Briefing highlights
- Economy perks up but ...
- ... many Canadians buried in debt
- G20 finance chiefs meet in Germany
- Alberta no slouch on debt
Economy perks up but ...
Economists are tentatively declaring an end to Canada’s two-year-old economic growth slump.
Which means your personal slump may be just about to start, if you’re one of the buried-in-debt Canadians that everyone is railing against.
First, the good stuff.
Economists cite a string of stronger economic indicators of late, though risks abound, from the threat of a housing correction to the frailty of oil prices to the uncertainties surrounding U.S. trade policy under President Donald Trump.
On Thursday, for example, Toronto-Dominion Bank’s economics team raised its forecast for 2017 economic growth by half a percentage point, to 2.3 per cent, a far sight better than 2016’s 1.4 per cent.
TD’s call for next year inched up by 0.2 of a percentage point to 1.9 per cent.
“The improved outlook does not mean that economic risks are fading,” the bank’s economists said.
“Quite the opposite when it comes to the ongoing over-reliance on the housing sector,” they added.
“The risks are rising around Canada’s largest urban centre, and a more pronounced correction may be in waiting beyond the 2017-18 forecast horizon. On the trade side, all eyes in Canada remain on upcoming NAFTA renegotiations and U.S. tax reform.”
There are several reasons for TD’s brighter outlook: Consumer spending is strong, job creation appears solid, the plunge in business investment is nearing a trough, and the Canadian dollar is weak, at about 75 cents U.S., in a good sign for exports.
At the same time, a stronger U.S. economy means stronger demand.
There’s also construction and the resale housing market. For now, anyway.
“Home prices across the [Greater Toronto Area] and surrounding areas appear to be detaching from fundamentals and are simply unsustainable,” the TD economists said.
“This pace cannot last forever, but in the absence of government policy intervention or a sharp movement in interest rates, momentum is likely to keep the Toronto housing party going for at least a few more quarters.”
Which brings us to the bad stuff, and the fact that many Canadians may be about to see the beginning of their own personal hell.
As The Globe and Mail’s Rachelle Younglai reported this week, a key consumer measure of household debt to disposable income now stands at a record 167.3 per cent, or about $1.67 owed for each dollar you’ve got to spend.
And only recently, the Bank of Canada warned of the troubling number of households with high-ratio mortgages, particularly those with a loan-to-income ratio above 450 per cent, and particularly in Toronto and nearby areas.
Indeed, observers around the world have been warning of Canada’s high debt levels for years. The Bank for International Settlements, for example, a body made up of the world’s central banks, recently flagged the threat of a financial crisis in Canada.
Absent a jerk higher in interest rates, or the sudden loss of a job, many families can juggle the cost of servicing their swollen debts.
And certainly the Bank of Canada isn’t going to be raising interest rates any time soon.
But as The Globe and Mail’s Tim Shufelt writes, higher yields in the United States have filtered north.
“Canada is a perfect example of a country that will be directly impacted by what transpires in financial markets south of the border,” the TD economists said.
“Even though the economy appears to have significant remaining slack, higher rates in the U.S. will be priced into Canadian sovereign bonds and eventually mortgage rates. This is already under way.”
Mortgage rates tend to be linked to the five-year Government of Canada yield, which has been rising.
Derek Burleton, TD’s deputy chief economist, said his group expects an ongoing, though moderate, push higher in that yield this year, and a steeper climb in 2018.
“If it plays out as we see, households will have time to adjust,” Mr. Burleton said.
Royal Bank of Canada economist Laura Cooper cited a recent telling trend: The pace of mortgage growth in Canada may be slowing in the wake of government measures to cool housing markets but Canadians are going full-out with other forms of debt.
“Consumer credit, led by lines of credit and personal loans, jumped in the final quarter to boost overall household debt accumulation higher in the quarter,” Ms. Cooper said of Statistics Canada’s measure of the last three months of 3016, released earlier this week.
“The typically unsecured nature of this debt commands higher borrowing rates and variable payments, leaving households increasingly vulnerable to a looming uptrend in interest rates.”
G20 meets
JPMorgan Chase wonders if the G20 finance meeting in Germany might become a “rumble in the jungle,” given the combative nature of the new U.S. administration.
Finance ministers and central bankers are meeting in Baden-Baden, the first such gathering from the Trump team, amid American accusations of currency manipulation and unfair trade regimes.
“The Trump administration’s general approach of challenging the status quo appears at odds with the natural persistence of status quo consensus on various strenuously negotiated issues in multilateral settings like the G20,” said Daniel Hui of JPMorgan.
“Hence upcoming G20 meetings present important test of both the Trump administration in its conviction to recalibrate the global status quo in trade, currency and monetary policy, as well as a test of the global community in its maintaining that status quo as optimal arrangements in a complex multilateral world.”
Having said that, Elsa Lignos, Royal Bank of Canada’s global chief of foreign exchange strategy, expects U.S. Treasury Secretary Steven Mnuchin “to present a softer tone from the U.S. shying away from the protectionist message of Trump’s campaign team.”
And Germany’s finance minister has said the statement from the G20 meeting could well shy away from trade issues altogether.
Whither Alberta
Canadian households aren’t alone in their debt woes: The Alberta government is no slouch on that front, though it projects better times.
As The Globe and Mail’s Carrie Tait reports, Premier Rachel Notley’s government expects to run deficits for six years, though it hopes more stable oil prices will help on that front.
Thursday’s budget projected a $10.3-billion deficit in the coming fiscal year, with the budget balanced by 2023-24.
“The partial recovery in oil prices is helping to stabilize the Alberta economy and also the province’s budget deficits,” said Maria Berlettano and Andrew Grantham of CIBC World Markets, noting the “modestly lower” gaps over the next few years.
Having said that, Bank of Montreal senior economist Robert Kavcic warned that the province seems to have “little interest” in cutting the size of its deficits.
“Alberta came into this period with two big advantages: by far the lowest tax burden and net financial assets,” he said.
“The former advantage has eroded significantly, and that latter has evolved into net debt that, while still low, is quickly closing in on its western-Canada peers.”