Briefing highlights
- Did other shoe just drop for economy?
- Global markets mixed
- European stocks higher but for Italy
- ‘Fears over future for Italian banks will persist’
The other shoe?
At least one economist wonders whether the collapse in Vancouver home sales means “the other shoe has just dropped” for Canada’s economy.
David Madani of Capital Economics was referring in a recent report to the latest measure of economic growth, which rebounded in the third quarter at an annual pace of 3.5 per cent.
But what Statistics Canada’s report also showed is that housing investment sank by 5.5 per cent in the quarter, the first contraction in about three years and tied to the Vancouver slump.
Housing has been a big part of Canada’s economic performance, particularly after the thud of the oil shock and its impact on business investment.
“Excluding energy, GDP has been growing at less than 1 per cent annualized over the past two quarters and we aren’t optimistic about prospects in the near term,” said Mr. Madani, his group’s senior Canada economist.
“While business investment remains in the doldrums, the decline in housing investment last quarter looks like the other shoe that just dropped.”
Mr. Madani and Capital Economics have been down on Canada’s housing market, and the broader economy, for quite some time.
But other economists, too, have questioned the overall economic outlook, despite the third-quarter rebound, which at any rate was coming off a second quarter that had been depressed by the Alberta wildfires.
“In particular, business investment was a soft spot in the third quarter, and is unlikely to pick up meaningfully in light of the heightened uncertainty surrounding trade with the United States post-election,” said Toronto-Dominion Bank economist Dina Ignjatovic.
“Employment in Canada appears to be holding up well on the surface – with nearly 11,000 jobs created in November – but underlying trends suggest otherwise,” she added.
“Much of the gains in employment this year have been in part-time jobs, with the full-time share of employment now at its lowest level in nearly six years. This is just another sign that the economy is struggling to gain traction.”
Where housing is concerned, the new 15-per-cent B.C. tax on foreign purchases of Vancouver area homes is believed to be playing a role in the real estate pullback there. There are also the more recent Canada-wide mortgage and tax measures introduced by the federal government to cool overheated housing markets.
As The Globe and Mail’s Brent Jang reports, home sales in Vancouver plunged by more than 37 per cent in November from a year earlier.
Like Mr. Madani, economists believe the Vancouver easing began last February, in advance of the tax and new rules, so something else has been playing out.
“In short, Vancouver’s housing bubble has burst, and we expect housing investment there to decline much further,” Mr. Madani said his report, titled “The other shoe just dropped.”
“What’s more, if household financial conditions tighten even by a moderate amount as markets seem to fear, then housing investment nationally could fall quite sharply,” he added.
Other economists expect the pace of price gains to ease in the scorching Toronto area, though not slump outright, given the federal measures and the fact that so many potential buyers are priced out of the market.
They, too, have cited concerns over tighter financial conditions after the run-up in longer-term interest rates, which has filtered into Canada, since the U.S. election.
“If that continues, we will see further increases in mortgage rates, and higher costs for fixed-term debt issued by the corporate sector,” said CIBC World Markets chief economist Avery Shenfeld, referring to the higher U.S. Treasury yields.
“Those rate developments are all well and good for the U.S. economy, which is closing in on full employment and no longer needs the crutch of ultra-low yields,” he added.
“The bond market is simply doing some of the [Federal Reserve’s] work for it. But it’s not in sync with what the Canadian economy needs right now, with our 6.8-per-cent unemployment rate masking a much weaker picture in a labour market that is adding part-time work, in lower-paid sectors, at the expense of full-time jobs.”
Which becomes an issue for the Bank of Canada as it prepares to release its policy statement on Wednesday and which, unlike the Fed, has no plans to tighten.
“The Bank of Canada would therefore like to send a friendly reminder to the bond market: Rate hikes are coming in the U.S, but they’re not in the offing in Canada any time soon, and a further climb in yields isn’t welcome,” Mr. Shenfeld said.
Markets mixed
Global markets are mixed but, notably, European stocks are still higher but for those in Italy.
“European markets have been surprisingly resilient this morning, as initial fears of another euro zone crisis have been largely brushed aside,” said IG market analyst Joshua Mahony.
“Sharp depreciation in the euro and European indices have been swiftly reversed, bearing more than a passing resemblance to the U.K. referendum and U.S. election results.”
Tokyo’s Nikkei lost 0.8 per cent, Hong Kong’s Hang Seng 0.3 per cent, and the Shanghai composite 1.2 per cent.
In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were al up, suggesting little angst outside of Italy over the results of Sunday’s referendum. Italian stocks were down, though, while North American markets mirrored Europe with a rise.
“Fears over the future for Italian banks will persist, with recapitalization plans thrown into doubt after Renzi’s exit,” Mr. Mahony said.
“However, this morning’s recovery is a clear sign that market perception is that, despite causing uncertainty, this result is unlikely to spark a major crisis for the banks.”
How markets ended Friday