Crude oil prices are poised for their biggest monthly gain in seven years, hitting a new high for 2016, and as day follows night, the Canadian dollar is up sharply–just shy of 80 cents U.S. Today’s February GDP report was not as weak as expected following the blowout number in January, leaving Canada likely to print 3% growth in the first quarter of this year. This compares to an extremely weak read for first quarter growth in the U.S. of only 0.5% annualized–the weakest pace in two years, after a 1.4% fourth quarter advance. American consumers reined in spending and companies slashed business investment, especially in the energy sector. 

Shaky global markets and oil’s tumble resulted in the biggest U.S. business-investment slump in almost seven years, and household purchases climbed the least since early 2015. As in Canada, last year’s slump in oil prices that extended into mid-February of this year led to an 86% annualized plunge in capital spending on wells and shafts in the U.S., the most in records back to 1958.

While Federal Reserve officials on Wednesday acknowledged the softness, they also indicated strong hiring and income gains have the potential to reignite consumer spending and propel economic growth. Some believe the Fed could raise rates in June after remaining on the sidelines in April, although the weak first quarter showing dims the prospects of such action.

In Canada, the first quarter story appears to be rosier. Canada’s GDP declined for the first time in five month in February, but the decline was smaller than expected and followed five consecutive months of expansion. January growth remained at 0.6%, the fastest pace since 2013. 

Hedge funds and other large speculators have started betting in the Canadian dollar’s favor this month, ending their longest sustained bearish stance since 2001, according to data from the Commodity Futures Trading Commission. The Canadian dollar is the second best performer among G-10 peers this year, up 17% since its mid-January low. Clearly it is oil that is driving the rally in the loonie (see Chart below). Canada has the most oil-dependent currency of all the commodity currencies.

The loonie’s strength creates challenges for the Bank of Canada, which held interest rates unchanged on April 13, partly in the hope that fiscal stimulus will be successful, but also with the prospects of a continued rebound in non-energy exports. A stronger currency dampens the export effect. 

Canada’s returning economic resilience in the first quarter will be driven by improved consumer spending and a slower decline in business investment. Net exports are dampened by the sluggish U.S. economy. Real after-tax income growth improved with this year’s middle class tax cut. 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

• 70% of Canadians own homes!
• The average Canadian credit score is 700!
•  78% of Barrie homes sell within 30 days!
• Average house price in Barrie has increased by 15% recently.
• Home values are expected to go up for the rest of this year and into next year.
• Unemployment is expected to remain low.
• The government could start to slowly raise interest rates after the USA election but rates will remain low.

Thank you Greg Casey from Genworth for your insight.

Despite headline-grabbing stories about million-dollar houses pushing home ownership out of reach in Canada’s large cities, there’s still plenty of opportunity for first-time buyers in certain segments of the Canadian real estate market, says Dominion Lending Centres Chief Economist Sherry Cooper.

Single-family home prices have been surging in cities like Toronto and Vancouver, but that’s driven largely by a shortage of land: You practically need to knock down an older home in order to build a new one. It’s the supply-demand story, Cooper says. Land for single-family homes is in short supply while demand is strong, driving double-digit price increases.

But that’s not the case in the condo market, where prices have not been escalating as quickly. Condos, and housing in those parts of Canada where the land supply is not an issue, are still an affordable option.

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Thank you Gordon Hamilton for your insight.

The true cost of mortgage penalties is a common concern and complaint among homeowners so it seems reasonable to review it once again. 

Due to the sometimes complex calculations the banks use to determine this amount – consumers have been left in the dark when trying to make a decision on whether the cost of refinancing early is worth it or not. Recent changes and more to come will regulate the banks to provide more information up front and over the life of your mortgage on penalty costs. As a broker I always discuss the true cost of mortgage penalties with my clients to ensure we work with lenders that have best options for penalties if ending the term is a possibility for any reason.

The three possible options for a penalty. 

First, three months interest. 

Second, interest rate differential (IRD). 

Third, the difference between IRD calculations by the bank and other lenders.  Almost all of the major banks have a different IRD calculation than other lenders which can more than double and in some cases triple the penalty.  Knowing the exit cost of your mortgage is an important part of the decision in choosing a lender and many people don’t realize this until it is too late.

The majority of long-term fixed-rate mortgage holders terminate or change their mortgage before their term is up. In fact, the average five-year mortgage lasts only three to four years.

For more information on penalties and your mortgage options please give me a call!

Thank you!

Thank you Pauline Tonkin for your insight.

To no one’s surprise, the Bank of Canada left its target overnight rate unchanged at 1/2 percent. The Bank, however, reduced its forecast for the global economy and for the U.S. economy as well, suggesting that the outlook for Canadian exports is less favorable than earlier forecast. (Table 1 below shows the Bank’s current global forecasts with the January forecasts in parentheses.)

While oil prices are off their lows and slightly above the level forecast by the Bank in January, the central bank now expects deeper cuts in oil sector business investment. The Bank expects crude oil prices to remain low (Chart 2). The Canadian dollar has increased sharply from its lows earlier this year, “reflecting shifting expectations for monetary policy in Canada and the United States, as well as recent increases in commodity prices.” The loonie has surged 15% in less than three months to its strongest level in since mid-2015. This, of course is bad news for exports, and the Bank played down the outlook for Canadian growth in its policy statement and Monetary Policy Report (MPR). 

The Bank suggested the surprising strength in the first quarter is in part due to temporary factors and will reverse in the second quarter. Their estimate of output growth in the first quarter is now 2.8%, below consensus private-sector estimates of 3+%, slowing to 1% output growth in the second quarter. The Bank re-emphasized that the structural adjustment to the decline in oil prices is ongoing and will dampen growth over the next three years. This is a more pessimistic, but realistic view than the Bank took a year ago. 

The Bank’s forecast for growth this year and next is significantly less optimistic than many market watchers expected, especially in light of the recent strengthening in the employment and monthly GDP data. The Bank’s Governing Council suggested that had it not been for the recent budget’s fiscal stimulus, the growth outlook would have been revised down from the January outlook. Including the effects of the budgetary easing, the Bank now forecasts Canadian growth this year at 1.7%, next year at 2.3% and and 2.0% in 2018. Slower foreign demand growth, the higher Canadian dollar and a downward revision to business investment all have negative impacts on the outlook but are more than offset by the positive effects of the fiscal measures announced in the federal budget in March.

The Bank of Canada also revised down its estimate of potential growth in the economy to roughly 1.5%, mainly reflecting slower growth in trend labour productivity as a result of weaker investment. The new growth profile, combined with the revised estimate for potential, suggests the output gap could close somewhat earlier than the Bank had anticipated in January, likely in the second half of 2017. Inflation is expected to remain at or  below the target rate of 2%.

Bottom Line: Caution is the watchword for today’s Bank of Canada policy report.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

The trend measure for housing starts fell to 196,783 in March compared to 201,618 in February.

“Overall, starts were trending lower in March due to a slowdown in multi-unit construction,” said Bob Dugan, CMHC Chief Economist. “This was the case across the country, except in British Columbia where declining inventories of new and unsold units as well as low levels of new listings in the resale market spurred builders to start new projects.”

Following three months of little job growth, economists expected to see a modest 5,000 increase in employment in March. The jobless rate was forecast to hold steady at 7.3%, matching the highest level in over 3 years. Surprise! March came in like a lion, with employment up 41,000 (+0.2%)–the strongest reading in five months. This lowered the unemployment rate by 0.2 percentage points to 7.1%.

The first quarter posted a gain of 33,000 jobs, the fourth quarter in a row of 0.2% growth.

Payroll gains were posted in Alberta, Manitoba, Nova Scotia and Saskatchewan. At the same time, employment declined in Prince Edward Island and was little changed in the other provinces. Alberta, ground zero for the oil crisis, recorded 19,000 net new jobs, taking the unemployment rate down 0.8 percentage points to 7.1%–still up sharply from a year ago. The gain was driven by increases in retail and wholesale trade. Despite the employment increase, the total number of hours worked in March declined by 0.7%, a nosedive that began early last year.

The divergence in provincial fortunes clearly continues. BC remains the leader, with the fastest payroll growth and strongest economy. On a year-over-year basis, gains totalled 72,000 in BC, up 3.2%. The jobless rate is unchanged at 6.5%. The second strongest province in the past year is Ontario with job growth of 1.2% and a jobless rate of 6.8%.

All of the employment gains in March were in the private sector. Manufacturing was the one area of weakness, posting declines of 32,00, with losses in Ontario, Quebec, Alberta and British Columbia. On a year-over-year basis, employment in manufacturing was little changed, as gains in Ontario and Nova Scotia were offset by losses in Alberta.

Unfortunately, the pain in the oil sector is not over yet. Second-round effects will hit payrolls through mid-year as oil production and business investment in that sector continues to decline.

Today’s stronger-than-expected labour market report follows on the heels of last week’s dazzling reading on January GDP. The data were well above expectation, causing many Bay St economists to raise their first quarter GDP forecasts to over 3.0 percent–well above the less than 1.0% reading in the final quarter of last year. Earlier this week, the trade numbers for February were released and disappointment reigned once again as the Canadian trade deficit widened sharply. Exports fell 5.4% alongside a 14.4% nosedive in energy shipments. Imports also slumped a more modest 2.6%, with the vast majority of major product categories lower in February. Nonetheless, net exports are still on pace to add to economic growth again in the first quarter, as the rotation in the Canadian economy continues.

Bottom Line: the Canadian economy is improving and is likely to grow at just under 2% this year. This will keep the Bank of Canada on the sidelines. South of the border, U.S. growth is likely to be just over 2%, with the Fed, though cautious, raising rates later this year.

Thank you Dr. Sherry Cooper for your insight.

Student debt, lackluster job prospects and skyrocketing prices do not appear to have diminished the dream of home ownership for that group of potential first-time buyers known as millennials.

A new survey conducted by Angus Reid for one of the big banks suggests 86% of 18 to 34 year-olds believe home ownership is important. Fifty-nine percent say it offers a sense of personal freedom. Currently 36% of millennials are home owners, 42% are renters and 21% live with their parents.

Eighty-five percent of Canadians, as a whole, believe home ownership is important. The majority cite the classic reasons: building equity and saving for retirement.

Tellingly though, the survey also suggests that nearly one in five Canadians (15%) do not think home ownership is important. Nearly half of the respondents (46%) say buying a home is too great a financial burden.

Lacking from the survey is any historical comparison so it is impossible to know whether any of these numbers are up or down from previous years.

Thank you First National for your insight.

As anticipated, the federal government announced that budget deficits of about $30bn (1.5% of GDP) are in store. This is about $11bn higher than revealed in the February Update.

•       The larger deficits relative to the Update largely reflect the implementation of commitments outlined in last year’s election campaign. Chief among these promises are additional infrastructure spending, changes to employment insurance and support for indigenous peoples. However, speculation that capital gains taxes would be raised did not materialize.

•       Deficits of more than 1% of GDP persist for the next several years, but the federal debt burden remains relatively low and stable. Revenue projections include a sizeable margin of prudence, ap­propriate in light of the longer-term headwinds to Canadian growth.

•       Recent weeks have seen calls to run even larger deficits to support economic growth. We feel that the moderate deficits announced today strike a good balance between injecting short-term stimu­lus, generating long-term benefits through infrastructure enhancement, and maintaining a credible longer-term fiscal path.

•       Given that today’s announcements were fairly well telegraphed in advance, we expect little market reaction. In terms of economic impact, we calculate that the blend of transfer payments, tax changes, and additional infrastructure spending will deliver a boost to the economy of about 0.1 percentage points this year, rising to 0.3 in 2017. This does not represent a massive game changer, but does provide a nice boost to an economy that appears to be increasingly benefitting from rising exports. All told, today’s budget is consistent with a growth outlook that will see the Bank of Canada on hold well into 2017.

Thank you TD Bank for your insight.