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Briefing highlights

  • OECD warns on stock prices
  • Also warns on housing market
  • Canada's trade surplus widens

Inflated stock and home prices

The OECD is adding its voice to mounting concerns over the “apparent disconnects” between the economy and high stock prices.

The group also cites – again – the rapid run-up in Canadian house prices and warns this can be “a precursor of an economic downturn.”

It also upgraded its forecast for economic growth in Canada this year, to 2.4 per cent from an earlier projection of 2.1 per cent, though it trimmed its 2018 call to 2.2 per cent from 2.3 per cent.

These fresh thoughts from the Organization for Economic Co-operation and Development, released in an updated assessment Tuesday, come in an era of heightened trade tensions, a topic that also came in for scrutiny.

On stock markets, which have surged since the election of U.S. President Donald Trump, the OECD said investors are seemingly out of synch with what’s happening on the ground.

“In financial markets, there are apparent disconnects between the positive assessment of economic prospects reflected in market valuations and forecasts for the real economy,” the group said in its interim economic outlook.

“Equity valuations have increased significantly further in many major markets over the past six months, despite the large rise in nominal interest rates and with long-term nominal and real GDP growth expectations based on consensus forecasts barely changed.”

The OECD’s warning on home prices and household debt are the latest in a years-long series of warnings from several observers, including the Bank of Canada.

“In advanced economies, some countries have experienced rapid house price increases in recent years, including Australia, Canada, Sweden and the United Kingdom,” the report said.

“As past experience has shown, a rapid rise of house prices can be a precursor of an economic downturn,” it added.

“House price-to-rent ratios are at record highs in several countries and above long-term averages in many others. Although there has been a slower accumulation of household debt in recent years, mortgage-debt-to-income ratios remain high in many countries.”

As for trade, the OECD noted the “significant uncertainty” over future policy, warning against the trend to protectionism.

“Efforts are needed to strengthen domestic policies that support trade openness, maximize the gains from trade and ensure that the benefits are fairly shared, with obstacles to the process of reallocation and transition for workers reduced,” it said.

“Internationally, progress is required in ensuring a level playing field. A rollback of existing trade openness would be costly, with a significant share of jobs in many countries linked to participation in global value chains.”

This, the OECD said, comes amid a five-year stretch of a global economy caught in a “low-growth trap.”

OECD Interim Economic Outlook (EO) real GDP growth projections

Year-on-year, percentage

Interim EO projections Difference from November EO

2016 2017 2018
World 3.0 3.3 0.0 3.6 0.0
U.S. 1.6 2.4 0.1 2.8 -0.2
Euro area 1.7 1.6 0.0 1.6 -0.1
Germany 1.8 1.8 0.1 1.7 0.0
France 1.1 1.4 0.1 1.4 -0.2
Italy 1.0 1.0 0.1 1.0 0.0
Japan 1.0 1.2 0.2 0.8 0.0
Canada 1.4 2.4 0.3 2.2 -0.1
Britain 1.8 1.6 0.4 1.0 0.0
China 6.7 6.5 0.1 6.3 0.2
India* 7.0 7.3 0.3 7.7 0.0
Brazil -3.5 0.0 0.0 1.5 0.3
G20 3.1 3.5 -0.1 3.0 0.0
Rest of the World 2.3 2.7 -0.1 3.2 0.0

It now forecasts global growth at 3.3 per cent this year, and 3.5 per cent next. Those would mark a modest gain from 2016’s mark, which was just shy of 3 per cent, but still below the average 4 per cent in the two decades that preceded the financial crisis.

For Canada, it said economic growth “is expected to increase, supported by fiscal initiatives, export-market growth and the slowdown in commodity-related investment bottoming out.”

Trade surplus widens

Canada has scored its third consecutive monthly trade surplus.

The surplus widened in January to $807-million from December’s revised reading of $447-million as exports climbed and imports slipped, Statistics Canada said.

January exports actually hit a record $46.5-billion, up 0.5 per cent, on stronger shipments from the auto, farming fishing and food industries, the agency said.

Export volumes climbed, while prices dipped.

Imports, in turn, slipped 0.3 per cent. Though volumes rose 2.5 per cent, prices fell 2.7 per cent.

“Chalk that up as a plus for the January GDP outlook, and given the strong handoff from Q4, we’re likely looking at another 2-per-cent quarter in Q1,” said Nick Exarhos of CIBC World Markets.

And one hopes Mr. Trump isn’t reading the Statistics Canada report: Exports to the U.S. rose 2.3 per cent, also led by the auto sector, widening Canada’s surplus with its neighbour to $4.5-billion from $3.8-billion.

The U.S. trade gap with the world, meanwhile, widened to the tune of 9.6 per cent, to $48.5-billion, the fattest in several years.