The Surge In Canadian Unemployment Keeps Another Jumbo Rate Cut In Play In December

Bank of Canada Leslie Blais 11 Dec

The BoC slashed the overnight rate by 50 bps this morning, bringing the policy rate down to 3.25%. The market had priced in nearly 90% odds of a 50 bp move, where consensus coalesced. The combined slower-than-expected GDP growth and a sharp rise in the Canadian unemployment rate to 6.8% triggered the Bank’s second consecutive jumbo rate cut. Today’s move will take the prime rate down 50 bps to 5.45% effective tomorrow, reducing floating rate mortgage loan rates by a half point, easing the cost of borrowing and reducing the monthly payment increase for renewals. This should spark housing activity, which accelerated in October and November.

The policy rate is now at the top of the estimated neutral rate range, 2.25% to 3.25%, with more moderate rate cuts continuing into next year. However, monetary policy remains restrictive, as the 3.25% policy rate is still 125 basis points above inflation, which has declined to roughly 2%, the Bank’s inflation target.

Economists have suggested that the tone of the central bank’s press release is more hawkish than before, unsurprising following two consecutive jumbo rate cuts. The Bank continues to say that its future decisions are data-dependent and will be impacted by policy measures taken by the government. In particular, the Bank highlighted the coming GST cuts, dispersal of bonus checks and the significant reduction in immigration. These developments have offsetting implications for inflation.

Governor Macklem signalled that he anticipated “a more gradual approach to monetary policy” in his press conference. We are forecasting 25 bp rate cuts through at least the first half of next year. That would take the overnight rate down to 2.5% by early June, a huge boost to housing that will likely enjoy a strong spring season.
Bottom Line

Monetary policy remains overly restrictive as the 3.75% overnight policy rate remains well above the inflation rate. We expect the overnight rate to fall to 2.5% by April or June of next year. This should continue boosting housing activity, which increased significantly in October and November.

Last week’s GDP data release showed that Canada’s third-quarter GDP grew a mere 1.0%, well below the Bank’s downwardly revised forecast of 1.5%. This, in combination with today’s employment report, bodes well for the Bank of Canada to consider cutting rates by another 50 bps seriously. However, given how aggressive they have been compared to the Federal Reserve, which will undoubtedly cut rates by only 25 bps in late December, they could be satisfied with a 25 bp cut for now.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

The Canadian Housing Market Shows Signs of Life

Latest News Leslie Blais 17 Nov

Canadian home sales surged to their highest level in more than two years as the Bank of Canada cut interest rates, bringing buyers back into the market. Home sales rose 7.7% month-over-month (m/m) in October, reaching their highest level since April 2022.

Rising home sales were broadly based, with the Greater Toronto Area and British Columbia’s Lower Mainland recording double-digit increases in October. The buoyant housing demand was likely the result of the surge in new listings in recent months and the fall in mortgage rates arising from the BoC’s easing. The jumbo rate cut, however, was in the last week of October, likely having little bearing on the monthly data released by the Canadian Real Estate Association this morning. Actual monthly housing activity came in 30% stronger than year-ago levels.
New ListingsNew listings posted a 3.5% month-over-month decline in October, although that followed a 4.8% jump in September. Thus, new supply remains at some of the highest levels since mid-2022. The national pullback in October was led by a drop in new supply in the GTA.

With sales rising considerably in October and new listings falling, the national sales-to-new listings ratio tightened to 58%, up from 52% in September. The long-term average for the national sales-to-new listings ratio is 55%, with a sales-to-new listings ratio between 45% and 65%, generally consistent with balanced housing market conditions.

At the end of October 2024,174,458 properties were listed for sale on all Canadian MLS® Systems, up 11.4% from a year earlier but still below historical averages for that time of year.

As of the end of October, there were 3.7 months of inventory nationwide, down from 4.1 months at the end of September and the lowest level in more than a year. The long-term average is 5.1 months of inventory, with a seller’s market below about 3.6 months and a buyer’s market above 6.5 months.
Home Prices

The National Composite MLS® Home Price Index (HPI) inched up 0.1% from August to September; however, small ups and downs aside, the bigger picture is that prices at the national level have remained mostly flat since the beginning of the year.

The non-seasonally adjusted National Composite MLS® HPI stood 3.3% below September 2023, a smaller decline than the 3.9% declines recorded in July and August. Given the price weakness seen towards the end of 2023, negative year-over-year comparisons will likely continue to shrink.
Bottom Line

The strength in home sales in October likely contributes to the expectation that the central bank will cut interest rates by only 25 bps when it meets again on December 11. Of course, their decision will be data-dependent; next week, we will see the October inflation data on Tuesday and retail sales on Friday. The November Labour Force Survey will be released on December 6. The unemployment rate has held steady at 6.5%, and wage inflation remains high. It would take a significant disappointment in these data to trigger another 50 bps cut.

In the meantime, bond yields continue to rise, triggered by the strong Trump victory and the fear that tax cuts and spending increases will boost government debt and deficits. While US long-term yields have risen nearly 80 basis points, Canadian 10-year yields are up less than half that amount. There is an unprecedented gap between economic activity in the US and Canada. The US dollar continues to strengthen, putting downward pressure on the loonie.

Pent-up demand for housing continues to be strong, and the combination of lower short-term interest rates and rising inventories of unsold homes will spur activity as we move into the all-important spring season. By then, the overnight rate, currently 3.75%, could be at least a full percentage point lower.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Weaker-Than-Expected October Jobs Report Keeps Jumbo Rate Cut In-Play in December

Employment Leslie Blais 10 Nov

Statistics Canada released October employment data today. The data showed a marked slowdown in job growth, underscoring ongoing labour-market softness that triggered a jumbo rate cut last month. Statistics Canada said the country added 14,500 positions in October, which missed the median expectation of a 27,200 rise in a Bloomberg survey of economists. It’s the smallest employment gain this year and far below the average monthly pace of about 40,000 positions. The jobless rate held steady at 6.5%, beating 6.6% forecasts.

Friday’s report showed an economy still creating jobs with room to churn out more. Bank of Canada policymakers cited the weakening in the labour market to ramp up the pace of reducing borrowing costs last month. Some market participants see a possibility of another 50 bps overnight policy rate cut at this year’s final decision on Dec. 11. Swap markets put the odds of a 50-basis point cut next month at about a coin flip.

The labour force participation rate fell a tick—the fourth monthly decline since May—to 64.8%, reaching its lowest level since December 1997 (except for the COVID-19 pandemic period). The decrease in labour force participation over the past year primarily reflects a drop in students looking for work.

The employment rate—the proportion of the population aged 15 and older who are employed—decreased by 0.1 percentage points to 60.6% in October, the sixth consecutive monthly decline. It fell 1.3 percentage points on a year-over-year basis and has been on a downward trend from a recent peak of 62.4% in February 2023. The longer-term trend of rising retirements from an aging workforce has also reduced the employment rate.

The number of employees in the private sector was little changed in October, following two months of growth totalling 99,000 (+0.7%) in August and September. Public sector employment and self-employment were both virtually unchanged in October.

In October, employment in business, building and other support services rose by 29,000 (+4.2%), the first increase since May. On a year-over-year basis, employment in this industry—which includes establishments primarily engaged in activities that support the day-to-day operations of organizations, from waste management to administrative services—was up by 33,000 (+4.8%).

Employment in finance, insurance, real estate, rental and leasing fell by 13,000 (-0.9%) in October. Despite the decline in the month, employment in the industry was up by 50,000 (+3.6%) on a year-over-year basis, outpacing employment growth across all industries (+1.5%).

Public administration employment fell by 8,700 (-0.7%) in October, following two consecutive months of little change in August and September. Employment in public administration had previously followed a strong upward trend from August 2023 to July 2024, rising by 65,000 (+5.5%) over the period.

Employment in Alberta rose by 13,000 (+0.5%) in October, the second increase in three months. At 7.3%, the unemployment rate was little changed in the month, but was up 1.4 percentage points compared with October 2023. Over the same period, the employment rate in Alberta fell 1.6 percentage points to 63.7%, as employment growth (+2.3%; +58,000) was slower than growth in the population aged 15 and older in the Labour Force Survey (LFS) (+4.8%).

Employment also increased in New Brunswick in October (+3,300; +0.8%) and the unemployment rate was little changed at 6.8%. On a year-over-year basis, employment in the province was up 3.1% (+12,000).

There were fewer employed people in Prince Edward Island in October (-1,100; -1.2%). The decline in employment, coupled with an increase in the number of Prince Edward Islanders in search of work, pushed the unemployment rate in the province up 2.9 percentage points to 10.0%.

Both Quebec and Ontario saw little overall employment change in October. The unemployment rate held steady in October in Quebec (at 5.7%) and in Ontario (at 6.8%).
The unemployment rate was unchanged at 6.5% in October, following a decline of 0.1 percentage points in September. On a year-over-year basis, the unemployment rate was up 0.8 percentage points in October, as 193,000 (+15.6%) more people searched for work or were on temporary layoff.
Wage growth for permanent employees accelerated to 4.9% in October, from 4.5% last month and beating the 4.5% rate anticipated by economists.

One more jobs report is scheduled before the Dec. 11 rate decision.  Canada’s October labour survey details aren’t as downbeat as we expected. However, the downside surprise in total hiring will give the BoC cover to continue cutting rates as it rushes to return to a neutral policy stance
Bottom Line
Economists are divided on whether the Bank of Canada will cut by 25 or 50 basis points on December 11. The October inflation data, released on Tuesday, November 19, will become all the more critical. The numbers are expected to be good, meaning low, but not as low as the 1.6% y/y inflation rate posted for September, driven down by the marked fall in gasoline prices. Monetary policy remains overly restrictive as the 3.75% overnight policy rate remains well above the inflation rate. We expect the overnight rate to fall to 2.5% by April or June of next year. This should continue to boost housing activity, which picked up significantly in October. Full data for October housing nationwide will be released next week on Friday, November 15.

All signals bode well for a sharp increase in housing activity by the spring, if not markedly sooner.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Canadian Housing Market Stuck In A Holding Pattern

General Leslie Blais 16 Sep

National home sales increased in June following the Bank of Canada’s first interest rate cut since 2020, and activity posted another slight gain in August on the heels of the second rate cut in late July. Still, the bigger picture appears to be a market mostly stuck in a holding pattern.

Home sales recorded over Canadian MLS® Systems increased by 1.3% month-over-month in August 2024, reaching their highest level since January and their second highest in over a year.

“Despite some fledgling signs of life to kick off the long-awaited monetary policy easing cycle, Canadian housing market activity still looks to be stuck in the same holding pattern it’s been in all year,” said Shaun Cathcart, CREA’s Senior Economist. “That said, with ever more friendly interest rates now all but guaranteed later this year and into 2025, it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well-behaved in most of the country.”

At the end of August 2024, about 177,450 properties were listed for sale on all Canadian MLS® Systems, up 18.8% from a year earlier but still more than 10% below historical averages of around 200,000 listings for this time of the year.
New ListingsAs of the end of July 2024, about 183,450 properties were listed for sale on all Canadian MLS® Systems, up 22.7% from a year earlier but still about 10% below historical averages of more than 200,000 for this time of the year.

New listings posted a slight 0.9% month-over-month increase in July. A much-needed boost in new supply in Calgary led to the national increase in new supply in Calgary.

With new listings up slightly and sales down slightly in July, the national sales-to-new listings ratio fell to 52.7% compared to 53.5% in June. The long-term average for the national sales-to-new listings ratio is 55%, with a ratio between 45% and 65% generally consistent with balanced housing market conditions.

At the end of July, there were 4.2 months of inventory nationwide, unchanged from the end of June. The long-term average is about five months of inventory.

“While it wasn’t apparent in the July housing data from across Canada, the stage is increasingly being set for the return of a more active housing market,” said James Mabey, Chair of CREA. “At this point, many markets have a healthier amount of choice for buyers than has been the case in recent years, but the days of the slower and more relaxed house hunting experience may be somewhat numbered.

At the end of August 2024, there were 4.1 months of inventory on a national basis, down from 4.2 months at the end of July. Continuing the theme of the market being in a holding pattern, this measure of market balance has been range-bound between 3.8 months and 4.2 months since last October. The long-term average is about five months of inventory.
Home Prices

The National Composite MLS® Home Price Index (HPI) increased by 0.2% from June to July. While a slight increase, it was slightly larger than the June increase, making it just the second and the most significant gain in the last year.  While prices were up slightly at the national level, they were held back by reduced activity in the most extensive and expensive British Columbia and Ontario markets. Regionally, prices are rising in most markets.

The non-seasonally adjusted National Composite MLS® HPI stood 3.9% below July 2023. This primarily reflects how prices took off last April, May, June, and July—something that was not repeated over that same period in 2024. Year-over-year comparisons will likely improve from this point on.

The actual (not seasonally adjusted) national average home price was $667,317 in July 2024, almost unchanged (-0.2%) from July 2023.

The National Composite MLS® Home Price Index (HPI) was unchanged from July to August, following two small increases in June and July. That said, the bigger picture is that prices at the national level have been flat since the beginning of the year, posing no reason for potential buyers to rush to market.

The non-seasonally adjusted National Composite MLS® HPI stood 3.9% below August 2023. This mostly reflects price gains last spring and summer, followed by declines in the second half of last year. As such, it’s mostly likely that year-over-year comparisons will improve from this point on.
Bottom Line

Potential homebuyers remain on the sidelines awaiting further rate cuts by the Bank of Canada. As long as home prices are flat, purchasers have no compelling reason to take immediate action. This should change gradually. With new supply on the market, sales should continue to rise this month.

With weak labour markets and falling economic growth, the Bank of Canada will continue to cut interest rates by at least 25 bps on each decision date. Governor Macklem has commented that more significant rate cuts would be forthcoming if the economy weakens too aggressively and inflation falls below the 2% target. This would be welcome news for housing. We expect the overnight policy rate to fall to 2.5% before the end of next year. It is now at 4.25%–well above the current inflation rate.

In separate news, the Trudeau government has taken action to implement some of the budget measures to improve housing affordability. The federal government will make 30-year mortgages available to all first-time buyers and to buyers of newly built homes.Canada cracked down on lengthy mortgage amortizations during the 2008 global financial crisis. Until this year, buyers who required government-backed default insurance on their mortgages were limited to 25-year amortizations.

Trudeau and  Finance Minister Freeland stepped toward loosening that rule in April, allowing 30-year amortizations on insured mortgages only for first-time buyers purchasing newly built homes.

The government will also begin allowing mortgage default insurance on homes worth up to $1.5 million, an increase from the current cap of $1 million, effective December 15. That means buyers can bid on more expensive homes even if they have less than a 20% down payment — as long as they purchase insurance.

Today’s announcement will significantly expand the pool of buyers who can access 30-year loans, which lowers monthly payments. According to Freeland, insured first-time buyers represent roughly 20% of the market in Canada, while new builds make up about 4%.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Weaker-Than-Expected August Jobs Report Raises Prospect Of Larger Rate Cuts

General Leslie Blais 9 Sep

Statistics Canada released August employment data today, showing continued growth in excess supply in labour markets nationwide. Employment changed little last month, up 22,100. The employment rate—the proportion of the population aged 15 and older who are employed—decreased a tick to 60.8%, marking the fourth consecutive monthly decline and the 10th decline in the past 11 months. On a year-over-year basis, the employment rate was down 1.2 percentage points in August, as employment growth (+1.6%) was outpaced by growth in the working-age population (+3.5%).

Full-time jobs declined by 44,000 while part-time work increased by 66,000. This was the fourth straight month of very modest employment gains.

The Bank of Canada expressed mounting concern about the rising output gap–the difference between economic growth at full employment and the current underemployment growth of less than 2%.

The number of private sector employees rose by 38,000 (+0.3%) in August, mainly offsetting a similar-sized decrease in the previous month (-42,000; -0.3%). The increase in private-sector employment in August was the first since April. Public sector employment and self-employment both changed little in August.

Year-over-year employment growth was concentrated among core-aged (aged 25 to 54) men and women as youth unemployment surged. Young immigrants have been hardest hit.
The unemployment rate rose 0.2 percentage points to 6.6% in August after holding steady in July. It was the highest since May 2017, outside of 2020 and 2021, during the COVID-19 pandemic. The unemployment rate has generally increased since April 2023, rising 1.5 percentage points.

In August 2024, 1.5 million people were unemployed, an increase of 60,000 (+4.3%) from July and 272,000 (+22.9%) from August 2023.

Among those unemployed in July, 16.7% had transitioned to employment in August (not seasonally adjusted). This was lower than the corresponding proportion in August 2023 (23.2%), indicating that unemployed people may face more difficulties finding work.

In August, the unemployment rate rose for men aged 25 to 54 years old (+0.4 percentage points to 5.7%) and for men aged 55 and older (+0.4 percentage points to 5.5%), while it was little changed for other major demographic groups.

Although the unemployment rate was up across all age groups year-over-year in August, the increase was most significant for youth (+3.2 percentage points to 14.5% in August). The rate was up for young men (+3.8 percentage points to 16.3%) and young women (+2.6 percentage points to 12.6%).

For core-aged people, the jobless rate was up 0.9 percentage points to 5.4% on a year-over-year basis in August. Increases for this age group were observed across all levels of educational attainment. On a year-over-year basis, the unemployment rate was up in August for core-aged people with a high school diploma or less (+1.5 percentage points to 8.2%), for those with some post-secondary education below a bachelor’s degree (+0.7 percentage points to 5.5%) as well as for those with a bachelor’s degree or a higher level of education (+0.9 percentage points to 6.2%) (not seasonally adjusted).

In August, employment rose by 27,000 (+1.7%) in educational services, the first increase since January. There were 75,000 (+5.1%) more people employed in this sector than 12 months earlier.

In August, health care and social assistance employment increased by 25,000 (+0.9%). In the 12 months to August, employment gains in health care and social assistance (+157,000; +5.8%) were the largest of any sector and accounted for nearly half (49.6%) of total net employment growth.

Year-over-year employment growth in health care and social assistance was recorded in the private sector (+94,000; +8.6%) and the public sector (+77,000; +6.1%). Self-employment in health care and social assistance changed little over the period (not seasonally adjusted).
Canada’s unemployment rate has risen from 5% at the start of last year.

The youth unemployment rate continued to surge in August, rising to 14.5%, the highest since 2012 outside the pandemic.
Bottom Line

The data point to deteriorating labour demand in an economy that consistently fails to add jobs at the pace of population growth. And while there’s little evidence of widespread layoffs, the continued weakness is likely to add to disinflationary pressures, allowing the Bank of Canada to keep lowering borrowing costs at a gradual pace.

Still, the unexpected jump in the jobless rate will further fuel debate about deeper interest rate cuts. Traders in overnight index swaps boosted bets that the Bank of Canada would cut by 50 basis points at its Oct. 23 meeting. They now put those odds at around 40%, compared with about 30% the day before.

Policymakers led by Governor Tiff Macklem reduced the policy rate by 25 basis points for a third straight time on Wednesday. Officials say they’re increasingly focused on downside worries and guard against the risk that growth slows too much. Speaking to reporters, Macklem said the Governing council had discussed a scenario wherein the economy and inflation were weak enough to require a more significant than a quarter-point reduction in borrowing costs. Policymakers also reiterated they’re concerned about undershooting their 2% inflation target. “We need to increasingly guard against the risk that the economy is too weak and inflation falls too much,” the governor said.

This is the first of two job reports before the October rate decision. A Bloomberg survey found that most economists expect the bank to cut by 25 basis points at the next four meetings, bringing the policy rate to 3% by mid-2025.

The Canadian data were released simultaneously with the highly anticipated nonfarm payrolls in the US, which rose by 142,000 following downward revisions to the prior two months. Economists surveyed by Bloomberg were expecting an increase of 165,000. Treasury yields fell as markets weighed whether the weaker job gains would prompt a larger than quarter percentage point cut from the Federal Reserve when they meet again on September 18.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Bank of Canada Cuts Rates Another Quarter Point

General Leslie Blais 4 Sep

Today, the Bank of Canada cut the overnight policy rate by another 25 basis points to 4.25%. This is the third consecutive decrease since June. The Bank’s decision reflects two main developments. First, headline and core inflation have continued to ease as expected. Second, as inflation gets closer to the target, the central bank wants to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the 2% target.Overall, the economy’s weakness continues to pull inflation down. However, price pressures in shelter and some other services are holding inflation up. Since the July Monetary Policy Report, the upward forces from prices for shelter and some other services have eased slightly. At the same time, the downward pressure from excess supply in the economy remains.

Tiff Macklem said today, “If inflation continues to ease broadly in line with the central bank’s July forecast, it is reasonable to expect further cuts in the policy rate. We will continue to assess the opposing forces on inflation and take our monetary policy decisions one at a time.”

The economy grew by 2.1% in the second quarter, led by government spending and business investment. This was slightly stronger than forecast in July. Together with the first quarter’s growth of 1.8%, the economy grew by about 2% over the first half of 2024. That’s a healthy rebound from our near-zero growth in the second half of 2023. The Bank’s July projection has growth strengthening further in the second half of this year. Recent indicators suggest there is some downside risk to this pickup. In particular, preliminary indicators suggest that economic activity was soft through June and July, and employment growth has stalled in recent months.

That makes this Friday’s Labour Force Survey data for August particularly important. We expect economic activity to slow in the third quarter to rough 1.3%, keeping the Bank in an easing posture through next year.

The unemployment rate has risen over the last year to 6.4% in June and July. The rise is concentrated in youth and newcomers to Canada, who find it more challenging to get a job. Business layoffs remain moderate, but hiring has been weak. The slack in the labour market is expected to slow wage growth, which remains elevated relative to productivity.

Turning to price pressures, CPI inflation eased further to 2.5% in July, and the central bank’s preferred measures of core inflation also moved lower. With the share of CPI components growing above 3% around its historical norm, there is little evidence of broad-based price pressures. But shelter price inflation is still too high. Despite some early signs of easing, it remains the most significant contributor to overall inflation. Inflation remains elevated in some other services but has declined sharply in manufacturing and goods prices.

As outlined in the Bank of Canada’s Monetary Policy Report, inflation is expected to ease further in the months ahead. It may bump up later in the year as base-year effects unwind, and there is a risk that the upward forces on inflation could be more potent than expected. At the same time, with inflation getting closer to the target, the central bank must increasingly guard against the risk that the economy is too weak and inflation falls too much. Judging from comments made at today’s press conference, the BoC is at least as concerned about too much disinflation–taking the economy into a deflationary spiral.

Macklem said, “We are determined to bring inflation down to the 2% target and keep it there. We care as much about inflation being below the target as we do about it being above it. The economy functions well when inflation is around 2%.”

With continued easing in broad inflationary pressures, the Governing Council reduced the policy interest rate by 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. The Governing Council is carefully assessing these opposing forces on inflation. “Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians”.
Bottom Line

Monetary policy remains restrictive, as the chart above shows. While the target overnight rate is now 4.25%, core inflation is only roughly 2.4%. Real interest rates remain too high for the economy to reach its potential growth pace of about 2.5%. Weaker growth implies a continued rise in unemployment and excess supply in other sectors.

In separate news, the US released data showing that US job openings fell to their lowest level since January 2021, consistent with other signs of slowing demand for workers.

US job growth has been slowing, unemployment is rising, and job seekers are having greater difficulty finding work, fueling fears about a potential recession.

Federal Reserve policymakers have made it clear they don’t want to see further cooling in the labour market and are widely expected to start lowering interest rates at their next meeting in two weeks.

In other news, consistent with a global economic slowdown, oil prices have plunged to new 2024 lows. Weak oil prices are a harbinger of lower inflation, growth and mortgage rates.

Bonds rallied in the wake of the disappointing US data, taking the 5-year government of Canada bond yield down to a mere 2.89%, well below the 3.4% level posted when the Bank of Canada began cutting interest rates in June. This decline in market-driven interest rates reduces fixed-rate mortgage yields. Moreover, today’s cut in the overnight rate will be followed soon by a 25 basis point reduction in the prime rate to 6.45%, reducing floating rate mortgage yields as well.

The Bank of Canada has two more decision dates this year: October 23 and December 11. At those meetings, the Bank is widely expected to continue its quarter-point rate cuts, taking the overnight rate down to 4.0% at year-end and 2.75% next year.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Canadian Q2 Real GDP Growth A Bit Stronger Than Expected, But Per Capita Real GDP Falls for The Fifth Consecutive Quarter.

General Leslie Blais 1 Sep

Q2 Canadian Growth, Boosted By Record Population Gains, Slows In June And July

Canada’s economy grew a bit more than expected in the second quarter, but falling per-capita gross domestic product and softening household consumption assure the Bank of Canada that it will cut rates for a third consecutive meeting next week.

Canadian GDP rose 2.1% annually in the second quarter, beating the median estimate of 1.8% in a Bloomberg survey of economists and the Bank of Canada’s forecast of 1.5%. Q1 growth was revised up a tick to 1.8%. Q2 growth was the strongest since the first quarter of 2023 and was boosted by the sharp rise in population. Canada’s population grew by 1.3 million people last year to 40.8 million, according to Statistics Canada–its fastest annual pace in Canada since 1957. This is one of the world’s most extensive immigration programs as pressures mount on Trudeau’s government to slow future inflows.

At a 3.2% annual rate, Canada now ranks among the world’s fastest-growing countries, only behind a few African nations with high fertility rates. In 2022, the population grew 2.7%, or by 1.1 million people, a previous record.

According to Bloomberg News, “Only 2.4% of the increase last year came from net births, and the rest was driven by international migration, primarily non-permanent residents such as foreign workers and students. Without temporary immigration, Canada’s population growth would have been 1.2%.”

Political pressure is mounting for the government to cut the influx of temporary residents entering the country in the next few years, but the Bank of Canada recently revised up the federal government’s forecasts of population gains this year and next.

Canada’s economy benefited from strong population growth, but this surge put pressure on infrastructure and services, worsened housing shortages, and led to soaring rents. Concerns about the declining standard of living prompted the government to reduce its immigration targets, serving as a cautionary tale for advanced economies that rely on newcomers to prevent economic decline.

 

The 2.1% real GDP growth in Q2—up from 1.8% in the first quarter of the year—reflected higher government spending, business investment in non-residential structures (primarily in the oil and gas sector), machinery and equipment, and household spending on services. Growth was reduced by declines in exports, residential construction, and household spending on goods. Population growth outpaced the increase in household spending in the second quarter, and, as a result, per capita household expenditures fell 0.4% after rising 0.3% in the first quarter. On a per capita basis, GDP fell for the fifth consecutive quarter.

Despite federal and provincial programs to boost housing, residential construction declined, falling in eight of the last nine quarters. Housing investment was down 1.9% in Q2, the most significant decline since the first quarter of 2023. The decrease in the second quarter of 2024 was driven by lower investment in new construction (-1.6%), as work put in place for single-family dwellings and apartments fell, primarily in Ontario. Renovations fell 2.6%, and ownership transfer costs, representing the resale market, declined 1.1%, led by less activity in Ontario.

Monthly GDP updates, also released today, suggest that the relatively strong spring performance was followed by a slower summer, as a flat reading for June looks to be followed by a similar result in July. The early reading in July is an evident disappointment, given some hints that activity picked up last month, and it casts some serious doubt on the BoC’s above consensus call of 2.8% growth in the current quarter.

Bottom Line
This is the last major economic release before the Bank of Canada meets again on September 4. Traders in overnight markets put the odds of a rate cut at next week’s meeting at about 98%. Moreover, the US core personal consumption expenditures (PCE) inflation data, the Federal Reserve’s preferred measure of consumer inflation, was tame. The Fed will no doubt follow through with its first rate cut when they meet later this month. Some speculation is that they could reduce rates by more than a quarter-point.

The Bank of Canada has every reason to continue easing monetary policy on every decision date this year–September 4, October 23 and December 11. They won’t stop until the overnight rate, currently at 4.25%, reaches 2.75%, likely in the second half of next year. This will boost housing activity.

Please Note: The source of this article is from SherryCooper.com/category/articles/

May Was Another Sleepy Month For Housing

Latest News Leslie Blais 17 Jun

The Canadian Real Estate Association (CREA) announced today that national home sales fell 0.6% in May, remaining slightly below the average of the past ten years. Actual (not seasonally adjusted) monthly activity was 5.9% below May 2023.

With the Bank of Canada rate cut on June 5, housing activity will likely perk up in the coming months. The central bank will likely reduce the overnight policy rate from 4.75% to 3.0% by the end of next year. While interest rates will remain above pre-pandemic levels, there is pent-up demand for housing, and activity will surely rise over the next year.

New Listings

The number of newly listed homes was up in May, though only by 0.5% monthly. Slower sales amid more new listings this year have increased the number of homes for sale across most Canadian housing markets.

As of the end of May 2024, about 175,000 properties were listed for sale on all Canadian MLS® Systems, up 28.4% from a year earlier but still below historical averages.

“The spring housing market usually starts before all the snow has melted, somewhere around the beginning of April, but this year I believe a lot of people were waiting for the Bank of Canada to wave the green flag,” said James Mabey, Chair of CREA. “That first rate cut is expected to bring some pent-up demand back into the market, and those buyers will find there are more homes to choose from right now than at any other point in almost five years.”

With sales down slightly and new listings up slightly in May, the national sales-to-new listings ratio eased to 52.6% compared to 53.3% in April. The long-term average for the national sales-to-new listings ratio is 55%. A sales-to-new listings ratio between 45% and 65% is generally consistent with balanced housing market conditions. There were 4.4 months of inventory on a national basis at the end of May 2024, up from 4.2 months at the end of April and, looking past the volatility at the onset of the COVID-19 pandemic, the highest level for this measure since the fall of 2019. The long-term average is about five months of inventory.

Home Prices

The National Composite MLS® Home Price Index (HPI) dipped 0.2% from April to May.

Regionally, prices are generally sliding sideways across most of the country. The exceptions remain Calgary, Edmonton, and Saskatoon, where prices have steadily ticked higher since the beginning of last year.

The non-seasonally adjusted National Composite MLS® HPI stood 2.4% below May 2023. This mostly reflects the price surge that started last April and hasn’t been repeated in 2024.

Bottom Line

Housing activity will gradually accelerate over the next year as interest rates continue to fall. The Bank of Canada was the first major central bank to ease monetary policy. While there has been some concern regarding the impact on the Canadian dollar of repeated easing by the Bank with the US Federal Reserve on hold, the divergence may be smaller than expected. Recent US inflation data showed a meaningful improvement, suggesting the Fed could cut rates two times before the end of the year. Moreover, movements in the loonie have little near-term impact on inflation.

The Canadian economy is far more interest-sensitive than the US, and the relative underperformance of our economy is the largest since 1965. Further rate cuts by the Bank of Canada are warranted.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

A Collective Sigh of Relief As The BoC Cut Rates For the First Time in 27 Months

General Leslie Blais 6 Jun

Today, the Bank of Canada boosted consumer and business confidence by cutting the overnight rate by 25 bps to 4.75% and pledged to continue reducing the size of its balance sheet. The news came on the heels of weaker-than-expected GDP growth in the final quarter of last year and Q1 of this year, accompanied by CPI inflation easing further in April to 2.7%. “The Bank’s preferred measures of core inflation also slowed, and three-month measures suggest continued downward momentum. Indicators of the breadth of price increases across components of the CPI have moved down further and are near their historical average.”

With continued evidence that underlying inflation is easing, the Governing Council agreed that monetary policy no longer needs to be as restrictive. Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain. “Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”

As shown in the second chart below, the nominal overnight rate remains 215 basis points above the current median CPI inflation rate, which shows how restrictive monetary policy remains. The average of this measure of real (inflation-adjusted) interest rates in the past 30 years is just 60 bps. The overnight rate is headed for 3.0% by the end of next year.
Bottom Line

There are four more policy decision meetings before the end of this year. It wouldn’t surprise me to see at least three more quarter-point rate cuts this year. While the overnight rate is likely headed for 3.0%, it will remain well above the pre-COVID overnight rate of 1.75% as inflation trends towards 2%+ rather than the sub-2% average in the decade before COVID-19.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Canadian Inflation Falls to 2.9% in January, Boosting Rate Cut Prospects

General Leslie Blais 20 Feb

The Consumer Price Index (CPI) rose 2.9% year-over-year in January, down sharply from December’s 3.4% reading. The most significant contributor to the deceleration was a 4% decline in y/y gasoline prices, compared to a 1.4% rise the month before (see chart below). Excluding gasoline, headline CPI slowed to 3.2% y/y, down from 3.5% in December.

Headline inflation of 2.9% marks the first time since June that inflation has moved into the Bank of Canada 1%-to-3% target band and only the second time to breach that band since March 2021.

Grocery price inflation also decelerated broadly in January to 3.4% y/y, down from 4.7% in December. Lower prices for airfares and travel tours also contributed to the headline deceleration. Prices for clothing and footwear were 1.3% lower than levels from a year ago, potentially reflecting the discounting of winter clothing after a milder-than-usual winter in much of the country.

The shelter component of inflation remains by far the largest contributor to annual inflation. The effect of past central bank rate hikes feeds into the CPI with a lag. The y/y growth in mortgage interest costs edged lower in January but still posted a 27.4% rise and accounted for about a quarter of the total annual inflation. Inflation, excluding mortgage costs, is now at 2.0%. Home rent prices continue to rise, but another component under shelter – homeowners’ replacement costs inched lower on slower house price growth.

On a monthly basis, the CPI was unchanged in January, following a 0.3% decline in December. On a seasonally adjusted monthly basis, the CPI fell 0.1% in January, the first decline since May 2020.
The Bank of Canada’s preferred core inflation measures, the trim and median core rates, exclude the more volatile price movements to assess the level of underlying inflation. The CPI trim slowed three ticks to 3.4%, and the median declined two ticks to 3.3% from year-ago levels, as shown in the chart below.

Notably, the share of the CPI basket of goods and services growing at more than 5% has declined from the peak of 68% in May 2022 to 28% in January 2024.
Bottom Line

The next meeting of the Bank of Canada Governing Council is on March 6. While January’s inflation report was better than expected and shows that the breadth of inflation is narrowing, it is still well above the level consistent with the 2% inflation target.

Shelter inflation will remain sticky as higher mortgage rates over the course of last year filter into the index and the acute housing shortage boosts rents.

The Bank of Canada will remain cautious in the face of still-high wage gains and core inflation measures above 3%. I hold to my view that the Bank will begin cutting rates in June.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
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