On January 18, 2012, Ukraine President Viktor Yanukovych appointed Valeriy Khoroshkovsky as a new Minister of Finance to replace Fedir Yaroshenko. Albeit unexpected, the move represents a rotation within the existing power circles, reflecting more orchestrated political maneuvering ahead of the October parliamentary 2012 elections. Khoroshkovsky, who had left the seat of the head of […]
As Canadian household debt has grown at an average 8% annually over the past decade, about twice the pace of income, it should take a significant slowdown in credit growth to reach sustainable levels. If credit growth slows to 2% per year, then it should take three years for the debt ratio to return to 140%. Otherwise, there is a risk that the number of households in the most vulnerable group (whose debt service ratio is at 40% or higher relative to their disposable income, as defined by the BoC), which currently stands at 1 million, will grow significantly. This segment of the population is also more exposed to any macroeconomic or income shocks.
Though Canada managed to avoid a U.S.-style housing crash, the Great White North may face its own set of difficulties, as the same ample credit extension, low interest rates and government incentives that helped the housing market rapidly recover the losses incurred during the 2008-09 downturn are contributing to increased household indebtedness. The ratio of debt to disposable income reached a record high of 148% in Q3 2010. As underlying macroeconomic trends (e.g., the open output gap and weak core inflation) warrant an extended pause in the Bank of Canada’s tightening cycle, Canadian authorities have turned to regulatory means to dampen excessive credit practices and ultimately decrease households’ vulnerability to rising debt service payments.
The 1.3% advance in November retail sales in Canada exceeded the market average forecast of a 0.5% rise. Although above our forecast, the strong gain was broadly in line with our expectations of holiday sales driving year-end sales volume. While the release highlights the continued strength of Canadian consumption toward the end of last year, we do not expect consumption to be a major driver of growth in 2011. Although some consumer-spending momentum should continue, November’s record increase in real retail sales is unsustainable. In particular, the record-high jump in the ratio of debt to disposable income to 148% in Q3 will keep Canadians from further credit borrowing, even as income growth slows, and wealth effects become more modest. These factors should restrain consumption.
As Canadian policy makers assess the ongoing economic recovery, they remain cognizant of the risks of returning to a tightening stance. Among them are the risks of attracting increased foreign capital inflows, which would drive the Canadian dollar to new highs, exacerbating the country’s competitiveness woes.
Lackluster growth, slowing domestic demand and cooling housing will also keep inflationary pressures in check. We expect inflation trends to remain soft in the coming quarters. Core inflation eased further in September to 1.5% y/y, bringing the Q3 figure to 1.6%. This was in line with the BoC’s revised estimate, which was released in October, days before the release of last month’s data. The BoC expects a similar inflation rate for Q4, consistent with RGE’s expectations, which point to continued slack in the Canadian economy, which will restrain prices.
The strengthening loonie has had an opposing impact on domestic importers and exporters. Some 44% of medium-sized Canadian businesses polled by BMO reported little or no impact from the currency movements. Many businesses have already had to adjust to a stronger currency, to shift their supply and distribution chains accordingly and move up the value chain. Conversely, Canadian exporters continue to face headwinds stemming from weakening competitiveness. As the loonie remains strong, it will adversely affect exporters and certain manufacturing sectors. Research by National Bank of Canada estimates that a 5% rise in the CAD to US$1.02 would narrow chemical, furniture and transportation equipment industries margins; meanwhile, profit margins will rise in motor vehicles, paper and the electronic equipment and appliances sectors. National Bank attributes the difference to the different exporting profile and proportion of expenses (labor, intermediate goods) priced in USD. In practice, it is the volatility of the currency rather than the strength that poses the most significant problems for businesses, as it forces them to continue to adjust.
This week will kick off with the Bank of Canada’s (BoC’s) policy rate meeting on October 19 (Tuesday) followed by the publication of the bank’s Monetary Policy Review (MPR) on October 20 and the release of key inflation and retail sales statistics on Friday (October 22). Consensus has now aligned with our view that the BoC will remain on hold given the recent softening of economic indicators in Canada and the slowing of the global economy.
The Bank of Canada (BoC) raised its overnight target rate to 1% at its September 8 meeting, in line with the expectations we put forth in last week’s North America Focus. What was unexpected was the hawkish tone of the central bank’s statement announcing the decision, which glossed over glaring signs of slowing domestic growth.
Canadian policy makers have become increasingly concerned about the overheating of the country’s housing market. Unlike some other markets, like the Nordics, Canada’s market has already started to cool. Though we believe that Canadian real estate market conditions do not imply a U.S.-style housing crash, we do anticipate a long period of cooling in the housing market before it stabilizes in 2011-12, when homebuilding and sales activity come into line with economic fundamentals.