News

Housing Activity To Stabilize In 2010 And 2011

Housing starts rebounded in the second half of 2009 and early 2010 and will stabilize over the next two years, according to Canada Mortgage and Housing Corporation’s (CMHC) second quarter Housing Market Outlook, Canada Edition.*

Following a total of 149,081 units in 2009, housing starts are expected to be in the range of 166,900 to 199,600 units in 2010, with a point forecast of 182,000 units. In 2011, housing starts will be in the range of 148,600 to 208,800 units, with a point forecast of 179,600 units.

“Canadian housing markets have recovered from the low levels posted in early 2009,” said Bob Dugan, Chief Economist for CMHC. “Moving forward, housing starts will moderate as activity becomes more in-line with long term demographic fundamentals. New measures for government-backed mortgage insurance introduced by the Government of Canada that took effect on April 19, 2010 will continue to support the long-term stability of Canada’s housing market.”

Mr. Dugan also noted that the existing home market will move towards balanced conditions over the next two years as MLS sales ease and inventory levels increase. In late 2009 and early 2010, sales activity included some pent-up demand from early 2009. Once this demand is exhausted, and as mortgage rates gradually rise, the pace of activity in the resale market will ease. As a result, existing home sales will be in the range of 484,000 to 513,300 units in 2010, with a point forecast of 497,300 units, and then move slightly lower in 2011 to be in the range of 443,500 to 504,900 units, with a point forecast of 473,500 units.

With an improved balance between demand and supply, the average MLS price is expected to stabilize through the end of 2010 and then rise modestly in 2011.…

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Strong Fundamentals Should See Canada Lead G-7 Economies

Strong commodity demand, comparatively low government and corporate debt along with favourable demographics should see Canada’s economic prospects lead those of the G-7 nations for much of the next decade, finds a new report from CIBC World Markets Inc.

The report notes that eurozone debt woes, along with geopolitical tensions in Asia, have, not surprisingly, grabbed the attention of the investor world recently. These concerns have overshadowed the strong longer-term fundamentals of Canada’s economy that could see the second decade of the 21st century be this country’s time to shine.

“Canada’s resource endowments, resilient financial system and favourable demographics relative to other G-7 nations make it an economic contender looking out over the next 5-10 years,” says Avery Shenfeld, Chief Economist at CIBC. “Another notable positive is in the healthier state of public and corporate sector balance sheets.

“These factors are no iron-clad recipe for national success in the near term, but do mean Canada is better-positioned than many of its competitors to deal with the challenges of the upcoming teen years. And where economic growth goes, corporate earnings, dividends and other rewards for investors are likely to follow.”

Mr. Shenfeld agrees with research that says economic rebounds from recessions linked to financial crises face greater headwinds than typical up-cycles. Government debt and the need to tighten fiscal policy in the aftermath of crisis rescue efforts appear to be the key transmission mechanism for this relationship. The research shows that countries that have higher indebtedness typically have slower rates of real per capita growth in the five years following the recession.

Given this, Canada is well positioned to outpace the typical major industrialized economy in the next few years, having less gross debt, and much less net debt, than most other nations. He notes that while an earlier rate hike cycle could prevent such a growth differential from showing through in 2010-11, Canada will have a longer-term advantage of dealing with a much lighter burden from fiscal restraint. Canada’s current federal deficit of three per cent of GDP (or five per cent including the provinces) pales next to double-digit deficit-to-GDP ratios for national governments in the U.S. and the U.K. The result is that if each country aimed to stabilize its debt-to-GDP ratio at 45 per cent, Canada would require a retrenchment of less than three per cent of GDP, while others would need fiscal cuts several times larger.

“That doesn’t mean that Canada won’t see a huge fiscal drag in 2011 – we estimate that the swing from stimulus to restraint represents a two per cent of GDP headwind in that year,” says Mr. Shenfeld. “But thereafter, the pain will be much lighter here than elsewhere.”

He adds that Canada’s economic growth will be driven by medium-term trends in population and productivity. “Demographers here and elsewhere are concerned about an aging work force that will slow growth ahead, but Canada is still well positioned relative to other mature economies. Japan is already seeing labour force shrinkage, and is ill-positioned to attract immigrants given language barriers and cultural homogeneity in its existing population. Fueled by immigration to a multi-cultural society, Canada’s economically active population is still set to grow faster than that of the U.S. or Europe.

“Immigration also has a side benefit, in terms of helping Canada make inroads into some of the world’s faster growing developing-economy markets. Research across countries has identified that bilateral trade tends to be enhanced between countries in response to the movement of people from one to the other. Business and cultural ties to the home country can facilitate the movement of goods, a trend that appears evident in the Canadian data. Continued in-migration from East Asia and South Asia should help build Canada’s export prospects in these fast growing markets.”

Mr. Shenfeld also expects Canada’s economy will see an output boost in the coming years as Canadian businesses invest in productivity-enhancing capital equipment. He notes that corporate Canada is carrying less debt than its U.S. counterpart leaving it more room to finance those plans. Governments have also done their part to encourage such spending, with corporate tax rates headed below those in all of the nation’s major developed-economy competitors.

“Productivity, which focuses on the volume of goods produced per hour, doesn’t, moreover, tell the whole story in terms of income and wealth,” finds Mr. Shenfeld. “In the past decade, volume gains were supplemented by an improvement in the global market value of the goods that Canada sells to the rest of the world (particularly commodities) relative to what it imports (consumer goods).”

He adds that even including the setback from softer energy and metal prices during the recent global recession, those terms-of-trade gains accounted for about a third of Canada’s domestic income growth since 2002. That trend almost certainly has further to run …

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Global Auto Industry Returns To Profitability

Strong sales gains have driven the global auto industry back to profitability, according to the latest Global Auto Report released today by Scotia Economics.

“The five largest auto manufacturers posted earnings of US$5.5 billion in the first quarter of 2010, a sharp turnaround from annual losses averaging in excess of US$22 billion from 2007 through 2009,” said Carlos Gomes, Senior Economist, Scotia Economics.

In the report, Mr. Gomes noted that profitability improved in every region last quarter, especially in North America, with the five largest automakers returning to profitability in the region. However, despite the turnaround in North America, Asia remains not only the auto market with the greatest potential, but is already the most profitable market in the world.

“The global economy continued to gain momentum through the first quarter of 2010, with growth picking up to roughly four per cent year-over-year – the fastest pace in two years,” commented Mr. Gomes. “This acceleration lifted global car sales 25 per cent above a year earlier, to a level only marginally lower than in early 2008. However, volumes still remain nearly five per cent below the industry peak set in mid-2007.”

Profitability per vehicle in North America jumped to more than US$1,500 in early 2010, compared with losses through September of last year, and will likely improve further in coming years as volumes expand. For example, light vehicle purchases in Canada, the United States and Mexico totaled an annualized 13.3 million in the opening months of 2010, and are expected to climb to 13.9 million for the full year, before rising to 14.6 in 2011.

“Of note, the jump in profitability occurred despite nearly a US$200 increase in industry-wide U.S. incentives through March, to more than US$2,800 per vehicle,” said Mr. Gomes.

The report also states that the five largest automakers reported a first-quarter operating profit of more than US$2.3 billion in emerging Asia – roughly 40 per cent of their overall total.

“This is particularly surprising, as the average car price in countries such as China and India averages less than US$12,000 compared with US$24,000 in North America and about US$20,000 in Europe,” stated Mr. Gomes. “In contrast, the industry still continues to lose money in Europe.”

The five largest automakers are still losing about US$400 per vehicle in Europe, with losses likely to increase in coming months, as recent austerity measures introduced in several countries act as a drag on economic growth and vehicle sales.

“We expect full-year sales in Western Europe to decline to 12.3 million units in 2010, down from an annualized 13.6 million in the opening months of the year,” concluded Mr. Gomes. “In fact, car sales in Europe fell six per cent year-over-year in April, led by a sharp fall-off in Germany. However, outside of Europe, purchases continue to strengthen – rising 23 per cent year-over-year – led by a 27 per cent gain in the BRIC nations.”…

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