|The Bank’s decision to lower its growth forecast was due to a deterioration in a number of key economic indicators through the first quarter of this year.|
Read the Report: Bank of Canada, Monetary Policy Report, April 2013.
The slow recovery of the Canadian export sector remained a particular concern for the Bank of Canada and played a large roll in the Bank’s decision to downgrade their baseline target for economic growth this year. However, in the second half of 2013 and more so in 2014, the Bank indicated that they expect exports and overall economic growth to improve. This will be partly due to a pick-up in demand for Canadian goods and services as a result of improving home construction in the United States.
While the export sector has been front and centrein discussions on Canadian economic growth, it is important to note that a pull-back in homeownership demand also played a role in slower than expected economic growth in the first quarter of 2013. Both resale home transactions and new home starts have been trending lower since the second half of 2012. The result: direct and spin-off benefits accruing to Canadian GDP as a result of home ownership demand have trended lower as well.
Unemployment Still Above Pre-Recession Norm
While monthly labor market reports have shown improvement more often than not since the onset of recovery from the recession, we have still not seen the level of unemployment in Canada (or the GTA for that matter) trend back down to the pre-recession norm. With a certain degree of slack still remaining in the labor market, annual growth wages and salaries and, by extension, household incomes has been slower than what was experienced in the pre-recession period as well.
Providing growth in the Canadian economy begins to accelerate in the second half of this year and even more so in 2014, the demand for labor will increase, resulting in tighter labor market conditions and stronger income growth next year.
Inflation Currently Not an Issue
The Bank of Canada explicitly targets inflation in setting the level for its Target for the Overnight Lending Rate. The Bank’s target for inflation is two per cent, with an operational band between one and three per cent.
Generally speaking, if the Bank feels that demand for consumer goods and services will be strong enough to push inflation towards or even above its three per cent upper growth boundary, it will raise interest rates in an effort to curb spending and keep inflation in check. The reverse is true when spending slows and the rate of inflation is in danger of falling below the one per cent lower growth boundary –during a period of recession for example. In the most recent recession, we saw the Bank of Canada lower its target rate to spur consumer spending, which benefitted the housing sector and led to a rapid initial recovery from the economic downturn.
Over the past year, the rate of inflation has been trending toward the bottom end of the Bank’s operational band. This has allowed the Bank to keep its target rate near historic lows. Given the prospects for economic growth and inflation through the end of 2014, the current market consensus is for little or no movement in short term interest rates over the next year. Longer term rates may start to edge upwards in 2014. This may impact posted rates for products like the five-year fixed rate mortgage towards the end of next year, but many borrowers will continue to have the ability to negotiate rates well below those posted.
Source: Toronto Real Estate Board (TREB)
Photo Courtesy of Wikimedia Commons.
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