Hey Guy’s!
With Stampede behind us, let’s get back to business!!
Funny how my belt is working a little bit harder this week :-) . #deepfriedfood #beer.
(I think this is a bit of a long post BUT I think worthy content. 5-7 min read)
Last week the Bank of Canada released their mid-year Monetary Policy Report (MPR) and made their most recent interest rate announcement.
The BoC’s language and data they report is an indicator on the Canadian and Global economic outlook. This will help anticipate the direction of interest rate movements in Canada.
This is a summary of information related to the Canadian Mortgage market.
Global Economy:
Canada has a small, open economy. With that is exposure to International “happenings” that trickle into our Mortgage market.
You’ve heard about the trade war, through the use of tariff’s, between the U.S and China already. Canada was also caught in this affair with tariff’s on Canadian steel, which have now subsided.
The impacts of this are dampening the Global economy. In fact, “all tariff increases globally over the past two years, as well as related uncertainty, are now estimated to reduce global gross domestic product (GDP) by 0.6 percent by the end of 2021.”
For me, the key here is “uncertainty”. I think a general human tendency, when faced with uncertainty, is to take the “do nothing strategy”.
For example, after my divorce I was facing a lot of uncertainty in my life. I held off making any big investment or large directional decisions in my life. I wanted time for things to settle.
We are seeing this in Alberta’s oil sector. With transportation constraint uncertainty (pipelines) and un-accommodative political support (nationally and provincially) some investment is either not happening or is being delayed.
From the Monetary Policy Report (MPR), “There is considerable uncertainty around estimates of the impacts from trade policy. Trade conflicts disrupt trade patterns and global value chains and negatively affect business investment and income.”
One “benefit” (I’m using this word very lightly) from uncertainty in the global economy is that bond yields have fallen.
Why?
“Many central banks have signalled shifts toward more accommodative monetary policy in response to slowing global growth and softening inflation expectations. Government bond yields have moved lower, reflecting market expectations of monetary policy easing.”
I’ve introduced the narrative, with my current clients, renewing your Mortgage at higher interest rates is a possibility.
I am still grounded in this conversation for the pure purpose of being in anticipation of this potential happening versus responding to it. That said, current Mortgagees are renewing their Mortgage into a very accommodative fixed interest rate environment.
Let’s look at a summary of the Canadian economy.
Canadian Economy:
I feel like a bit of an outsider. Kind of like looking into a family home from the street on a cold night. Everyone is warm inside, laughing, drinking and eating.
Over the past 5 years, other parts of Canada have seen improvements in asset prices, wages and overall prosperity.
Alberta’s economy and housing market have been stalled since 2014. I think Alberta’s outside on the street looking into the warm home (Canada’s economy) where everyone (most other provinces) are doing well.
“While the oil sector continues to undergo significant adjustment, investment in this sector is forecast to stabilize by 2020, and its exports should gradually increase. In other sectors, investment and exports are projected to expand at a moderate pace”.
The Bank of Canada has been saying (hoping?) that business investment will pick up the slack of lower consumer spending.
With global trade uncertainty, and the delayed ratification of the Canada-U.S-Mexico trade agreement (CUSMA), businesses are not exactly going all-in on the Canadian economy.
That said, consumer spending is picking up nationally. “Consumer spending is expected to grow steadily, supported by sustained income gains and solid consumer confidence.”
Alberta Treasury Branch reported incomes are flat, at best, in Alberta and rising nationally. “The median after-tax family income for Alberta as a whole was $62,950 in 2017, well above the national figure of $52,330. The negative effects of the recession are evident, however, with the national figure rising 7.2 per cent since 2014 compared to an increase of just 0.5 per cent in Alberta (not considering inflation).”
Again it seems like Alberta is on the outside looking in.
“Despite global developments, recent data and results from the summer Business Outlook Survey provide reassuring signs that business sentiment and investment in Canada are improving (chart below).”
Now Alberta needs some of this positive sentiment to rub off in our oil and gas sector. I think we all know this sector drives our provincial economy.
With Canada’s economy based largely on exports, I think the interest in the trade war and completion of the CUSMA agreement is important to take note of.
“Energy exports are expected to be roughly flat in 2019 and to grow moderately over 2020 and 2021. In the coming quarters, production and export of oil will continue to be influenced by Alberta’s production curtailments and transportation capacity constraints in Western Canada. Mandated curtailments are expected to be phased out later than was anticipated … and the Enbridge Line 3 replacement program has been further delayed.”
July 17th marked the latest inflation data from Statistics Canada. The Consumer Price Index (CPI) came in at 2 per cent flat. Other core measures of inflation are, CPI-trim 2.1%, CPI-median 2.2%, CPI-common 1.8%.
The Bank of Canada forecasts CPI inflation to decrease temporarily to 1.9 per cent in 2019 before returning to about 2 per cent in 2020 and 2021.
From the marginal slow down in our economy in 2018 and weather related economic holdbacks in the early part of 2019, there is a bit of “slack” in the Canadian economy.
Slack refers to the difference between current economic output and full potential economic output. This creates space for the economy to grow without significant upward pressure on inflation.
“Over the projecting horizon (2020 & 2021), economic slack is expected to be a source of modest downward pressure on inflation that is largely offset by a small boost from federal carbon pollution charges. Because economic slack is concentrated in a few regions, the impact of inflation may be less than would be expected if it were uniform across the country.”
Key Factors Of Note:
The Monetary Policy Report outlines the risks to the inflation outlook for Canada. These are key areas of interest to note. The BoC notes how increased economic protectionism through the use of increasing tariffs, or the reversal of tariffs, could dramatically effect the Canadian economy and our inflation outlook. These are both positive and negative risks to the inflation outlook.
“If current trade disputes were resolved and increases in tariffs introduce over the past couple of years were reversed, economic activity would be stronger. However, the impact of increasing protectionism, if it were to occur, could be a significant negative supply shock. The negative effects on economic activity could be very large and, in the near term, would be accompanied by increases in inflation due to higher tariffs.”
Aside from trade, here is a summary of two-sided risks (positive and negative) to the inflation outlook:
Stronger real GDP growth in the United States. The U.S could enact additional fiscal stimulus (meaning: U.S Government spending) measures to avoid a material decline in growth in 2020 (election year). Canada would benefit.
Sharp tightening of global financial conditions. Financial conditions could tighten suddenly and increase government bond yields, higher inflation expectations which would translate into a rise of debt-service burdens and decline in activity in sectors sensitive to interest rates and weaker global/Canadian economic growth. Canada would suffer.
Stronger consumption and rising household debt in Canada. Should Canadians spend more and save less than expected, that could increase inflation. However, increasing vulnerabilities of increased indebtedness would be a negative and possibly worsen any adverse shock long-term.
Weaker growth in China. Weaker demand from China would depress global demand and commodity prices, negatively affecting Canadian investment and trade.
More pronounced housing weakness in Canada. If markets were to worsen in Vancouver, Toronto and Alberta that poses a risk to the inflation outlook.
Conclusion:
In 2014 I was exposed to a philosophy that I think can be applied to any economic outlook, at any point in time. For my long-time readers, you might recall this in previous writing??
“The economy is about the same as it has always been. Opportunity mixed with difficulty. It isn’t going to change.”
I enjoy reporting this information to you so you have a Mortgage/Real Estate related summary of economic data to help guild your forward thinking.
Please forward this to others who might find value it in (do not spam though :-)).
If you know anyone who’s house if full with kids, just got married, divorced, or is relocating within or outside of Calgary – put them in touch with me!! Thank you in advance.
Talk soon,
Chad Moore
P.S
I plan on rafting the Bow River this weekend. What is a good entry and exit point? What is the estimated time on the water? Thanks for your help!
