Overview of Canada’s Economy Recovery

Photo by Iain Bradbury
Photo by Iain Bradbury

Positive economic predictions are proving to be true. According to Business Review Canada, Canada’s manufacturing sector has led the economy toward continued strength. Economic growth of 5% almost perfectly matches predictions. Retail sales’ 0.3% decline during January hasn’t affected the overall progress because the automotive industry balanced the loss, seeing a 2.8% growth in January. Growth in the manufacturing, transportation, and wholesale trade industries also pushed the economy forward, while the oil price increase’s impact on the economy has been minimal. A report by TD bank indicates that the Canadian economy is doing better than expected.

What’s coming

This forward momentum is expected to continue through the first half of the year: the annual average real GDP is expected to grow by 3.0%. In the second quarter of 2011, the negative consequences of Japan’s earthquake/tsunami disaster and global turmoil may inhibit growth. According to the Bank of Canada’s predictions, stretched household balance sheets are expected to restrain the pace of growth in consumer spending and residential investment. Business investment will probably rebound strongly, due to the low cost and high availability of credit and to investments by businesses to improve competitiveness. “We must improve our competitiveness. Recovery after a recession demands that capital and labour be reallocated,” explains Mark Carney, Governor of Bank of Canada.

Exports and business investment are also likely to drive growth forward. Among the provinces, Newfoundland and Labrador recorded the largest upward revision (with +1.1 percentage points) followed by Saskatchewan, Alberta, and Ontario, which each experienced boosts of about half a percentage point. However, it is speculated that the elections in May will divert this progress.

Housing market predictions

“In combination with tougher mortgage insurance regulation, rising interest rates will also dampen demand in the Canadian resale housing market as mid-year rolls around,“ the TD Economics report announced. The new mortgage insurance rules will increase the average monthly cost of carrying an insured mortgage. Despite these changes, the Canadian housing market is expected to remain balanced.

Recovery in Europe and the U.S.

Europe faces trouble concerning its government fiscal problems and the unity of the European Union, as stronger countries don’t want to pick up the tab for poorer countries like Ireland, Greece, and Portugal. This unrest could lead to one or more debt restructurings, which could impact European financial stability. According to the Chinese Daily, Chinese investments will play an important role in driving European economic recovery and generating employment.
The U.S. recovery is stronger than Canada’s, but reliant on monetary and fiscal stimuli. Massive U.S. fiscal imbalances also could cause financial market instability. Statistics show that the U.S. created 192,000 jobs in February — significantly more than was projected for the month. Economists believe the U.S. Federal Reserve will want to see payroll gains in excess of $200,000 for at least six to nine months and a significant decline in unemployment before starting to withdraw its massive monetary support from the economy. “If we start to add enough jobs, sufficient to lower the unemployment rate, I think the Fed will feel a little more comfortable in easing off the throttle,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Sceptical Canadians

Although the news and predictions are positive overall, Canadians are less optimistic about the national economy and their personal financial situations than they were last year, according to the RBC Canadian Consumer Outlook Index. Only 38% of Canadians believe their economic situations will improve this year. This pessimistic mood caused 46% of respondents to answer that they stayed within their budget because they didn’t want to increase their debt, and 67% confirmed that they didn’t overspend their holiday budgets. “We know that managing debt is top of mind for Canadians. Having a budget in place that you can stick to is one of the best ways to keep your finances in balance and take care of any debts,” said Ashif Ratanshi, head of Branch Investments, Deposits and Direct Investing at RBC. However, only 20% of Canadians stated that they are worried about losing their job or being laid off, while in 2010, 26% of respondents were anxious about their jobs. “As the economy continues to expand, we expect interest rates to drift moderately higher through the coming year. This should limit pressure on household balance sheets in an environment of continued employment gains,” noted Craig Wright, senior vice-president and chief economist of RBC.

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One Response to Overview of Canada’s Economy Recovery

  1. Nalliah Thayabharan says:

    If you are an investor in real estate, please invest in Canadian real estate. It is not recommended to invest in US real estate. During the first three months of this year, less new homes were sold in the U.S. than in any three month period ever recorded. Home prices just keep falling month after month. The Standard & Poor’s/Case-Shiller 20-city index has fallen for seven months in a row. U.S. home prices have now declined 32% from the peak of the housing bubble. In Phoenix, Arizona home prices are now down 56% from the peak of the housing bubble. Home prices in Las Vegas, Nevada are now down 58% from the peak of the housing bubble. Nearly 70% of all Las Vegas mortgages are now underwater. Due to the housing crisis, there are now more than 167,000 vacant homes in the state of Nevada. It is estimated that 25% of all mortgages in Miami-Dade County are “in serious distress and headed for either foreclosure or short sale”. 13% of all homes in the United States are sitting empty. 18 percent of all homes in the state of Florida are sitting vacant. That number is 63% larger than it was just ten years ago. In the city of Detroit alone, there are more than 33,000 abandoned homes. The average home in the city of Merced, California has declined in value by 63 percent over the past four years. U.S. home values have fallen an astounding 6.3 trillion dollars since the housing crisis first began. California had more foreclosure filings that any other U.S. state during 2010. The 546,669 total foreclosure filings during the year means that over 4 percent of all the housing units in the state of California received a foreclosure filing at some point during 2010. Total home mortgage debt in the United States is now about 5 times larger than it was just 20 years ago. Approximately 26 percent of all renters in the United States spend more than half their pre-tax income on rent. It is estimated that 49 percent of all American renters are paying out more in rent than they can afford. In 1996, 89 percent of Americans believed that it was better to own a home than to rent one. Today that number has fallen to 63 percent. 72% of the major metropolitan areas in the United States had more foreclosures in 2010 than they did in 2009. Two years ago, the average U.S. homeowner that was being foreclosed upon had not made a mortgage payment in 11 months. Today, the average U.S. homeowner that is being foreclosed upon has not made a mortgage payment in 17 months.
    In September 2008, 33 percent of Americans knew someone who had been foreclosed upon or who was facing the threat of foreclosure. Today that number has risen to 48%. During the month of January, it was estimated that there were 1.8 million distressed homes in the United States that had yet to be listed for sale. Many analysts believe that this “shadow inventory” will extend the housing crisis for several more years. In February, U.S. housing starts experienced their largest decline in 27 years. Now home sales in the United States are now down 80% from the peak in July 2005. Bank repossessions and short sales now make up approximately 30 percent of all home sales in the United States. As of the end of 2010, new home sales in the United States had declined for five straight years, and they are expected to be lower once again in 2011. 31% of the homeowners that responded to a recent Rasmussen Reports survey indicated that they are “underwater” on their mortgages. Deutsche Bank is projecting that 48% of all U.S. mortgages could have negative equity by the end of 2011. At least 8 million Americans are currently at least one month behind on their mortgage payments.

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