January is not typically a kind month to the home renovation sector. It's too cold, and the post-holiday bills are pouring in, deterring consumers from spending.
This year, it's a different story. January promises to be a blockbuster month for home renovations as Canadians race to finish projects and buy materials before the federal government's home renovation tax credit - a key stimulus measure in last year's federal budget - expires at the end of the month.
The credit has proven a boon to companies such as Acrylon Plastics, a Winnipeg-based maker of window frames. CEO Craig McIntosh said sales have increased 30 per cent since October in an ordinarily slow month. He has been able to keep 30 workers employed who normally would have seen temporary layoffs.
Mr. McIntosh is worried though, that the recovery isn't yet sturdy enough to sustain demand once that tax credit runs out at the end of this month.
It's a concern for top policy makers. The Bank of Canada said yesterday that the recovery continues to depend on "exceptional" and "extraordinary" measures by governments and central banks.
Sustained global economic growth hinges on the delicate timing of how the life support of low interest rates and stimulus spending is removed. Move too quickly, and the risk is wilting back into recession. Act too slowly, and the danger is asset bubbles, inflation and more government debt.
Mr. McIntosh frets about the former as the government's tax credit expiry looms and the outlook for demand is unclear. "My concern is that there's no momentum behind this recovery - we'll return to where we were a year ago where demand drops off and people throughout the industry get laid off."
He and others in the industry would like the credit extended by six months, to give time for new home construction to gain traction and the labour market to recuperate.
It may be false hope. Finance Minister Jim Flaherty said this week that the measure is not "inexpensive" and that the government plans to let it expire. The measure has cost $3-billion, according to the federal government's economic action plan.
The program lets tax payers get up to $1,350 in tax relief for projects worth between $1,000 and $10,000 that take place by Feb. 1. It's proven popular, those in the industry say. The Canada Revenue Agency figures at least 3.5 million Canadians have enquired about the program on the Web or by phone since it started.
The program has spurred spending, economists say. Renovation spending outpaced new-home construction spending in the third quarter, accounting for a greater-than-average 41 per cent of total residential spending, says John Clinkard, Deutsche Bank AG's chief economist on Canada.
He believes the credit has been a big driver of spending in the past six months, especially given that rock-bottom borrowing costs are making renovations easier to finance. "Clearly once it expires, you're going to see a pause in activity" for a few months, he says.
He disagrees that demand will fall off a cliff though. "The strong growth of home sales ... is going to support renovation spending because when people buy a home, they're probably going to make some changes."
Retail figures suggest the measure has boosted spending. Sales at home centres and hardware stores rose 1.4 per cent in October from a year earlier even as total retail sales slipped 0.2 per cent, according to Statistics Canada.
Canadian spending on home renovations accounts for about 2.6 per cent of economic activity, or $33.8-billion in 2008.
Home improvement chain Rona Inc. has seen such spending climb steadily over the past year, a trend it pegs partly to the tax credit. Average projects are running at about $8,000, much higher than Rona had expected, and activity has continued into January, traditionally its quiet month.
The company would like the program extended for another year, until the economic recovery is more firmly entrenched, says Claude Bernier, executive vice-president of marketing and customer innovations.
Casey Edge, in Victoria, has different arguments for extending the credit: It will encourage improvements in energy efficiency and puts curbs on the underground economy. Consumers need to have official bills for the taxman to qualify for the credit, forcing more companies to officially register renovation projects in their books.
"It creates more revenue for governments by mitigating the underground economy," says the executive officer of the Victoria office of the Canadian Homebuilders' Association. "It requires contractors to operate legitimately."
The Bank of Canada, for its part, struck a cautious tone yesterday, repeating its pledge to keep interest rates at a record low of 0.25 per cent unless its inflation outlook changes. "The recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems," it said. The central bank "does seem to be emphasizing that this is depending on exceptional measures," says Deutsche Bank's Mr. Clinkard. "That suggests they are certainly not going to back off" from their low-rate policy.
