Tuesday, October 31, 2006

Economy accelerates to fastest pace in 6 months

TAVIA GRANT

Globe and Mail Update

Canada's economy expanded at the fastest pace in six months in August, boosted by gains in the energy and retail sectors.

The 0.3-per-cent increase in the gross domestic product came after a 0.2 per cent gain in July, Statistics Canada said Tuesday. August's gains matched economists' expectations.

While the economy continues to benefit from strong domestic demand and rising commodity prices, other sectors, such as manufacturing and construction, are still holding back growth, economists said.

“Even with the solid gain in August, this hardly represents the start of a new, bold trend for Canadian GDP growth,” wrote Doug Porter, senior economist at BMO Nesbitt Burns Inc., in a research note.

“We expect growth to struggle to stay above the 2-per-cent threshold for the next few quarters, undercut by a struggling manufacturing sector. The slow but steady deterioration in the previously booming construction sector is another drag on the outlook.”

CIBC World Markets senior economist Avery Shenfeld said it would require “two more soft quarters before the Bank of Canada sees enough slack to begin cutting interest rates.”

Service industries contributed 0.4 per cent to the growth while goods-producing industries added 0.2 per cent. The energy sector, wholesale trade and retail sales were “especially vibrant,” while utilities and construction declined, the Statscan report said.

The energy sector advanced 0.7 per cent in the month. Natural gas production and transportation drove the sector's gains.

The mining sector excluding oil and natural gas advanced 1.5 per cent, amid higher output of metallic and non-metallic minerals.

For the second month in a row, activity in the manufacturing sector was flat. The industry's activity level was 1.7 per cent lower than at its peak in December, 2005. Among factories, the most significant gains were in the production of chemicals, food products and furniture. The largest declines were in machinery, wood products, electrical appliances and transportation equipment.

The construction sector dropped for a fourth straight month, declining 0.1 per cent in August.

“Decreases in residential and non-residential construction were partly offset by an increase in engineering and repair works,” the report said.

Tourism-related industries, such as transportation, accommodation and food services, benefited from the effects of the international AIDS convention in Toronto, as well as an 1.2-per-cent increase in the number of international overnight visitors.

In agriculture, total crop production this year is expected to be lower than last year with an anticipated drop in wheat, barley, grain corn and canola, Statscan said.

Wholesale trade grew 1.7 per cent in August as growth in renovations stimulated sales of building materials.

Retail sales rose 1.1 per cent, led by auto sales and demand in home centres, hardware stores and furniture stores.

The American economy - Slow road ahead

Oct 26th 2006 | WASHINGTON, DC
From The Economist print edition
America's long-term potential rate of growth is falling, perhaps to its lowest pace in over a century

EVERYONE knows that America's economy is slowing. Thanks to the bursting of the housing bubble, overall GDP growth has fallen back sharply. The biggest short-term uncertainty for the world economy is whether American consumers stop spending and drag the country into recession. But beyond the business cycle, another slowdown has received scant attention. America's potential rate of growth—that is, the pace at which annual output can expand without pushing up inflation—is also falling. By some estimates, it could drop to 2.5% over the next few years, which would be the slowest pace in over a century.

If that happens, the consequences will be serious. Tax revenues will grow more slowly than expected. Monetary policy will become harder to manage: as the 1970s showed, inflation can get out of control if central bankers do not realise that an economy's speed limit has fallen. Financial markets will be disturbed as conventional wisdom adjusts from an assumption of 3-3.5% potential output growth, and investors downgrade their expectations.

Potential output is hard to estimate, let alone predict. That is because an economy's trend growth rate cannot be measured directly. It has to be inferred. Over the long run economic growth depends on two things: increases in the supply and productivity of labour. The growth of labour supply, in turn, depends on the growth of the working-age population, the proportion of people who work and the number of hours they put in. The pace of productivity growth depends on capital investment, improvements in business processes and technological innovation. By looking at such trends, economists can estimate future potential output.

Although it generates precise-looking forecasts, this kind of “growth accounting” is fraught with difficulty. Both labour supply and productivity growth bounce around during business cycles. The share of people willing to work may fall in a recession, for instance, as discouraged people temporarily drop out of the workforce. Once job prospects pick up, they might return. Productivity growth is usually higher at the beginning of an expansion than at its end as firms work their existing employees harder before hiring new people. As a result, potential output can temporarily diverge from its underlying trends, making it even harder to estimate.

Nonetheless, the broad post-war history of America's underlying growth rate is clear. In the 1960s potential output accelerated to around 4% a year, largely because more women got jobs. In the early 1970s, for reasons that are still ill-understood, productivity growth slowed sharply, pulling down the trend rate of growth. Between the mid-1970s and mid-1990s America's economic speed limit was about 3%. Around half that growth came from an expanding workforce; the other half from productivity growth.

Thanks mainly to higher productivity growth, but also to a rise in the number of Americans working, trend growth rose suddenly in the mid-1990s. After the 2001 recession, productivity growth accelerated again, while the growth of labour supply slowed sharply. The share of working-age Americans in jobs fell after rising almost continuously for over four decades (see chart 1). This fall was widely interpreted as temporary, a sign that the recession was deeper than it appeared. But after five years of expansion, it has not been reversed, suggesting (although the evidence is still tentative) that structural changes are afoot. These labour-markets shifts are the main reason to be pessimistic about America's potential output growth.

So why is the proportion of Americans who work falling? For three reasons. First, the baby-boomers are heading towards retirement. The share of people aged between 55 and 64 has risen from 10.5% in 1995 to 13.3% in 2005 and is likely to reach over 16% by 2015. People over 55 tend to work much less than younger folk.

Second, the rush of women into the workplace has stopped. The proportion of women working rose from below 40% in 1960 to a peak of over 60% in 1999. It has subsequently fallen slightly.

Third, the rate of teenage employment has plunged. In the 1990s over 50% of young people aged 16-19 had jobs. Today just over 40% do, the biggest drop since records began. This decline is a bit of a mystery, since job growth in the kinds of industries that tend to employ young people—restaurants and shops—has been well above the national average. It may have happened because teenagers are staying at school or college longer, and are working less on the side. More education may mean higher future productivity, but in the medium term it cuts the number of available workers.

If economists at the Federal Reserve in Washington, DC, are right, these three components are likely to result in a bigger change than has hitherto been expected. A recent study* suggests that America's trend rate of labour-force participation could drop by a further 1.4 percentage points in the next four years, to just over 64%. By combining these projections with the Census Bureau's estimates for the growth in the working-age population, they calculate likely changes in the overall supply of workers. By 2010, the Fed economists reckon, labour supply in America will be rising by a mere 0.4% a year, well under half its current rate.
The geezer difference

These projections could be too gloomy. Washington's official number-crunchers, such as the Congressional Budget Office, predict that labour-force growth will slow down, but not that dramatically. An unexpected jump in what Dick Berner of Morgan Stanley calls the “geezer labour force” could make a difference as ageing baby-boomers work longer. Men in their 60s are already the fastest-growing segment of the workforce, although this has not made up for the overall decline.

A rise in immigration could increase the supply of labour, too, particularly since the proportion of immigrants who work is higher than that of native-born Americans. As the labour shortage begins to bite, the demand for immigrants should rise. But the politics of the issue argue against a big rise in the next few years. The government is under increasing pressure to crack down on employers who hire illegal workers, and Congress recently passed legislation to build a fence along a large stretch of the Mexican border.

It seems very likely, then, that America's labour supply will grow more slowly. And if that happens, potential output growth will too, unless productivity growth accelerates.

Unfortunately, the latest evidence suggests that, if anything, productivity growth is slowing unexpectedly. Over the past two years, in the non-farm business sector, it slowed to an annual average of 2% from an average of almost 4% in the previous three years.

And even that figure may be too high. The Bureau of Labour Statistics recently said 810,000 more jobs were created between March 2005 and March 2006 than they first thought. Thanks to those extra jobs the productivity figures for 2005 may be revised down by a further half of a percentage point. For the economy as a whole, the figure is some 0.3-0.5 percentage points lower than the official productivity figures suggest, because productivity growth in farming and government, which are left out of those figures, is even lower.

The longer the economy's expansion goes on, the slower productivity growth is bound to be. But the pace of the deceleration has begun to raise concerns. The small band of economists who study these things now agree that underlying productivity growth rose sharply in the late 1990s, from around 1.5% to some 2.8%. Three of those experts, Dale Jorgenson, of Harvard University, Kevin Stiroh, of the New York Fed and Mun Ho, also of Harvard, have calculated that over 60% of the late 1990s productivity surge was related to information technology. The industries that saw the biggest productivity gains were those that used IT most intensively.

The 2001-04 productivity surge is now the focus of an argument with big implications. Only 30% of that acceleration was related to IT, says Mr Jorgenson and his colleagues. Optimists take that as a good sign. It shows improvements in business processes spawned by the IT revolution are spreading through the broader economy. The economists reckon underlying business productivity growth is now around 2.5% (or around 2.2% in the overall economy). This is slower than in the late 1990s, but still far above historical averages.

Others are more worried. Robert Gordon, of Northwestern University, reckons that the post-2001 acceleration was the result of cost-cutting, not innovation. Other economists note that the pace of investment, particularly in IT, is much lower than it was in the 1990s. JPMorgan's calculations, for instance, show that firms' spending on IT equipment has grown by only 5.5% a year in this expansionary period, compared with over 20% a year in the late 1990s. Lower capital spending, they fear, could be a harbinger of slower productivity growth. Morgan Stanley's Mr Berner worries that high oil prices may also have hurt underlying productivity growth, by shifting the relative profitability of different sectors of the economy (much as the oil shocks of the 1970s did).

Mr Gordon sees the underlying rate of business productivity growth slowing to below 2.5% which, by his calculations, implies a rate of 2.1% for the overall economy. Coupled with the slowdown in labour supply, he concludes that America's potential growth rate could fall to 2.5%. Although their predictions for productivity and labour supply are different, JPMorgan's economists agree with his figure.

Mr Gordon's calculations suggest that 2.5% would be America's slowest economic speed limit in over a century (see chart 2). That is less surprising than it sounds. Though the statistics are less reliable for the years before 1950, it seems that in the early 20th century potential output grew rapidly thanks both to technological innovation and rapid immigration. Although actual output tumbled during the 1930s, America's potential growth rate did not. Some scholars argue that the 1930s were among the most technologically innovative years of the century.

Since no one foresaw the productivity revolution of the mid-1990s, these predictions could prove too pessimistic. The next “killer application” could be just around the corner. Even without rapid investment, the IT revolution may yield more productivity gains. But without some such happy chance, it looks as though America's potential growth rate is heading for a slowdown, at least for the next few years. The sooner that investors and policymakers wake up to this, the smoother the adjustment is likely to be.

Sunday, October 29, 2006

U.S. housing woes a ‘buzz saw'

BARRIE MCKENNA

From Saturday's Globe and Mail

WASHINGTON — There is fresh evidence that the severe housing slump is weighing heavily on the U.S. economy, and by association, on Canada's fortunes, too.

The world's largest economy expanded at an annual rate of 1.6 per cent between July and September — a full percentage-point slower than in the second quarter and well shy of forecasts — according to a report released yesterday by the U.S. Commerce Department.

The main culprit was the steepest decline in spending on U.S. home construction in 15 years, along with a growing trade gap.

BMO Nesbitt Burns economists likened the impact of the housing woes to taking a “buzz saw” to the U.S. economy.

“For Canada, this is not good news,” concluded BMO Nesbitt Burns chief economist Sherry Cooper. “The slowdown in the U.S. inevitably weakens the Canadian economy.”

What's happening in the United States is already spilling over into Canada, most immediately in the building materials market. Producers of everything from lumber and gypsum to copper wiring are suffering from dropping demand south of the border, and falling prices.

Ontario's export-oriented economy is feeling the twin effects of the strong Canadian dollar and the struggles of the Big Three U.S. auto makers, which are shutting plants to cope with falling demand.

The most immediate threat is housing. It's not yet clear how deep or how long the housing slump will be. Some economists are convinced the worst may already be over, and the United States is headed for what looks like a soft landing.

“The drag from residential construction likely peaked in the third quarter,” said economist Zoltan Pzsar of Economy.com. “From here on forward we will see smaller drags.”

For now, though, prices for both new and existing homes are falling sharply after a long boom. Priced out of the market or spooked by the slowdown, buyers are staying away in droves, particularly in the U.S. Northeast.

The collapse hits home sellers first, along with heavily mortgaged homeowners who may have to put up additional collateral to cover their falling equity. Longer term, the worry is that many homeowners will feel poorer as falling home values eat into their household wealth.

But it's a tale of two economies in the United States, and outside of housing and the auto sector, life is still pretty good. Corporate profits are surprisingly healthy, pushing the stock market to record highs on a near-daily basis and cheering investors. Commercial construction also remains very active. And thanks to falling gasoline prices and still-rising real personal incomes, Americans are continuing to spend, at least for now, and price pressure, outside of housing, is up, not down.

Indeed, if it weren't for the resilience of consumers, the U.S. might already be in recession.

“Consumers and business investment have continued to stave off the recession that the housing adjustment and the tide of imports could easily cause,” remarked economist Peter Morici, a business professor at the University of Maryland.

Consumer spending actually grew faster in the third quarter than in the second quarter (3.1 per cent versus 2.6 per cent). And even though Americans aren't buying as many cars and houses as they once were, their purchases of other durable goods — TVs, furniture and the like — was up a surprising 8.4 per cent in the quarter.

That, at least, partly explains why U.S. imports continue to grow faster than exports (7.8 per cent versus 6.5 per cent). Many durable goods are made in China and elsewhere.

Mr. Morici pointed out that most other sectors of the U.S. economy should provide a counterweight to what's happening in housing. He predicted that falling oil prices, combined with strength in commercial construction, business spending on items such as software and corporate profits, should keep the stock market rally alive for a while yet.

“Homes will no longer be viewed as a good speculative investment and individuals will put more money into equities,” he said.

Wednesday, October 25, 2006

Ottawa awash in surplus cash

STEVEN CHASE AND HEATHER SCOFFIELD

From Wednesday's Globe and Mail

OTTAWA and NIAGARA-ON-THE-LAKE, ONT. — Ottawa is running a $6.7-billion budget surplus five months into the fiscal year, $2-billion ahead of where it stood one year ago.

This poses a political dilemma for Ottawa, but also appears to give Finance Minister Jim Flaherty more spending room to address provincial cries about a fiscal imbalance between Ottawa and the provinces and to deliver tax cuts.

However, it's also potentially embarrassing for the Conservative Party, which vowed to end the former Liberal government's practice of lowballing surplus estimates.

That's because the Tories forecast a surplus of only $3.6-billion for this fiscal year.

Yet the federal Finance Department's monthly monitor says that as of the end of August -- only five months into this fiscal year -- the budget surplus had hit $6.7-billion. That's significantly better than the $4.8-billion surplus recorded in the same April-to-August period last year.

Last year, Ottawa racked up a $13.2-billion surplus, and while this year might appear on track for another such windfall, the Finance Department yesterday cautioned against breaking out champagne.

"The results to date are not representative of results expected for the fiscal year as a whole," Finance said, because they don't yet reflect the full impact of Budget 2006 measures.

Still, the fiscal outlook is somewhat rosier. Despite its trademark caution, Finance already acknowledged two months ago that this year's surplus is "currently expected to somewhat exceed" projections.

So far, in the first five months, Ottawa's revenue is already up $5.2-billion, or 6 per cent, from the same period last year.

The main reason, the Finance Department said, is that it has collected significantly more tax revenue so far than it did during the same April-to-August period last year. And this is due to economic good fortune.

Personal income tax revenue is up nearly 11 per cent from a year ago, a development that Finance said reflects "solid growth in employment and wages and salaries."

Plus, corporate income tax revenue is also up about 11 per cent from last year, a situation that is partly due to "ongoing gains in corporate profitability this year," the department said.

While a growing surplus is always good news for governments, it's nevertheless politically awkward for the Tories, who for years accused the former Liberal government of lowballing budget surplus estimates and then spending windfall surpluses at year end.

"It certainly does not fit with the notion that the days of large unexpected surpluses are over," Liberal finance critic John McCallum said.

Finance Minister Jim Flaherty denied that the country's books were out of whack, but at the same time took credit for the windfall.

"Two good things are happening, I think. One is, that our budget predictions are on track and we're doing okay there," he told reporters after a speech in Niagara-on-the-Lake, Ont. "Secondly, we're controlling spending, and that hasn't happened in Ottawa in quite a while. It makes a difference."

He said he would revise the budget projections in the government's economic update this fall, and give some details about where any extra money might be spent.

"We're on track and we're doing well on the revenue side, and I can tell you on the spending side we're controlling spending effectively."

Economists caution that Ottawa could still experience a reversal of fortune in the rest of the fiscal year as the U.S. economic slowdown hits Canada and the impact of the one-percentage-point goods and services tax cut affects revenue.

Toronto-Dominion Bank chief economist Don Drummond said he is surprised by the powerful growth in personal income tax revenue and doesn't think this will continue for the entire fiscal year. "It's extraordinarily odd that personal income taxes would be growing at double the rate of the economy."

John Williamson, federal director of the Canadian Taxpayers Federation, said the real problem is that Canadians are still overtaxed.

Regardless of how much of a surplus Ottawa reaps, demands are heavy, particularly for money to fulfill the Tories' pledge to restore the fiscal imbalance. There are calls for as much as $2-billion in additional postsecondary and skills-training money and $1-billion to enrich equalization payments. The Bloc Québécois is demanding $3.9-billion more in annual payouts for Quebec or it will vote against the Conservative budget, a move that could help defeat the Stephen Harper government.

Mr. Flaherty's fall update, expected by early-to-mid November, also plans to lay out a pro-growth economic agenda that goes beyond the five-priority Tory election platform to address broader economic concerns such as clogged highways and border crossings, skill shortages and Canada's high tax burden.

U.S. slowdown to hit Ontario says Dodge

HEATHER SCOFFIELD

Globe and Mail Update

NIAGARA-ON-THE-LAKE, ONT. — Ontario's economy will take a hit because of the U.S. slowdown, but Ontario's woes will be short-lived, Bank of Canada Governor David Dodge said Wednesday.

He urged policy makers to focus on long-term challenges in the country's economic development, rather than get caught up in a regional slump that won't last long.

“This slowing should not be prolonged,” he said in an address to the Ontario Chamber of Commerce's annual economic summit. “The real challenge for policy makers is to address the long-term structural issues facing Ontario's economy.”

Ontario's industrial base is the most vulnerable to the U.S. slowdown, since American consumers are cutting back on automobiles and housing.

“Nevertheless, modest growth in Ontario's economy should persist,” Mr. Dodge said. “Seventy per cent of Ontario's economic activity comes from the service sector, and that sector remains in good shape.”

His comments contrasted sharply with the gloomy vision put forth by John Tory, the provincial leader of the opposition Progressive Conservatives. He said the weakness seen in Ontario's manufacturing, auto and forestry sectors are a sign of wider weakness that will spread across the province's economy.

“We are not going to be able to coast our way through [these problems],” he told the conference.

Mr. Dodge, however, emphasized that the U.S. slowdown will be “mild and temporary,” and “a necessary cyclical correction,” albeit one that he admits he didn't see coming so fast or so strong.

Canada's economy fell short of his expectations in the second and third quarter of this year because of the sudden onset of the U.S. slowdown, he said. He expects third-quarter growth in Canada of about two per cent at annualized rates — the same slow pace seen in the second quarter.

But consumer spending will remain strong in Canada, and will sustain the country through the short U.S. slump.

“Overall, the Canadian economy has performed remarkably well when you consider that it is continuing to adjust to a number of powerful global forces,” Mr. Dodge said, although he reiterated that Canada's productivity has not responded well.

He also repeated his message that interest rates are fine where they are right now, and inflation should remain on steady track over the medium term.

Economists have forecast that Ontario's economy is quickly coming to a standstill, and possibly flirting with recession.

Mr. Dodge said Ontario's exports, especially in the auto sector, are hurting, but he emphasized that 70 per cent of the Ontario economy is based in the services sector, which is flourishing.

“Ontario may well underperform the Canadian average for the balance of this year and in 2007,” he said. “Nevertheless, modest growth in Ontario's economy should persist.”

The more pressing issue for Ontario's economy is the province's long-term development, Mr. Dodge said.

Forestry is being hammered by low-cost competition from Brazil and India. The auto sector is scrambling to compete with Asia. Furniture, clothing and textiles are also under intense pressure.

“But no matter which sector we are talking about, we should also remember that the importance of improving efficiency is paramount,” he said.

He urged policy makers to improve skill development, and invest in early childhood education, support post-secondary education, and improve research and development. He also pointed to the need to confront the aging work force by developing incentives to keep older work forces in the work force longer. And he urged policy makers to figure out better ways to recognize the credentials of foreign-educated workers.

The Ontario government should also embrace public-private partnerships so that the province's urgent infrastructure needs can be met quickly and affordably.

“Now is the right time to encourage partnerships between the Government of Ontario and private providers, given the climate of low nominal interest rates and the presence of large pension funds that are searching for these kinds of investment opportunities,” he said.

He gave the address via satellite from Ottawa to the meeting in Niagara on the Lake, Ont.

Friday, October 20, 2006

Inflation dips on cheaper gas, but core prices rise

TAVIA GRANT

Globe and Mail Update

The annual rate of inflation matched its lowest point in two-and-a-half years last month as consumers paid much less at the pumps. Core prices, however, unexpectedly rose.

September consumer prices eased to a 0.7-per-cent pace, matching the lowest since March, 2004, Statistics Canada said Friday. Gasoline prices fell 18.7 per cent from last year, the sharpest drop in almost five years after Hurricane Katrina sent prices to a record last year.

The central story in today's report lies in the so-called core rate of inflation, which strips out the eight most volatile items in the index. That rate, seen as a more reliable indicator of future inflation, unexpectedly quickened to 1.7 per cent from 1.5 per cent. Stripping out the effect of the GST cut, the rate hit 2.2 per cent.

The report comes a day after Bank of Canada governor David Dodge sounded an alarm bell that inflation may heat up.

“The big story here is the move in core inflation to above 2 per cent, a lot earlier than the Bank (of Canada) expected,” said Douglas Porter, senior economist at BMO Nesbitt Burns Inc. “Let's just say that their warnings on the inflation dangers are bound to grow a lot louder in the months ahead, even if growth remains disappointing.”

The main reasons behind the increase in core inflation were higher homeowners' replacement costs, electricity prices, automobiles and restaurant meal prices.

Among provinces, the annual inflation rate remained the highest in Alberta, at 3.7 per cent, and was the lowest in New Brunswick, where consumer prices fell 0.3 per cent.

Gasoline prices fell the most since December, 2001, Statscan said, as Hurricane Katrina limited supplies last year, and rising inventories sent prices lower this fall.

“Gasoline plunged this September, but it also captures the fact that a year ago, last September, gasoline prices were headed in the exact opposite direction after...Hurricane Katrina,” said Warren Lovely, an economist at CIBC World Markets Inc., before the report was released. “Both influences are contributing to a big, significant decline in that year-over-year rate.”

Prices fell, meantime, for computer equipment and supplies and men's clothing.

On a monthly basis, consumer prices posted a 0.5-per-cent decrease after a 0.2-per-cent increase in August as gasoline prices fell a record 17.4 per cent in the period.

Economists polled by Bloomberg had expected an annual rate of 0.9 per cent after 2.1 per cent in August and a core rate of 1.5 per cent.

Thursday, October 19, 2006

Good News from the Dismal Science Magazine (The Economist)

The alternative engine



Oct 19th 2006 | HONG KONG
From The Economist print edition
A sharp slowdown in the American economy could be offset by the growing and largely unrecognised power of Asia's consumers
AFP

AMERICAN consumers have been one of the main engines of global growth for the past decade. But now, as America's housing boom threatens to turn into a bust, many forecasters expect household spending to stall. A few even worry that America could come perilously close to a recession in 2007. Previous American downturns have usually dragged the rest of the world economy down, too. Yet this time its fate will depend largely upon whether China and the other Asian economies can decouple from the slowing American locomotive.
<IMG SRC="http://m1.2mdn.net/711766/NorthAmerica350x300.gif" WIDTH="350" HEIGHT="300" usemap="#default_350x300" BORDER=0>

According to conventional wisdom, American consumers have single-handedly kept the world economy chugging along, whereas cautious Europeans and Asians have preferred to save. Yet the importance of America's role in global growth is often exaggerated. During the past five years America has accounted for only 13% of global real GDP growth, using purchasing-power parity (PPP) weights.

The real driver of the world economy has been Asia, which has accounted for over half of the world's growth since 2001. Even in current dollar terms, rather than PPP, Asia's 21% contribution to the increase in world GDP exceeded America's 19%. But current dollar figures understate Asia's weight in the world, because in China and other poor countries things like housing and domestic services are much cheaper than in rich countries, so a dollar of spending buys a lot more. If you want to compare consumer spending across countries, it therefore makes more sense to convert local currency spending into dollars using PPPs rather than market exchange rates.

However, the doomsayers argue that Asia's growth has itself been based largely on exporting to America, whereas domestic demand in the region has languished. Their evidence for this is that Asia is running a combined current-account surplus of over $400 billion, implying that it is contributing much more to world supply than to demand. Thus if America's demand stumbles, the growth in Asia's exports and output would also plunge.

Asia's export growth would certainly slow sharply, but it is the change in net exports that contributes to a country's growth rate, not the absolute size of that surplus. Since 2001 the increase in emerging Asia's trade surplus has added less than one percentage point a year on average to the region's average growth rate of almost 7%. Contrary to the received view, the bulk of Asia's growth has been domestically driven. True, domestic demand (investment and consumption) has grown more slowly than GDP over the past year everywhere except in Malaysia (see chart 1). But in most cases the gap has been small, especially in China, India, Japan and Indonesia. In contrast, growth in Taiwan, Hong Kong and Singapore has been heavily dependent on external demand over the past year.

It is true that exports account for 40% of China's GDP, but those exports have a large import component; only a quarter of the value of China's exports is added locally. The impact of a slowdown in export growth would therefore be partially offset by a slowdown in imports. China's GDP growth has come mainly from domestic demand, which has been growing by an annual 9% in recent years.

The idea that China's growth is mainly export-led is not the only popular myth. Another, says Jonathan Anderson, an economist at UBS, is that China's consumer spending is feeble. Several recent reports highlight that according to official figures spending has fallen from 50% of nominal GDP in 1990 to 42% today. But this partly reflects an even stronger boom in capital spending. Real consumer spending has been growing at an average annual pace of 10% over the past decade—the fastest in the world and much faster than in America (see chart 2).

There is also good reason to believe that official figures understate consumer spending in China because of their inadequate coverage of services. Purchases of homes by the Chinese have risen rapidly since they were first allowed in 1998, but these are also excluded from the figures. If they are added in, Mr Anderson calculates, total household spending has not fallen as a share of GDP.

How does this square with the common perception that Chinese household saving is extraordinarily high and rising? The truth is that it is not. The saving of Chinese households has in fact fallen from 20% to 16% of GDP over the past decade. The main reason why China's total national saving rate looks so high (at close to 50%) is that Chinese companies have been saving a much bigger slice of their booming profits (see article).
Bags and bags of shopping

Across many other Asian countries, the notion of the frugal Asian consumer is equally flawed, says Mr Anderson. Although consumption has fallen as a share of GDP in most Asian countries, this does not mean that households are saving more. Excluding China and India, household saving has fallen sharply, from 15% of GDP in the late 1980s to 8% today. The paradox is explained by the fact that wage incomes have risen more slowly than GDP as production has become more capital intensive. But this means that Asian consumers are spending a rising share of their income by borrowing or running down their savings. Amazingly, the savings rate of Japanese households has fallen more sharply than that of American households over the past decade.
AFP Doing their bit to help the world economy

The IMF estimates that in Asia as a whole (including Japan as well as the emerging economies) real growth in consumer spending has averaged a healthy 6.3% a year in 2005 and 2006. This suggests that Asian consumers can help sustain fairly robust GDP growth in Asia even if America's economy takes a dive.

Some pundits have predicted a boom in Asian consumer spending over the coming years, which would help to fill the gap left by American consumers cutting back on their purchases. But if consumer spending is already rising strongly in Asia, there is little pent-up demand ready to explode. On the other hand, spending by firms could pick up. After the Asian economic crisis in the late 1990s, investment plunged everywhere except China. It has remained relatively weak. However, as the overhang of excess capacity and debt has disappeared, capital spending is now starting to perk up across Asia.

Japanese firms' average return on assets now exceeds long-term interest rates by 5%, the widest margin for decades, according to Merrill Lynch. The Bank of Japan's latest Tankan survey of business confidence found firms to be unexpectedly cheery. Big Japanese manufacturers now report insufficient production capacity for the first time since 1991 and plan to increase capital spending by 17% in the year to March.

Another reason for believing that Asian economies can decouple from an American downturn is that most of them have small budget deficits or even surpluses. This means they have plenty of scope to ease fiscal policy to support domestic demand so as to offset some of the fall in exports. The main exception is Japan, which has a massive public debt; Taiwan, where domestic demand is worryingly weak, is also constrained by a large budget deficit. South Korea, on the other hand, which has run a budget surplus for seven years, has plenty of scope to ease up.
The United States of where?

Not only is growth in China and the rest of Asia chiefly domestically led, but America's share of Asia's total exports has fallen from 25% to 20% over the past five years. Regional trade links within Asia have also deepened, thanks partly to growing Chinese demand. Goldman Sachs reports that five years ago China's imports for domestic use were only half as big as those for the assembly and re-export of products, but now they are roughly the same size. So strong domestic demand in China sucks in more imports.

China's exports to America have fallen from 34% of its total exports in 1999 to 25% now (adjusting for the re-exports which are made through Hong Kong). Chinese exports to the European Union are now almost as big as those to America and are growing faster.
When America sneezes, the rest of the world's economies may no longer catch a cold

America takes only 23% of Japan's exports, down from almost 40% in the late 1980s. However, this understates Japan's total exposure. Japanese firms (like those in South Korea and Taiwan) send a lot of components to China for assembly into goods, which are then exported to America as finished products. On top of this, if a sinking American economy pulled the dollar down with it, this would further squeeze Asian exporters.

A recent report by Peter Morgan at HSBC estimates that slower American growth will hurt China, India and Japan much less than it will the smaller Asian economies, such as Singapore, Taiwan and Hong Kong, that are more dependent on foreign demand. China, India and Japan account for three-quarters of Asia's GDP and so, given the deeper regional trade links, they should help to support demand in the whole region. If America's GDP growth slows next year to 1.9%, from 3.5% in 2006, as HSBC expects, then Asia's growth is tipped to slow from just above 7% this year to just below 6% in 2007. Weaker exports will badly hurt some industries, but overall, the region will continue to grow at a reasonable pace.

Could Asia withstand a sharper American slowdown? Hong Liang at Goldman Sachs estimates that if America's GDP growth drops to zero by the end of 2007 then China's annual export growth could plummet from 26% in early 2006 to a decline of 2% by late 2007. That sounds dire. Yet after taking account of the impact of slower export growth on imports and domestic demand (ie, slower growth in investment), Ms Liang estimates that China's GDP would still expand by a respectable 8%. That is significantly down from this year's growth rate of over 10%, which is still too fast to be sustained. China is today tightening policy so as to slow down its runaway economy: weaker external demand could be partly offset by reversing these measures.

In sum, if America suffers a slump, the economies of China and the rest of Asia would slow, but they are unlikely to be derailed. However, a slowdown in America could affect Asia indirectly through other channels. Most important and least certain of all would be the impact of an American recession on financial markets. Even if economies can decouple, global financial markets tend to be more tightly linked through the investment strategies of hedge funds and the like. If America's economy hits the buffers, this will surely trigger a rise in risk premiums and a drying up of market liquidity, pushing share prices lower in Asia as well as in America. When America sneezes, the rest of the world's economies may no longer catch a cold; but if Wall Street shivers, global tremors will still be widely felt.

Disregard the negative headlines and read further in the articles below

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Bank of Canada sees bumpy road ahead

HEATHER SCOFFIELD

Globe and Mail Update

Toronto — The Canadian economy is having more trouble than expected in adjusting to a new world of high commodity prices, a strong Canadian dollar and global competition, the Bank of Canada says.

As a result, the most the Canadian economy can hope to grow over the next two years is 2.8 per cent, the central bank says in its quarterly outlook.

Behind that calculation is a more pessimistic view of Canada's productivity.

The bank now estimates that Canada's productivity will only grow by 1.5 per cent per year for the next two years, down from 1.75 per cent.

“The modest realized pace of productivity growth is consistent with an economy that is undergoing significant structural adjustments in the face of large movements in commodity prices, the marked appreciation of the Canadian dollar, and new sources of competition from emerging Asia,” the bank says. “This adjustment is ongoing and may be having a larger and more protracted impact on productivity growth than previously projected.”

The next few quarters will probably be a bit bumpy, the bank said. The U.S. slowdown is hurting Canadian exporters and lower energy prices are sapping some of the momentum in the energy sector. “This implies some downward pressure on the growth of corporate profits and government revenues in the future,” the bank says.

Still, the softness will be short lived and the Canadian economy, in tandem with the United States, will pick up in the second half of 2007, the report says.

And consumer spending will likely remain strong throughout, as people borrow against their houses.

As such, interest rates are fine where they sit now the report stated, reiterating sentiments expressed earlier this week when the central bank left rates unchanged for the second time in a row

Canada losing its appeal for Chinese immigrants

MARINA JIMENEZ

The number of Chinese applying to immigrate to Canada has decreased sharply, reversing a long-term trend, while the number from India is on the rise.

The waning Chinese interest in Canada as a place to live is seen as nothing less than a "paradigm shift" that will alter the face of the country and affect everything from how financial institutions sell to funding for language classes.

"For years, China has dominated. This is about to change and there will be a dramatic shift in cultural taste," said Richard Kurland, a Vancouver immigration lawyer who obtained the data under the federal Access to Information Act. "There is also a lower cost to the Canadian taxpayer, as Indian immigrants usually speak English already and can hit the ground running."

Financial institutions should watch the trend closely, he added, as it will affect such areas as the real-estate market and marketing strategies for communication products and financial services.

In June of 2006, just 19,826 immigrant applications were processed at Canada's mission in Beijing , compared with 37,124 in July of 2004. The number of applicants from Hong Kong is also "in free fall," decreasing to 32,752 in June of this year from 47,260 in July of 2004.

In contrast, 132,693 immigrant applications were processed at Canada's mission in New Delhi in June of 2006 (20 per cent of the global total), compared with 88,383 in July of 2004 (16 per cent of the total).

These numbers include economic immigrants (skilled workers and entrepreneurs), refugees and people being sponsored by family members in Canada.

Lorne Waldman, a Toronto immigration lawyer, suggested the decline in the number of applicants from China could underscore their difficulty in meeting the selection criteria, particularly their ability to speak French or English, as well as their frustration with the long delays to have their files processed.

In 2001, the waiting time for an interview at the mission in Beijing was as long as 10 years. Today, waiting times in Beijing are between five and six years, about the same as they are in New Delhi.

"We have always had a massive inventory of skilled workers wanting to come to Canada. But if we don't make our system friendly to them, we won't have enough applicants to meet our quotas, especially because we are competing with Europe and the EU," Mr. Waldman said.

Marina Wilson, a spokesperson for the federal Department of Citizenship and Immigration, said she could not speculate about the drop in applications from China. She said the downward trend was also reflected in the yearly totals over the past three years.

For the past several years, China has been among the top five source countries, if not the top, for immigration to Canada.

In 2005, 42,291 of the 262,236 immigrants who arrived here were from China, more than from any other country, while 33,000 were from India, in second place. However, these statistics are based on applications filed more than five years ago. "There is no doubt Indians are set to surpass Chinese," said Mr. Kurland, the Vancouver lawyer.

The decline in applicants from China could reflect the growing strength of China's economy, and the dramatic improvement in the quality of life there, suggested Max Berger, another Toronto immigration lawyer. As well, many Canadian lawyers and immigration consultants are now targeting India and travelling to Punjab to solicit new clients, he added.

Mr. Kurland believes adverse publicity from a class-action lawsuit launched against Citizenship and Immigration could also be partly to blame for Canada's decreasing popularity in China.

The lawsuit was launched after the department introduced more stringent selection criteria in 2002 and grossly underestimated the number of applicants in the backlog who had applied under the former, more lenient rules.

"More than 100,000 people, mainly Chinese applicants, were going to be failed," Mr. Kurland said. "The former government held out the unwelcome sign to China." After the Federal Court of Canada ruled against the department in 2004, the government agreed to process all pre-2002 applicants by 2008, under the previous guidelines. But the bad publicity had a permanent impact, Mr. Kurland argued.

In contrast, the number of immigrant applicants from London is on the rise, and has nearly doubled in the past two years to 71,262 in June of 2006, from 42,823 in July of 2004. Many of the applicants are not Britons. "About 62 per cent of the cases in inventory originated in the Gulf [states], and over 55 per cent of visas issued went to residents of the Gulf," according to the 2006-2007 planning report for London, obtained under the access-to-information legislation. Some Persian Gulf residents may be Indian nationals who worked in the gulf and then applied to immigrate to Canada, Mr. Kurland suggested.

The immigration inventory at Canada's missions in Manila, the Philippines and Islamabad is also growing, although not as quickly as in London and New Delhi.

It is difficult to know whether China's waning interest in Canada over the past three years is a long-term, permanent change, cautioned Jeffrey Reitz, a sociologist at the University of Toronto.

Losing Interest

Chinese interest in Canada as a place to live is in decline, reversing a long-term trend. The number of immigrant applications from China and Hong Kong has decreased notably in the past three years while the number of applicants from India has grown. This year, Indian nationals comprised 20 per cent of the total 630,000 immigrant applicants to Canada, while people from mainland China comprised just 3 per cent.

Monday, October 16, 2006

Housing activity continues to ease

ROMA LUCIW

Globe and Mail Update

Existing home sales will likely close the year at record levels, but evidence of a ”soft landing” is building as the furious pace of activity in the housing market gives way to the most balanced conditions in more than five years, according to the Canadian Real Estate Association.

Sales of homes that were not brand new, as measured through the Multiple Listing Service, reached 82,119 units on a seasonally adjusted basis in the third quarter of this year, a 2.5 per cent slide from the previous quarter.

”With the housing market becoming more balanced, price gains are slowing down in a number of major markets,” said CREA chief economist Gregory Klump. The CREA expects those trends will continue over the rest of the year and into 2007.

Vancouver, Calgary and Toronto experienced the largest drops in sales, although activity in Edmonton and Thunder Bay rose to quarterly records. Hamilton's housing market was also strong in the third quarter.
Related to this article

CREA said the third-quarter numbers show that the housing market is becoming more balanced, resulting in smaller price increases. The dollar value of existing home sales slumped 2.7 per cent in the third quarter from the second although new listings climbed 3.8 per cent to 143,760.

"The quarterly decline in sales combined with an increase in new listings caused the resale housing market to become more balanced than in any other quarter in the past 5.5 years," CREA said.

In the first nine months of the year, transactions are above year-earlier levels and rose 1.4 per cent and sales are still on track to set a record in 2006.

Saturday, October 14, 2006

LONG-TERM OUTLOOK FOR CANADIAN HOME PRICES

Special Reports

September 14, 2006

Real estate is usually the single biggest financial asset most individuals own. It is estimated that more than 70 per cent of Canadian families are currently homeowners. The total value of residences exceeds $1 trillion and land and housing together account for one-third of all personal assets. Given this importance, the future value of a home should be included in the financial plans of Canadians. However, while it is relatively easy to assess the current value of a property, gauging the future value is far more challenging.

In the following sections, we examine past trends in home prices and consider how factors like a sustained low inflation environment and the aging population might impact prices going forward. The main conclusion is that the national average of home prices is expected to rise at close to a 4% average annual rate over the next 25 years, but with considerable variation at the individual city or neighbourhood level and with significant volatility from year to year.

History as a guide

Over the past two and a half decades, the average annual increase in resale home prices has been 5.6% per annum. Given that this time frame encompasses several business cycles (i.e. long-term economic fluctuations), one might be inclined to believe that a similar performance would be delivered in the future. This assessment, however, fails to take into account the declining trend in inflation over the past several decades. Like any financial asset, the return on real estate must compensate the investor for the declining purchasing power of money from rising prices. Over the past 25 years the average annual rate of inflation has been 3.7%, implying that the after-inflation (real) increase in home prices has been 1.9%.

Since the mid-90s the Bank of Canada has been remarkably successful in keeping inflation under wraps. Indeed, the average rate of inflation from January 1995 to December 2005 was 2%, which is bang on the Bank of Canada target. There is every reason to believe that the Bank will deliver a similar track record in the future. If this assumption is correct, the historical trend in real resale home prices combined with the outlook for inflation suggests that national average home prices will rise at close to 4% per year over the long term.

Key determinants of home prices

This expectation may be erroneous if there are major structural changes in the economy that impact home prices. An alternative approach is to examine the main drivers behind resale prices and consider their future trends. Various analytical studies have suggested that the key determinants of home prices include: demographics, labour markets conditions and the level of interest rates.

Aging population could constrain price growth

Demography is the major driver of demand for housing over the long haul and the aging of Canada's population is likely to act as a constraint on home price growth in the years ahead. Statistics Canada provides a medium growth, medium immigration projection that is a good benchmark. It shows population growth slowing to a 0.6% pace in 2030, down from the 1.0% average in the last decade. This aggregate view masks the changing age distribution of the population. Demand for residences is driven by the rate of net household formation, which will decline in response to an aging population. Household formation growth is expected to slow from 1.4% in 2007 to 0.8% in 2030.

Furthermore, the increasing reliance on immigration for population growth could impact demand for housing. At least initially, immigrants overwhelmingly go into rental accommodation, and they will increasingly account for a rising share of household formation.

All of this points to weaker demand growth for housing and more modest price gains than in the past.

A number of offsets will be present

However, fears that baby boomers will depress housing markets as they sell their properties and move into retirement homes are likely overblown. Individuals are living longer, healthier lives. The aging population could actually lead to a modest rise in the national home ownership rate. The implication is that slower household formation may temper home price growth, but the impact should be gradual and only moderate.

The aging population could also create an offsetting increase in personal income by creating tighter labour market conditions. A study on determinants of house prices by the Federal Reserve of Boston found that the entry of baby boomers into the labour market temporarily depressed wages and salaries growth. Conversely, we can speculate that the exit of baby boomers may lead to a structural decline in unemployment rates and a higher trend rate of wages and salary growth, particularly for highly skilled workers. This would lead personal income to rise as a share of total income in the economy (i.e. nominal GDP) -- reversing the recent trend where corporate profits have taken up a larger share of GDP.

The impact of demographics on home prices may also be limited by more modest construction of new homes. In other words, weaker demand could be offset by more limited supply. For example, the demographically supported rate of housing starts could fall from the current annual level of around 175,000 to 125,000 by 2030.

Rate changes should wash out over the long-run

What about the impact of interest rates? Borrowing costs influence home prices both in terms of the supply of homes and demand for homes. Lower interest rates encourage construction by reducing financing costs for builders, but also raise demand by lowering the financing costs for buyers. It should be noted that it is real (after-inflation) interest rates that matter. While increasing supply is negative for prices, empirical studies show that the dominant effect from lower interest rates is on raising demand, with the result that the net impact of lower rates is positive for prices.

In the 1990s, real interest rates trended lower, reflecting the adjustment to a low and sustained inflation environment and the increased credibility of central banks at maintaining relative price stability going forward that reduced the inflation-risk premium demanded by lenders. This likely contributed to strong housing markets in the late 1990s and first half of this decade, but the adjustment process is now complete. While real interest rates will fluctuate in the coming years, rising in strong economic times and falling in weaker ones, there is unlikely to be a major long-term structural trend either higher or lower. As a result, the outlook for interest rates should not impact the long-term prospects for home prices.

National average annual price gains of 4%

Putting it all together, the combination of weaker demographic demand for housing is likely to be offset by rising home ownership rates, rising personal income, a modestly lower long-term rate of unemployment and more modest construction of new homes. Meanwhile, the level of interest rates should have little impact over the long-haul. So, the assumption that national home prices will rise at an average annual pace of 4% (after-inflation increase of 2%) over the next decade and a half seems reasonable, but as the demographic pressures build particularly after 2025 there is a risk that the trend rate of price growth could slow into a 3 to 3.5% range.

Location, location, location

One should recognize that the national perspective is a gross simplification. There is an old adage that real estate is all about location, location, location. There is no national housing market. Instead there are hundreds of local markets, each with their own characteristics and prospects for demographics and labour markets. The table above shows the average annual performance of home prices of selected major cities in Canada from 1981 to 2005. Real average annual home price gains have ranged from 0 to 3%. If this performance repeated itself, the future increase in home prices would be roughly 2 to 5% when inflation is factored in.

Historical experience shows that larger cities (where land scarcity and demand for housing is the strongest) have tended to have the greatest price gains. This is why Vancouver, Victoria, Toronto and Montreal have had the most rapid price gains over the last two decades. Over the next 25 years these cities are likely to continue to experience price gains above the national average, with Toronto and Vancouver benefiting from their attraction to immigrants, who will play a greater role in the pace of Canadian population growth going forward.

Two cities that are likely to break away from their historical performance are Calgary and Edmonton. Home prices after removing the impact of inflation in these urban centres averaged close to a flat performance from 1981 to 2005. However, this is extremely unlikely to be repeated in the coming decades, as the past weakness likely reflected the secular decline in oil prices in the 1980s and 1990s. While energy prices will prove volatile in the years ahead, the level of energy prices is expected to remain well above their historical averages. Alberta also has the advantage of lower tax rates, stronger projected population growth and a younger population than many other provinces. Thus, all of the stars are aligned for Calgary and Edmonton to experience above average price growth in the future. However, it should be stressed that the recent pace of price gains in these markets have been completely unsustainable and will eventually come back to earth when the housing markets become more balanced.
Conversely, a number of cities in Canada will experience slower than average home price growth, reflecting less supportive demographic and labour market conditions.

Type of housing matters as well

Finally, the changing demographics could significantly influence the price performance of various types of dwellings. As the chart above shows, demand for entry level homes will moderate, while demand for housing more suited to older Canadians will increase (e.g. condos, ranch-style homes and perhaps smaller size properties). However, support for entry level homes could come from the immigration front. Unless immigrants are better integrated into the labour force, a trend we deeply hope will take place, their demand for homes will be greatest for more modest dwellings. So, the largest impact from the shifting population may prove to be on the high-end, largest square footage properties.

Craig Alexander, VP & Deputy Chief Economist
416-982-8064

CANADIAN STARTS ARE HOLDING UP MUCH BETTER THAN IN THE U.S.

October 10, 2006

* Housing starts down modestly to 211K in September
* Recent trend consistent with soft landing scenario
* Downtrend in Canada not as rapid compared to the U.S.

September’s housing starts came in at 211,300 annualized units, a notch lower than in the previous month. Even though this figure is the lowest one registered since August 2005, this is no big deal. What is more important to notice is that the recent trend in starts is consistent with our scenario of a soft landing. Housing starts averaged 222,000 annualized units in the third quarter of this year, only a touch lower than the 229,100 units in the second quarter, and this follows a cyclical high of 247,600 units in the first quarter.

What’s more, the Canadian new housing market is not cooling off like in the United States. Housing starts in Canada were down only by 6.6 per cent on a year-over-year basis in the third quarter. South of the border, the decline is much heavier, about 20 per cent. The softer downtrend on this side of the border is explained in part by lower mortgage rates, stronger job creation, and better financial health among households. Also, Canada has an additional card in its hands that the U.S. does not have, Alberta. In the third quarter, starts in this province were up 21 per cent from last year. But, even excluding red-hot Alberta, starts in the rest of the country were only down by 7.3 per cent, still a fraction of the decline in the United States. In fact, starts in the third quarter were also stronger than a year ago in three other provinces: P.E.I., Nova Scotia, and New Brunswick. In the U.S., starts are down in every region.

Slicing starts by housing type reveal a similar story. Both starts of multiple and single units are cooling off rapidly in the United States. In Canada, the picture is mixed. Single starts bounced back in the third quarter of 2006 and were up by 3 per cent from a year ago. Multiple starts, however, lost some steam in August and September. As such, starts in this segment of the market were 12 per cent below the level observed in the third quarter of last year.

We believe this gentle downward path observed in Canada is likely to continue in the last quarter of this year as well as in the next two years. For further details, see the latest edition of TD Economics’ Provincial Economic Update, which contains housing starts forecasts by province for 2007 and 2008.

Sébastien Lavoie, Economist
416-944-5730

Friday, October 13, 2006

Economy to grow by 2.7 per cent in 2007: RBC

DAVID PARKINSON

Globe and Mail Update

Canada's economy should grow by 2.8 per cent in 2006 and 2.7 per cent in 2007, amid strong domestic markets but weakening demand for Canadian exports, according to a new economic forecast issued by Royal Bank of Canada.

The bank said domestic spending by businesses and consumers continues to be the driving force for the economy, mitigating a slowdown in exports.

The RBC forecasts are below the Bank of Canada's forecasts of 3.2 per cent real GDP growth (excluding the impact of inflation) this year and 2.9 per cent next year, released in the central bank's most recent monetary policy report update in July. The central bank will issue a new monetary policy report on Oct. 19, in which it will update its forecasts. The RBC forecasts also imply an economy operating slightly below full capacity, which the Bank of Canada typically regards as a 3-per-cent growth rate. Canadian GDP grew by 3.3 per cent in 2004 and 2.9 per cent in 2005.

RBC predicted that Alberta would post the strongest growth of any province, at 6.3 per cent this year and 4.5 next, driven by the booming energy sector. But it warned that the province's booming growth is leading to building inflationary pressures, as wages have soared 8 per cent this year and the province suffers from labour and materials shortages.

It said the country's traditional economic driver, Ontario, would be the big growth laggard, expanding by a mere 1.5 per cent this year and 2 per cent next year, barely escaping a recession. “The economy isn't very far from a standstill,” the bank said in its report, noting that the province is suffering from a contraction in the manufacturing sector, weak retail sales, and a slowing construction and housing sector.

It said Ontario's critical manufacturing sector should “emerge on much stronger footing towards the end of the decade” as new investment in the auto sector kicks in, but it should remain weak this year and next.

The bank predicted growth in Quebec of 2 per cent this year and 2.1 per cent next year. It said the province's manufacturing sector has held up reasonably well, with shipments up 4 per cent this year, but the sector will remain under pressure from a strong currency and overseas competition.

British Columbia's growth is expected to be 4.8 per cent in 2006 and 3.7 per cent in 2007. It said strong demand from Asian markets, together with the economic stimulus provided by investment in facilities for the 2010 Winter Olympics, should help bolster the province.

The bank dropped Newfoundland down to the third-best growth rate this year from previous predictions that it would lead the country in growth. It blamed technical problems at the massive Terra Nova offshore energy project, which was shut down for almost half of the year. It forecast growth in the province of 4.7 per cent this year and 4 per cent next year, driven by its growing energy sector.

Among other provinces, RBC forecasts growth of:

Prince Edward Island — 2.1 per cent in 2006, 1.9 per cent in 2007;

Nova Scotia — 2.6 per cent in 2006, 2.4 per cent in 2007;

New Brunswick — 2.7 per cent in 2006, 2.4 per cent in 2007;

Manitoba — 3.3 per cent in 2006, 2.7 per cent in 2007;

Saskatchewan — 3.8 per cent in 2006, 3.1 per cent in 2007.

RBC said Canada's trade sector has pulled down national gross domestic product growth over the past two years, as the growth in imports has outpaced exports. The bank said it expects this to persist in 2006, “as waning U.S. demand for products like motor vehicles and lumber weigh on exports.”

“Despite slower growth for the second quarter of 2006, Canada's domestic economy actually grew at a robust 4 per cent annual rate,” said Craig Wright, vice-president and chief economist at RBC, in a news release Friday. “The trade sector subtracted more than four percentage points from the quarterly growth rate.”

“The weaker, but still strong, Canadian dollar will continue to fuel import demand for machinery and equipment as Canadian businesses bolster investment,” it said.

“With a Canadian economic outlook of near-potential growth and only a modest increase in core inflation, we expect the Bank of Canada to hold the policy rate at 4.25 per cent to ensure that the domestic economy is strong enough to withstand a period of slower U.S. demand for Canadian exports,” Mr. Wright said. “The Bank of Canada's next move is likely to be an ease, but not until the fourth quarter of next year as Canada's domestic economy will remain buoyant.”

The Bank of Canada announces its next decision on interest rates on Tuesday.

RBC predicted that the U.S. economy would grow at about a 2.5-per-cent annualized rate in the second half of 2006 and in 2007, amid slowing consumer spending and a cooler housing market. It predicted that the Canadian dollar would decline to 85.5 cents (U.S.) by the end of 2006 and to 80.6 cents by the end of 2007, from 88 cents currently.

On Thursday, another of Canada's major banks, Bank of Nova Scotia, trimmed its Canadian growth targets slightly for 2006 and 2007, due primarily to slower growth and a fading housing market in the United States. It forecast Canadian GDP growth of 2.8 per cent this year and 2.5 per cent next year. Scotiabank's forecast called for U.S. growth of 3.3 per cent for all of 2006, but slowing to 2.4 per cent in 2007. It trimmed its year-end Canadian dollar forecast to 87.5 cents, citing falling commodity prices, but predicted the currency would rebound to the 90-95 cents range next year amid renewed weakening in the U.S. dollar.

Wednesday, October 11, 2006

Housing prices surge in August

Canadian Press

OTTAWA — The cost of new housing rose substantially in August, largely due to significant gains in Alberta.

Statistics Canada reports the New Housing Price Index rose 1.5 per cent in August to 145.7, eclipsing the 1.1 per cent increase registered in July; contractors selling prices increased 12.1 per cent from a year earlier.

Prices advanced in 16 of 21 metropolitan areas surveyed, with Edmonton posting the largest monthly increase at 6.8 per cent followed by Calgary at 3.5 per cent, Vancouver at 2.5 per cent and London, Ont. at 1.7 per cent.

In Edmonton and Calgary, increased costs for construction materials, steeper trade labour rates and higher land costs combined with strong demand to push up the prices of new homes.

Other noteworthy gains were recorded in Greater Sudbury-Grand Sudbury and Thunder Bay, Ont. which registered a 0.8 per cent gain, and Victoria, which posted a 0.7 per cent gain as builders said construction materials (drywall, heating and siding), labour costs and lot values contributed to the increases.

Land prices rose in 11 of the 16 metropolitan areas showing increases, while only five metropolitan areas registered no monthly change and none recorded decreases.

Monday, October 09, 2006

Crude may plunge if OPEC can't cut it

SHAWN MCCARTHY

Globe and Mail Update

With geopolitical risks off the table at least temporarily, global crude oil prices are now being driven by a more familiar dynamic: OPEC. But can the Organization of Petroleum Exporting Countries act like the cartel it was meant to be in order to tame the swings of a price-sensitive market?

OPEC ministers on Sunday said they had reached consensus to lower production by one million barrels a day, though analysts were skeptical, saying internal bickering could make any deal difficult to enforce.

Without concerted action from OPEC, crude oil prices appear to be headed sharply lower in a real-world demonstration of Economics 101: Record highs seen last year and the first eight months of 2006 have stimulated additional supply and inhibited demand, thus driving prices lower again.

Bearish analysts like Michael Lynch of Strategic Energy and Economic Research Inc. predict that high-quality, light crude could fall below $30 (U.S.) a barrel by this time next year if OPEC fails to rein in production.

He noted that OPEC and non-OPEC producers have added new production capacity in response to record prices — Saudi Arabia alone is expected to add 1.5 million b/d by next year — while consumers are using less because of slowing economies and conservation measures.

Last week, the market was filled with reports of planned OPEC production cuts, rumours that surfaced each time the price of West Texas intermediate fell below $60 (U.S.) a barrel on the New York Mercantile Exchange. By the end of the week, with no solid agreement on cutbacks, the Nymex price for November delivery was again below $60, settling at $59.76. The crude price — which hit a record $78 in July and August, was off 4 per cent on the week, after dropping 3 per cent the week before.

Sunday, the current OPEC president Edmund Daukoru said the group has agreed informally to reduce production by 3.5 per cent to its official 28 million b/d ceiling.

“I think there is more or less consensus for one million [b/d],” Mr. Daukoru told Reuters.

But Mr. Daukoru, who is also Nigeria's Oil Minister, said he was not favouring an emergency meeting later this month to determine how the cuts would be implemented; the next scheduled ministerial meeting comes in December.

Some analysts remained unconvinced of any agreement. The Saudis — who are being lobbied heavily by the Bush administration to keep the taps open so that prices will head lower — are said to be the key.

“Until you've got somebody within spitting distance of the [Saudi] King, saying this is what we're going to do, you've got nothing,” said James Williams, an energy economist at WTRG Economics Inc.

He noted the Saudis have invested heavily to increase productive capacity to 12 million b/d from 10.5. The Saudis, Algeria and Libya have all increased their production capacity well above their official limits and want a revamping of the existing country-by-country quotas. Venezuela, Nigeria and Indonesia are now producing well below their official limits, but are unwilling to formally acknowledge their declining capacity.

Fadel Gheit, an oil analyst with Oppenheim & Co. in New York, said he believes the Saudis are likely to heed the U.S. administration's requests to forgo production cuts, at least until the November mid-term elections have passed.

Of reports that the Saudis have agreed to reduce their output, Mr. Gheit said: “I don't believe them — it is a political statement. They say something, but they do something else.”

With Republican control of the U.S. Congress in jeopardy, the White House is eager to keep pump prices heading down, thereby removing a major irritant among voters.

Mr. Gheit noted that, in recent months, U.S. President George W. Bush has toned down the rhetoric aimed at Iran and its refusal to restrict its nuclear program. The U.S.-Iranian conflict was one of several geopolitical factors that had added a significant risk premium to oil prices.

“I really believe the wheels are set in motion to bring prices down,” Mr. Gheit said. “In my long years of experience in the industry, I have learned that you cannot separate oil from politics; it is part of the price structure.”

Simon Wardell, a London-based analyst with Global Insight Inc., said he believes OPEC could cut production by as much as one million b/d, but the reduction would have a minimal impact on the headline prices for light sweet crudes like West Texas intermediate and North Sea Brent.

Mr. Wardell said the cuts would most likely affect low-quality, heavy oil, thereby reducing the wider-than-average differential between light and heavy crudes.

“If they wanted to make a lot of noise, they would have to reduce the quota [of 28 million b/d] rather than simply say they will trim production,” Mr. Wardell said.

But the Global Insight analyst is not as bearish as some — he said spare capacity remains tight and escalating violence in Nigeria could reduce that country's exports.

“We think prices will firm up this winter, unless it is a particularly warm one,” he said.

Sunday, October 08, 2006

Market Update! Downtown Vancouver's property market is stabilising

Hi All,

People have been asking me my thoughts on the Downtown Vancouver property market, many of whom are concerned about the bad news coming from South of the Border.

I would like to start by saying the downtown market is not falling! Prices are NOT going down! I have spoken to many people who have seen price reductions and have assumed the market is falling and prices are going down. This is not the case.

Alot of people listed their properties at unrealistically high prices this Summer and Fall on the assumption the large price increases up to late Spring, early Summer were continuing.

The market has stabilised since Summer. Those who listed their properties at unrealistically high prices since then have had to reduce their prices in order to sell (but not below the sale prices of those properties listed during the run up) and those who did not reduce their prices had listings that went stale.

Prices have not fallen. The sale prices of the properties with price reductions were not below the sale prices of comparable units sold during the price run up.

Implications for the Downtown Vancouver Market

Disclaimer - I don't have a crystal ball, so all you read here is conjecture and if you make decisions based on what you read here you do so at your own risk.

Buying a property downtown is a solid safe bet for the long term. I think the market will accelerate again before the Olympics and I think it will coincie with the coming rate cuts the Bank of Canada has been hinting at for next year in light of economic weakness in Central Canada.

Assignments

If you are holding an assignment or pre-sale that you purchased recently, I would hold. If you bought something way back and you would like to use the capital for something else, selling now would be fine.

Everything Else

The market is still good and you should be able to sell your property at prices in line with comparables sold in the last quarter. Some unique waterview units may sell for more. Working with a professional full service realtor and realistic pricing is the key to selling in a stable market (more on that below)

To all who read this blog, henceforth there will be no more Listings posted on this site!

Note to all who read this blog!

I spoke to a man yesterday who gave me some sage and much appreciated blogging advice. The most important bit was that I should avoid posting my listings on my blog. Also you will not see "elevator" analysis ie; the market is up or its down.

Any and all tips and/or feedback on the form and/or content of this blog are wanted and would be hugely appreciated by this blogger!

Many Thanks!

Mike Stewart

Thursday, October 05, 2006

Building permits reach second-highest level on record

ROMA LUCIW

Globe and Mail Update

Building permits, an early indication of planned building activity, surged past expectations to their second-highest level on record in August, Statistics Canada reported Thursday.

Municipalities issued $5.8-billion worth of permits, an 8.3 per cent jump from July, soaring past expectations for a 1 per cent rise, as construction intentions increased across all residential and non-residential components. Ontario was the main driver of the “exceptional” monthly gains.

Statscan said August's proposed building activity was the highest since permits rose to $6.3-billion in December, 2005, when several permits in Toronto had to be rushed through before the end of the year to avoid higher development charges.

Stewart Hall, market strategist with HSBC Securities (Canada), said that if building permits are a reflection of builder sentiment, the construction sector appears to be “all beer and little froth.”

The higher dollar valuation is in part a reflection of the recent jump in prices, Mr. Hall said, adding that prices have been climbing at a rate of 1.3 per cent. He said the report suggests that housing start data for September, slated to be released next week, could top expectations.

The U.S. housing market is suffering through a severe slowdown, raising fears the Canadian market will follow down that same path. But, the Canadian “fundamental picture continues to support the optimism reflected in the permits data,” Mr. Hall said.

There are indications that Canada's housing market is gearing down. Existing-home sales will reach a record for the sixth straight year in 2006, the Canadian Real Estate Association forecast on Wednesday. However, the market is projected to ease in 2007 as sales slip back to more normal levels.

The building permit data released Thursday contained no evidence of a slowdown, as residential permits climbed 5 per cent and non-residential permits jumped 14.2 per cent. Permits for commercial, industrial and institutional projects logged double-digit increases.

The value of residential permits hit $3.6-billion, up 5 per cent from July.

“These results point to a busy end of 2006 for workers in both the residential and non-residential construction sectors, as the value of permits are a leading indicator for building activity,” Statscan said.

Although Alberta's housing market has been booming, Ontario drove the sharp monthly increases for both residential and non-residential permits. British Columbia saw the second-largest rise in July.

“Based on these results, the housing sector has remained clearly healthy,” Statscan said. “The favourable job market, a dynamic economy in western Canada, solid consumer confidence and still advantageous mortgage rates continued to sustain the nation's housing market.”

Royal Bank of Canada senior economist Dawn Desjardins and economist Rishi Sindhi said the report does not change the economic picture of a strong domestic economy, albeit with continued drag from net trade but with solid import demand. “As such, the data is consistent with the Bank of Canada keeping the policy rate at 4.25 per cent in order to ensure that the domestic economy remains robust.”

Tuesday, October 03, 2006

Rubin turns a little bearish (Says interest rates will drop next year)

TAVIA GRANT

Globe and Mail Update

Jeffrey Rubin, one of the most bullish voices on Bay Street, has changed tacks and now recommends banks and bonds over energy as a slowing U.S. economy puts the brakes on consumer spending.

That drop-off in demand will likely prompt interest-rate cuts on both sides of the border, Canadian Imperial Bank of Commerce chief strategist Mr. Rubin said in a note late Monday. He expects the Bank of Canada will slash its key lending rate by 1 percentage point over the next year.

As the bank loads up on financial stocks and bonds, it is "significantly" cutting its exposure to natural gas shares by slashing the overweight portion of its energy position by half.

"Given the recent string of record warm winters in North America, we do not want to be making what is essentially a weather bet," said Mr. Rubin, who is also the bank's chief economist.

Mr. Rubin suggested last month that it might be the time to switch into bonds and protect stock portfolios from an increasingly vulnerable U.S. economy. It's only now, however, that the bank is cutting its energy exposure.

Broadly speaking, "we are continuing to orient our portfolio toward a falling interest rate environment, in both our overall asset allocation and sector selections within the TSX and trust market," Mr. Rubin said.

The Canadian bank has made other changes to its portfolio recommendations, including:

— adding another 2 percentage points of weighting to bonds from stocks, while remaining overweight in its bond portfolio

— adding 3 percentage points of weighting to financial stocks, as well as 1.5 points to telecoms and another 0.5 percentage point to the utilities sector, which tends to pay hefty dividends

— cutting income-trust exposure to 8 per cent from 10 per cent and trimming 6 percentage points from energy trusts weighting on the expectations natural-gas prices will fall

To offset the changes and help rebalance portfolios, the bank suggests now is the time to move into real-estate investment trusts and the power and pipe sectors.

Added together, the moves mean CIBC will now be 4 percentage points overweight in the financial services sector, rivalling the previous overweight position in energy stocks.

CIBC did note, however, that it remains "fundamentally bullish" on both oil and uranium prices and expects to see records in both commodities in the next year.