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business briefing

Briefing highlights

  • How Alberta has been hit hard
  • SoftBank strikes huge deal for ARM
  • Pros and cons of surging home prices
  • Video: Can you protect your job from robots?

Alberta hit hard

Alberta is in the midst of one of its “most severe recessions” ever, Toronto-Dominion Bank says, warning of a cumulative contraction of a sharp 6.5 per cent in economic activity by the end of this year.

TD chief economist Derek Burleton and economists Diana Petramala and Warren Kirkland said in a new forecast they expect Alberta's gross domestic product to shrink by 3 percentage points this year, coming on the heels of what the province has already suffered from the oil shock.

“Based on our revised forecasts, the 2015-16 recession is likely to go down in history as one of the most severe using the GDP benchmark,” the TD economists said.

“Compared to the average of the past four recessions, declines in both real and nominal [GDP] are expected to be double the magnitude.”

The hit to jobs, though, suggests an “average” recession, and the current slump probably would have been uglier still but for some offsetting reasons, including low interest rates, the sinking Canadian dollar and a “moderately growing” U.S. economy.

“That said, to the extent that these factors have been blunting the downside, the recovery anticipated in Alberta starting next year is likely to lack the typical punch that has characterized those in the past,” they said, projecting average economic growth of 3.2 per cent between 2017 and 2018.

As TD put it, Alberta can’t catch a break. Just as oil “provided a decent whiff of recovery,” along comes the uncertain trade threats from Britain’s decision to leave the European Union. That comes on top of the Alberta wildfires that ripped through the Fort McMurry area.

Looking at four previous recessions starting in the early 1980s, TD found this:

Note the hit to personal disposable income. And while unemployment is well below the levels of those past recessions, it is forecast to remain elevated through the end of the year.

It’s also worth noting that while TD forecasts Alberta won’t get back to its 2014 levels until 2018, GDP per capita will still top that of other provinces even during the slump.

“Regarding Alberta’s longer-term prospects, much will depend on how the province tackles many of the challenges on its doorstep - sizable budget deficits, inadequate oil and gas pipeline capacity, competition from the U.S. shale industry for investment, and addressing climate change, to name a few,” the TD economists said.

SoftBank in ARM deal

Japan’s SoftBank Group Corp. has struck a deal worth more than $30-billion (U.S.) for British tech giant ARM Holdings PLC, a huge global player in chip design.

“ARM will be an excellent strategic fit within the SoftBank group as we invest to capture the very significant opportunities provided by the ‘Internet of things,’” said chief executive officer Masayoshi Son.

The deal drove tech stocks sharply higher in London.

“It would not be surprising to see other bids for U.K. firms that have now become dheapter thanks to the fall in sterling, so the ARM deal could simply be the first in a procession of deals,” said IG senior market analyst Chris Beauchamp.

“It won’t be an ugly rush since ongoing political uncertainty will make it even more important for acquisitive firms to pick their targets carefully, and questions will linger over just how protectionist the U.K. may become with regards to some of its prized assets.”

Pros and cons

There are costs attached to what Bank of Nova Scotia calculates is the $200-billion in housing wealth created in Canada over the past year.

Among those costs are the fast erosion of affordability and the build-up in household debt to the point that it’s now one of the most worrisome in the world.

The benefits, too, are clear: Anyone who happens to own a home, particularly in Vancouver and Toronto, are growing richer with every transaction in those inflated markets.


1. As a simple investment, it ain’t bad, particularly if you live in Vancouver or Toronto or any of the regions surrounding them. Indeed, says Scotiabank’s Adrienne Warren, rising prices have pumped up homeowner wealth by $200-billion in the past year alone.

Here’s another way of looking at it, from BMO Nesbitt Burns chief economist Douglas Porter:

The average resale price across Canada climbed by $50,610 in June from a year earlier. Compare that to his calculation of annual pay levels – just shy of $50,000 – based on average weekly earnings.

And that’s the Canadian average for home prices, so consider what Vancouver and Toronto were bringing in.

2. Realtors are getting richer by the day. I have no problem with that – I wish I could get rich, and I guess I am because I own a house in Toronto – but, please, not on the backs of people who God-knows-when will ever be able to buy their first homes.


1. The biggies, of course, are swollen household debts and the fear of a bubble popping so loudly it will be heard across the country.

This is the biggest threat to the economy, and one that has caught the eye of the Bank of Canada and the regulator of commercial banks.

Many observers have taken a stab at this, all of them flagging concerns. The latest, a recent report from Capital Economics, puts Canada, Australia, the Netherlands and Sweden in the very naughty camp for consumer debt.

“Rising household debt in these countries has gone hand-in-hand with large increases in the cost of housing,” said the group’s global economist, Michael Pearce, noting that home prices are now “historically high” compared to incomes.

“The risk is that, if house prices begin to fall, households will be forced to cut back spending to repay debt and that defaults will rise as households fall into negative equity,” Mr. Pearce added.

“The risks are perhaps greatest in Canada where there is evidence that looser lending practices, including issuing mortgages with very long amortization periods and with high loan-to-income ratios, are driving recent increases in housing demand.”

But you can at least take some comfort from this: “The growing debt burden in the final group of economies is in some cases unlikely to end well, but the implications for the global economy should be small.”

2. This comes down to affordability and the fact that our kids have been priced out of the Vancouver and Toronto markets.

According to the latest measure by National Bank, affordability suffered again in those cities in the second quarter, based on mortgage payments as a percentage of income, or MPPI, for a representative home with a five-year term and 25-year amortization.

“The number of months required to accumulate a down payment on a representative home at a savings rate of 10 per cent was 34.9, versus 32.6 months a year earlier,” National Bank’s Matthieu Arseneau and Kyle Dahms said of Canada’s overall market, which certainly isn’t bad.

But “in Vancouver, for a non-condo dwelling, it reached 403 months, which is almost 34 years.”

Vancouver and Toronto, they said, are now “less affordable than at any time since the early 1990s.”

2. There’s a lot at play here, including the strong employment gains in Vancouver and Toronto. But also apparently at play are foreign capital and speculation.

The price gains have been luring foreign buyers, whose money is believed to be helping drive costs higher still, something that’s keeping B.C.’s Finance Minister up at night.

There’s little in the way of hard numbers, but BMO’s Mr. Porter looked at home prices and borrowing, and found this:

“Note that home prices tend to ebb and flow very closely to overall household-credit growth,” Mr. Porter said, though there were obvious differences during the global financial crisis.

“If anything, home prices have tended to grow slightly slower than credit growth over time,” Mr. Porter said.

“But look at what has transpired in the past year – prices have absolutely surged, while credit growth has barely budged,” he added.

“Something besides domestic borrowing has clearly fanned the flames. We will simply note the anecdotal evidence that many foreign buyers do not borrow to buy.”

There’s also speculation – and homes sitting empty while those waiting to make a killing sit it out – and what the Bank of Canada says are “self-reinforcing expectations.”

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