Here are segments of an important update from RBC.com

 


Canada’s economy recovered from the winter wallop
Canada’s economy recovered strongly in the second quarter with real GDP growing at an annualized 3.1% rate. This was a marked improvement from the first quarter’s revised 0.9% gain and confirmed that first-quarter, weather-related weakening in activity temporarily reduced the economy’s momentum. The gain was broadly based with domestic demand rebounding by 3.0% following the 0.2% decline reported in the first quarter. Net exports also provided a solid boost to the growth rate in the second quarter. Extreme cold earlier this year hampered transportation facilities, rail systems in particular, and contributed to first-quarter declines in both exports and imports. In the second quarter, exports jumped by 17.8% and imports rose by 11.1%. The greater rise in the former resulted in net exports contributing 1.7 percentage points to annualized GDP growth in the second quarter.

 

And the beat goes on…..
In July, Canada’s trade deficit in volume terms narrowed for the third consecutive month, which augurs well for an improvement in the third quarter relative to the second-quarter average. This early read tracks a potentially stronger contribution to growth from net trade in the third quarter than the 1.7 and 1.6 percentage point additions in the second and first quarters, respectively. The addition from net trade in the third quarter would mark the eighth consecutive quarterly support from the component, the longest such streak on record back to at least 1981. Moreover, recent improvements have been led by strength in exports rather than import weakness with
the level of real exports in July already an annualized 13.7% above its second-quarter average.


Bank of Canada sees no need to change policy stance
The Bank of Canada left the overnight rate at 1.0% and the neutral policy basis intact earlier this month despite the stronger than expected gain in real GDP. When combined with the downgrade to the first quarter’s growth rate, the Bank said it left the level of real GDP in line with its expectations. The Bank highlighted the improvement in Canadian exports in the second quarter although stated that the upward momentum needs to be sustained in order to support business investment and employment gains. This sentiment indicates that more evidence will be needed before any change to policy will occur. The main tenet of the Bank’s July position appeared to be unchanged with the economy needing to “reach and remain at full capacity” in order for its inflation target to be met on a sustained basis and that monetary policy support continues to be required. The Bank expects the economy to reach full capacity “during the next two years.” In July, the Bank stated that the economy was expected to “reach full capacity around mid-2016.”

 

Read the full report by clicking here.

 

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There were few signs that Canada’s home resale market was letting up in this morning’s statistics from the Canadian Real Estate Association (CREA). The numbers showed that home resales rose (albeit modestly) for the sixth consecutive month nation-wide in July to the highest level since March 2010, and that prices were still up comfortably from year-ago levels. While the fact that July sales levels moved further above the longterm average indicates that the market is getting hotter overall, this latest increase stemmed more from the temperature rising in previously cooler local markets than an overheating in markets that saw strong gains earlier this year such as Toronto, Calgary and Vancouver. In fact, activity fell in these three markets in July. Where the upward pressure emerged in July relative to June was in areas such as Montreal, Ottawa, Victoria and Halifax in July, which were soft markets until very recently. 

 

 

The supply side of the market continued to adjust upwardly, thereby maintaining some balance with demand overall. The Calgary and Toronto markets continue to be among the few where supply is tight relative to demand; however, Toronto saw some reprieve in July with new listings rising faster than resales. The demand-supply balance also eased in Vancouver.

 

Home prices (MLS HPI) climbed at a year-over-year rate of 5.3% overall in Canada in July, still faster than growth in household disposable income (3.2%); however, the increase was still narrowly based in Calgary, Toronto and, to a lesser extent, Vancouver, where gains were substantial.

 

For the full report please click here.

 

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Home resale activity continued to be within a constructive range in Canada in November, remaining essentially flat from October and still up notably from a fairly weak level in November 2012. The latest batch of statistics released today by the Canadian Real Estate Association (CREA) is consistent with our view that the vigorous rebound in home resales since spring has largely run its course and that activity will stabilize near recent levels in the short term.

 

Following a seven-month stretch of monthly gains from March to September, and a 3.3% decline between September and October, November 2013 resales came in just 0.1% below the October tally. Resales in Canada still tracked higher than year-ago levels; however, the rate of increase moderated to 5.9% (from a recent high of 18.2% in September). The level of activity in November was essentially on par with the 10-year average (exceeding it marginally by 0.7%), thereby indicating that the market is sustaining a pace that is neither too hot nor too cold. On a year-to-date basis, home resales were effectively flat (edging 0.2% higher) from the same period last year, reflecting a very slow start to 2013.

 

At the national level and in the vast majority of local markets, demand-supply conditions continued to be balanced for the most part despite a 1.8% rise in new listings overall in Canada between October and November. Nonetheless, earlier tightening of market conditions in a number of markets (including Calgary and Toronto) this summer led to further acceleration in home price increases in November. The composite MLS HPI rose 4.1% from November 2012, representing the strongest annual gain since July 2012. Calgary and Toronto contributed most to this annual increase.

 

Faster-rising prices, while still reasonably contained at this stage, represent a risk to housing affordability if the current trend persists too long. We believe, however, that upward pressure will diminish in the period ahead as the earlier strength in homebuyer demand continues to partly unwind and that supply of homes (consisting increasingly of condos) available for sale continues to grow. We suspect that the run-up in resales during the summer and early fall included purchases made by many buyers who advanced their decision to buy in order to lock-in lower mortgage rates. We expect that some further modest pullback may occur in the months ahead as payback for sales that may have been advanced.

 

Link to the full report here.

 

Till next time ...

 

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  • The forward guidance statement reiterated that "as long as" there is significant slack, low inflation and improving household balance sheet conditions, the current policy support will remain

  • The bank says that "over time" as conditions normalize a "gradual normalization of policy interest rates can also be expected."

  • Today’s statement reconfirmed that the Bank will look through the choppiness in the economic data with the expectation that the economy’s momentum will shift into a higher gear thereafter. In July 2013, the Bank estimated that the gap would close around mid-2015. While today’s statement incorporated a slightly less optimistic view of the near-term outlook for US growth and acknowledged that in turn, a firming in Canadian export and business investment was evolving slower than projected, the main thresholds required for the Bank to start to reduce the amount of stimulus remained intact. On balance, by highlighting that the output gap will begin to narrow in 2014 and that imbalances in the household sector are likely to continue to dissipate, today’s statement supports our expectation that the Bank will begin to pare back the amount of stimulus in the second half of 2014

The Bank of Canada made no change to the policy rate today as was universally expected. The statement reiterated that there are three factors supporting the case for the current "considerable monetary policy stimulus" to remain in place: muted inflation, significant economic slack, and the constructive evolution of household balance sheet imbalances. As these factors normalize, "a gradual normalization of policy interest rates can also be expected."

 

The statement acknowledged that the global economy was expanding as the Bank expected; however, US growth has been slightly slower while Europe and Japan showed improvement. The Bank acknowledged that geopolitical events were exerting upward pressure on oil prices although overall commodity prices have been stable.

 

Although the global economy is expanding as expected, the attendant effect on Canada has been less favourable with the anticipated strengthening in business investment and export growth not, as yet, playing a strong role. Canada’s housing market has proven to be somewhat firmer than expected; however, this has not fuelled a pickup in credit demand, and the Bank expects recent increases in mortgage rates to support a continuation of the trend toward improvement in household imbalances.

 

The 1.7% annualized increase in second quarter gross domestic product (GDP) exceeded the Bank’s forecast; however, it confirmed that the economy was affected by one-off factors including flooding in Alberta and a construction industry strike in Quebec as the growth rate was lower than the 2.2% annualized gain recorded in the first quarter of 2013. Despite this overshoot in the second quarter, the Bank still looks for the economy to grow at a rate in line with its forecast contained in the July Monetary Policy Report thereby suggesting that policymakers may have tempered the magnitude of the rebound in the real GDP growth forecast for the third quarter. In July, the Bank projected real GDP growth of 1.8% in 2013, and 2.7% in 2014 and 2015. These forecasts are in line with our own projections. Against the backdrop, the Bank looks for the output gap to begin to narrow in 2014.

 

Today’s statement reconfirmed that the Bank will look through the choppiness in the economic data with the expectation that the economy’s momentum will shift into a higher gear thereafter. In July, the Bank estimated that the gap would close around mid-2015. While today’s statement incorporated a slightly less optimistic view of the near-term outlook for US growth and acknowledged that in turn, a firming in Canadian export and business investment was evolving slower than projected, the main thresholds required for the Bank to start to reduce the amount of stimulus remained intact. On balance, by highlighting that the output gap will begin to narrow in 2014 and that imbalances in the household sector are likely to continue to dissipate, today’s statement supports our expectation that the Bank will begin to pare back the amount of stimulus in the second half of 2014.


Written by:

Dawn Desjardins, Assistant Chief Economist, RBC Economics


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