate 25 basis points to 4.5 per cent, but signalled that it would pause future hikes to give higher rates a chance to percolate through the economy.

• Email: shcampbell@postmedia.com

February 3, 2023 0 comment

Personal Finance

Stocks, large purchases a no-go as Canadians get more pessimistic about finances: poll

by Davies Otwell January 10, 2023

written by Davies Otwell

This section is

by HSBC

More felt their financial position deteriorated amid another interest rate hike and holiday bills

A pedestrian walks past festive lighting in Toronto, in December. Photo by Peter J. Thompson/National Post

Household sentiment soured in December, as holiday bills piled up and the Bank of Canada raised interest rates for the seventh time in 2022, according to a recurring poll that tracks consumers’ financial outlook.

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The latest version of Maru Public Opinion’s monthly household outlook index (MHOI) — shared exclusively with the Financial Post — found that 29 per cent of Canadians felt their financial position deteriorated last month, representing an increase of five percentage points from November. Meanwhile, 11 per cent of respondents said their financial position improved, compared with 14 per cent the previous month.

“Coming off of a fairly pessimistic November, Canadians were a little bit more upbeat in early December due to a combination of those who are younger making financial adjustments for better savings, retail bargains for lighter budgets, and the festive season,” said John Wright, executive vice-president of Maru Public Opinion. “However, in the aftermath, they’ve returned to their November more negative sentiments, soured by the impact of higher interest rates, inflation, and gift buying bills that are coming home to roost.”

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The survey was conducted Dec. 29 and 30, a few weeks after the Bank of Canada raised its benchmark lending rate a half point to 4.25 per cent. Maru’s index came in at 88 in December, down one point from November and well off the most optimistic result of 107, recorded in July 2021.

The baseline for the index is 100. A score below 100 indicates negative sentiment, while a score above 100 is considered positive. Maru, a subsidiary of global research firm Maru Group, comes up with its household index by asking a representative panel of about 1,500 people a series of questions designed to probe how they feel about the economy’s prospects over the next 60 days. Maru started tracking Canadian households’ outlook in February 2021.

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Asked if the economy was headed in the right or wrong direction, 63 per cent said the latter, unchanged from November. However, the number of Canadians who said they believe that the economy will improve in the next 60 days fell two percentage points to 37 per cent.

Sixty-three per cent of respondents said they could muster two or more months’ of savings to cover an unexpected cost, down from 69 per cent from November. The number of respondents who said they were likely to make a large purchase such as a car or furniture declined six percentage points to 13 per cent in December, meaning 87 per cent were unlikely to make such a purchase in the next 60 days.

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Financial markets appeared to be off limits.

Sixty-eight per cent said they were unlikely to invest in financial markets “because now is not a good time to do so,” up from 61 per cent. The last time Canadians held a similarly negative view was in September 2022.

“When we do the next survey it will be a real telltale sign of where we are headed in the spring,” Wright said, as Canadians continue to juggle inflation and interest rates that have risen on a “hockey stick” curve.

The benchmark interest rate began 2022 at 0.25 per cent, making last year the most aggressive tightening of monetary policy in the Bank of Canada’s history. Policymakers said they spike in borrowing costs was necessary to control inflation, which surged to 8.1 per cent in June and was hovering around seven per cent in November.

• Email: gmvsuhanic@postmedia.com | Twitter: gsuhanic

January 10, 2023 0 comment

Real Estate

Toronto rent climbs 26% from last year, but national average cools in October

by Bailey Amber November 23, 2022

written by Bailey Amber

After breaking through the $2,000-a-month level in September, the national average rent for all property types slipped 3.2 per cent to $1,976 in October, according to the latest report by Rentals.ca and Urbanation Inc.

While the month-over-month average decreased slightly in October, year-over-year results rose 11.9 per cent. Rents charged last month averaged $209 per month higher than in the same month a year ago at $1,767. The overall rise in rent comes as many potential home buyers continue to lease as interest rates rise and inflation runs hot. The Bank of Canada’s final interest rate announcement of the year is expected in December.

“The unprecedented growth in rents underway is broad-based across Canada, with most markets reporting double-digit annual rent inflation,” said Shaun Hildebrand, president of Toronto real estate research firm Urbanation, which co-released the report. “The rental market keeps getting hotter with each interest rate increase, coupled with a record-high increase in the population. The need to ramp-up rental supply has never been greater.”

Atlantic Canada has experienced the steepest rises in rental costs over the past year, with an average rent increase of 32.2 per cent. In Ontario, British Columbia and Alberta, rents have still risen dramatically, by 17.7 per cent, 15.1 per cent, and 13.2 per cent, respectively, over the past year.

The Greater Toronto Area saw larger increases than the province as a whole. Toronto’s average rent surged by 26.8 per cent year over year, Brampton’s rents were up 28.9 per cent and in North York the increase was 24.2 per cent. Burlington and Missisauga saw increases of 18.5 per cent.

The average monthly rent for purpose-built and condominium apartments in Vancouver was $2,976, the highest among markets with populations of more than one million. Meanwhile, rents in Toronto for purpose-built and condominium apartments stepped back to an average of $2,820 in October, down from $2,855 in September.

Edmonton remains the most affordable market in Canada, with an average rent of $1,273.

• Email: shcampbell@postmedia.com

November 23, 2022 0 comment

Real Estate

Canada’s housing woes won’t be solved by restricting newcomers, says immigration minister

by Bailey Amber November 14, 2022

written by Bailey Amber

Sean Fraser says Canada will need to bring in more workers who can build homes and shift them to where they are needed

A home under construction in Ottawa. Photo by Ashley Fraser/Postmedia

Closing the door on immigrants can “never be” the solution to solving the Canada’s housing shortage, says immigration minister Sean Fraser, as the country prepares to welcome a record 1.45 million newcomers in the next three years.

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Speaking to immigration experts at an event in Ottawa on Monday, Fraser said Canada will need to bring in more workers who can build homes and encourage people to shift to parts of the country that have a better “absorptive capacity” to tackle the housing sector’s problems, which include a steep rise in prices in the past few years.

“The solution to our housing shortage is not to close the door to newcomers, it will never be,” Fraser said at the annual Pathways to Prosperity National Conference. “We intend to bring skilled workers in, in larger numbers than was historically the case, who have the ability to work in home building.”

Canada has increased its immigration targets for the next three years, but some economists, such as Carrie Freestone from the Royal Bank of Canada, believe the government needs to embed its targets into its infrastructure plans to make sure the necessities are in place to “welcome everyone.”

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The country wants to bring in 465,000 permanent residents in 2023, 485,000 in 2024 and 500,000 in 2025 as it looks to tackle labour shortages. The numbers are higher than last year’s plan, which targeted 447,055 newcomers in 2023 and 451,000 in 2024.

Canada will also introduce new tools next year to better help the immigration system target sectors such as health care and construction that have the highest need for labour.

Construction continues to be among those industries reporting employment gains, yet there are still increases in the number of job vacancies, according to BuildForce Canada, a national organization representing all sectors of the construction industry.

The Ontario government last month said the province will need about 100,000 more construction workers this decade to meet its goal of building 1.5 million homes by 2031.

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Fraser said the government is about to embark on a “long-term planning exercise” to tackle future problems related to housing, adding he has “all the faith in the world” that the country will be able to avoid creating a “long-term systemic problem when it comes to the conversation about welcoming large numbers of newcomers.”

The minister added he was in constant touch regarding the issue with housing minister Ahmed Hussen, who sits next to him at the House of Commons.

“Our running joke as I sit down and say, ‘Ahmed, if I can continue to increase our immigration numbers, can you build enough houses?’ He says, ‘Well, depends, can you bring enough newcomers with the skills to build houses to make sure we all have … places to live?’” Fraser said. “Though we kind of joke about it, that’s part of the solution.”

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Rebekah Young, head of inclusion and resilience economics at the Bank of Nova Scotia, said the minister’s message was broadly positive since labour shortages are “clearly one of the bottlenecks impeding greater supply.”

But she added the ministers should “be sure to let their provincial and municipal counterparts in on the joke” to ensure the federal policies align across all government levels since many of the “policy levers” for unlocking more homes are at the provincial and municipal levels.

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Immigration plays a key role in Canada’s labour supply, accounting for 84 per cent of the growth in the total labour force during the 2010s, according to Statistics Canada.

At the same time, data shows the skills of newcomers are regularly underutilized. The number of university-educated immigrants working in jobs requiring a university degree fell to 38 per cent in 2016, from 46 per cent in 2001, compared to 60 per cent for Canadian-born workers, according to Statistics Canada.

• Email: nkarim@postmedia.com | Twitter: naimonthefield

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November 14, 2022 0 comment

Business

‘Declining household wealth will further slow consumption growth’: Secretary to the Treasury

by Bailey Amber November 12, 2022

written by Bailey Amber

The global economy’s prospects have deteriorated dramatically since the April Pre-election Economic and Fiscal Outlook (PEFO).

The likelihood of major industrialised countries entering a recession in the near future is growing, and China’s development outside of the pandemic is likely to be the slowest in more than 30 years. Dr Steven Kennedy, the Treasury Secretary, released a statement warning that the slowing of consumption growth will be worsened further by diminishing household wealth due to continuous, predicted reductions in housing values.

The impact of pandemic activity restrictions is still being felt, albeit the 612 per cent increase in consumption in 2022-2023 is expected to be relatively transitory, owing primarily to the sustained recovery in services spending and travel abroad. The services-driven recovery is expected to slow by early 2023, with consumption growth falling to 11 per cent in 2023-2024.

Furthermore, as more mortgages exit fixed-rate periods, more households will experience the effects of higher interest rates on their budgets.

“Workers at the lower end of the income distribution are expected to be impacted most sharply by the rising cost of essentials, as the cost of food, housing and energy make up a larger share of their spending, Dr Kennedy said.

“With prices set to grow faster than wages for a period, indexation of pensions will continue to be linked to growth in consumer prices rather than benchmarked against male total average weekly earnings.

Furthermore, it is predicted that inflation will reach a peak of 73.4 per cent by December 2022 before progressively decreasing to 31.2 per cent by June 2024.

“While this peak remains the same as the profile prepared for the July Ministerial statement, high inflation is expected to persist for longer than previously expected, largely due to the pass-through of higher energy prices to household bills.

“Electricity and gas prices are expected to directly contribute ¾ percentage points to inflation in 2022–23 and 1 percentage point in 2023–24. This assumes consumer electricity prices will increase by an average of 20 per cent nationally in this financial year and 30 per cent next year.”

Without the subsidy programmes, data from the ABS released the day after the Budget shows that energy costs would have risen by about 16 per cent in the third quarter of this year. The increase in pricing this fiscal year is attributable to market dynamics and increases in default market offer published by the Australian Energy Regulator (AER) in May. Wholesale gas prices on the east coast remain more than double their pre-Russian invasion of Ukraine norm, while wholesale power prices have nearly tripled this year over last.

At the same time, domestic weather events and supply constraints, combined with strong demand in residential construction and consumer goods, are contributing further to generalised price growth.

The way ahead

According to the statement, the fiscal position’s near-term prognosis has improved following PEFO, with the underlying cash deficit falling by $41.1 billion in 2022-2023 and $12.5 billion in 2023-2024. Future projections show a decrease in gross and net debt each year. The cost of sending payments has risen due to higher-than-expected inflation. Payments have increased by $92.2 billion over four years, excluding the new policy.

A third ($34.1 billion over four years) reflects increased payment indexation. On September 20, the most current indexation of income support payments occurred, representing the greatest indexation rise for pensions and allowances in 30 years.

Higher inflation will continue to materially increase payments in the subsequent six-monthly indexation updates (March and September) until inflation returns to the RBA’s target range. Payments will then stabilise at a proportionally higher level.

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November 12, 2022 0 comment

Real Estate

Softening housing market is not a crash

by Bailey Amber November 10, 2022

written by Bailey Amber

Watch: CIBC economist Benjamin Tal on Canada’s fourth quarter outlook

Publishing date:

Nov 09, 2022 • 34 minutes ago • < 1 minute read • Join the conversation

A 'for sale' sign is displayed outside a home in Toronto. — A ‘for sale’ sign is displayed outside a home in Toronto. Photo by Carlos Osorio/Reuters files

November 10, 2022 0 comment

Personal Finance

Ottawa reveals plan for new tax on stock buybacks

by Davies Otwell November 4, 2022

written by Davies Otwell

The tax plan is expected to increase federal revenues by $2.1 billion over five years

Publishing date:

Nov 03, 2022 • 14 minutes ago • 4 minute read • Join the conversation

Deputy Prime Minister and Minister of Finance Chrystia Freeland attends a news conference about the fall economic statement in Ottawa. Photo by Blair Gable/Reuters

The federal government plans to impose a new tax on public companies who pursue share buybacks, a popular way to reward investors and reduce volatility, but one criticized by some politicians for diverting funds away from pressing goals like the energy transition and domestic job creation.

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The tax plan, unveiled by Finance Minister Chrystia Freeland in her fall economic update Thursday, is to be fleshed out in the 2023 budget and come into force Jan 1, 2024. It is expected to increase federal revenues by $2.1 billion over five years.

Freeland said the tax will be “similar” to the one per cent buyback tax in the Inflation Reduction Act signed into law by U.S. President Joe Biden in August.

“We’re taxing share buybacks to make sure that large corporations pay their fair share, and to encourage them to reinvest their profits in workers and in Canada,” Freeland said in prepared remarks for the economic update.

“While buying back shares is one legitimate way that corporations can return value to their shareholders, it can also divert corporate resources away.”

Energy companies weren’t singled out, but recent share buybacks amid record profits from rising oil prices and inflation have drawn criticism from government.

Environment Minister Steven Guilbeault, in particular, criticized oil companies earlier this month for returning money to shareholders while making limited investments in energy transition.

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Oil and gas companies are making record profits.

It’s time for them to make record investments in clean energy and reducing pollution. pic.twitter.com/km14XbZ3ST

— Steven Guilbeault (@s_guilbeault) October 27, 2022

At a news conference Thursday, Freeland said she believes the share buyback tax is better than a “windfall” tax on energy companies, such as the ones imposed by the United Kingdom and European Union. Canada itself has imposed specific levies on financial institutions including banks and insurers, noting that government initiatives helped them remain were profitable throughout the COVID-19 pandemic.

Freeland said she believes the share buyback tax announced Thursday is a “very appropriate step” because it sets up an incentive for all public companies.

“What that tax does is it create an incentive to do precisely what we want to see big Canadian companies doing… taking their profits and investing them in the productive capacity of Canada,” she said.

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“It’s a smart tax. It will raise some money for Canada, which is a good thing. But perhaps even more importantly it creates the right set of incentives for companies to do the right thing.”

Word of the planned share buyback tax leaked out before the economic update, and received a chilly reception from some business leaders and finance experts.

Speaking before the tax on corporate share buybacks was confirmed, Alex Gray, senior director of fiscal and financial services policy at the Canadian Chamber of Commerce, said the tax would limit “efficient” allocation of capital. He added that, in the Chamber’s view, it would hinder Canadian businesses’ ongoing recovery from the economic consequences of the COVID-19 pandemic and as recession concerns mount.

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“As stock buybacks help improve stock liquidity while limiting stock volatility, such a proposal would ultimately increase economic uncertainly at an already precarious time,” he said.

“When higher volatility is expected, companies can increase their buyback intensity to stabilize stock prices, thereby enabling smoother trading and lowering transaction costs.”

Yrjo Koskinen, a professor of Finance at the University of Calgary’s Haskayne School of Business, said share buybacks are being “vilified” in public discussion even though it makes more sense to return funds to shareholders via buybacks and dividends than to invest in unprofitable projects.

“This applies to all companies, including energy,” he said.

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Moreover, Koskinen said that if Canada matches the one per cent buyback tax in the United States, it would be unlikely to change the calculus for energy companies that are unlikely to profit from transition investments in the short term.

“If investing in energy transition was unprofitable before the tax, it would also remain so after the tax,” he said. “So the tax on buybacks would be mostly a symbolic act with limited consequences.”

Koskinen said he thinks there should be accelerated investments in energy transition to address the risks of business as usual, but he said there are probably better ways than a new tax.

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“In order to foster long-term investments, it would be of utmost importance to create a stable regulatory and tax environment, so that companies dare to take the plunge,” he said. “To me the tax on stock buybacks sounds more like a gimmick rather than a serious policy.”

In the fall economic update, Freeland reiterated her government’s earlier pledge to introduce a new minimum tax regime for the wealthiest Canadians, and to implement a global minimum tax regime to ensure that large multinational corporations cannot avoid paying taxes, regardless of where they do business.

• Email: bshecter@nationalpost.com | Twitter: BatPost

November 4, 2022 0 comment

Real Estate

Calgary home sales on track for record year even as market eases in October

by Bailey Amber November 2, 2022

written by Bailey Amber

Calgary home sales are on track for a record year even as the real estate market continued to ease in October, with sales and new listings down for a seventh straight month, and benchmark prices dipping slightly from September.

Total sales dropped to 1,857 units for the month, down from 1,901 in September and 2,184 in October last year, according to figures released Tuesday by the Calgary Real Estate Board (CREB). So far this year, sales have reached 26,823, setting the market up for a record 2022 with only two months left to go.

November 2, 2022 0 comment

Real Estate

David Rosenberg: Canada’s housing bubble has burst — now brace yourself for the economic hit

by Bailey Amber October 29, 2022

written by Bailey Amber

This section is

by HSBC

The upcoming recession could be deeper than what Bay Street folks are expecting

Publishing date:

Oct 28, 2022 • 5 hours ago • 3 minute read • 20 Comments

Canadian home prices are now down nine per cent from their peak en route to a 30 per cent or so decline, says David Rosenberg. Photo by Tyler Anderson

By David Rosenberg and Alena Neiland

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Canada’s housing bubble has burst. The MLS house price index is now down nine per cent from last February’s peak en route to a 30 per cent or so decline, which we view as consistent with deteriorating affordability and the uber-aggressive tightening of monetary policy by the Bank of Canada.

We estimate the negative wealth effect associated with such a price slump will pull down gross domestic (GDP) growth by about 2.5 percentage points. Add to this the deleveraging effect of higher interest rates on consumption and investment, and the hit to trade from the expected downturn in the United States and global economy, and it’s not difficult to see why Canada’s upcoming recession could be deeper than what Bay Street folks are expecting.

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The last time all these factors were at play was the early 1990s, when Canada entered a Bank of Canada-induced recession

Individuals spend more when the value of their assets (for example, equities and houses) rises because they feel they are getting wealthier. This occurs through several channels: there is a behavioural aspect that translates into spending more of one’s earned disposable income, as well as an increase in credit access, a theme that has dominated in the face of persistently low borrowing costs over the past decade-plus. As homeowners continue to make regular payments on their mortgages, their credit scores improve, making them better candidates to pile on more debt.

But with the Bank of Canada’s overnight target rate having risen 350 basis points since March (with more to go), the theme of rising wealth is bound to fade as credit access dries up and real estate prices collapse. The MLS house price index is already down nine per cent from last February’s peak and the correction is far from over.

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Households are being hit with a confluence of factors heading into this recession: rapid restrictions on credit access, higher debt-servicing costs on near-record-high household debt levels and inflation limiting disposable income. This is all being compounded by wealth depletion in both equity and residential markets, which also weigh on sentiment.

The last time all these factors were at play was the early 1990s, when Canada entered a Bank of Canada-induced recession and residential property prices fell by almost 30 per cent from their peak between 1989-1996.

This housing drawdown is just getting started

While consumption is set to slow because of the multitude of factors mentioned above, the wealth effect will also contribute negatively. If home prices end up falling 30 per cent from the peak — which we view as consistent with deteriorating affordability and the uber-aggressive tightening of monetary policy by the Bank of Canada — consumption would fall about five per cent (using the central bank’s estimate of nearly six cents per dollar of marginal propensity to consume due to changes in housing wealth), and this translates to a hit of roughly 2.5 percentage points to annual GDP growth.

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Even if you assume Canada Mortgage and Housing Corp. is right about a more modest 15-per-cent peak-to-trough decline in home prices, the GDP hit from the wealth effect will be around 1.3 percentage points, which is still significant. Worse, there is reason to believe the overall economic impacts will be further skewed to the downside, because this analysis does not even consider the deleveraging effects of higher interest rates on consumption and investment.

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While acknowledging the housing-induced negative wealth (albeit not necessarily the extent), the Bank of Canada is not about to drop its hawkish stance amid still-hot and above-target inflation. With further policy tightening in the pipeline, the overnight swap market is now pricing a peak rate of 4.25 per cent by year-end, so this housing drawdown is just getting started. And given consumers’ sensitivity to the pullback in real estate prices, Canada’s recession is likely to be deeper than what many Bay Street types are expecting.

As such, the Canadian dollar is bound to have many more months and quarters of weakness and not just because of the bear market in commodities, but also because of the serious repercussions surrounding the economic outlook from the escalating weakness in home values and the multiplier impacts on the consumer broadly speaking.

David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. Alena Neiland is an econoimist there. You can sign up for a free, one-month trial on Rosenberg’s website.

October 29, 2022 0 comment

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