Looking back to last year, it would have been inconceivable to talk about a Canadian economic miracle; however, that is exactly what we have on our hands today.
Unlike the nascent U.S. rebound, the Canadian recovery has occurred with no arithmetic support from inventories, and with a lot less intervention in the form of fiscal stimulus. The National Bureau of Economic Research is still unsure of when (or whether) the recession ended south of the border, but Statistics Canada boldly told us a little more than a week ago that the domestic downturn was officially terminated back in the third quarter of last year.
So, what was the principal factor underpinning this impressive Canadian economic revival, especially in relation to what is happening in the United States? We can answer the question in one word: housing.
The housing sector is the quintessential leading indicator of the economy, and, true to form, it caught fire in Canada before the overall economy did. The U.S. market has stabilized, at best, with the help of massive doses of government support, but in Canada, housing activity has absolutely been ripping: Housing starts in March were up 38 per cent on a year-over-year basis and up a resounding 75 per cent from the trough of February, 2009; existing home sales are up more than 60 per cent from the bottom in December, 2008.
Real estate-sensitive retail sales have risen nearly 15 per cent year over year as of February, the fastest pace in seven years.
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On an annualized basis, real residential construction is up about 20 per cent since the recession ended.
Construction employment has jumped 6 per cent (that’s 66,000 jobs) from the low of July, 2009. This employment represents only a 7-per-cent share of the overall employment pie but has been responsible for nearly 40 per cent of the aggregate increase in employment since the recession bottom.
We did a bottom-up accounting from the gross domestic product data to see just how much of the post-recession recovery in Canada has been due to the direct and indirect effects of the housing boom. Part of that indirect impact comes via the “wealth effect” on consumer spending from the 20-per-cent year-over-year surge in home values, since housing comprises nearly one-quarter of the asset base in the household sector.
In Canada, this means that every dollar increase in housing wealth translates to 7 to 9 cents of incremental spending in the GDP accounts. Housing has tremendous spinoff effects outside of the wealth effect, and it’s all locally driven.
