Geoff Cowling

The Canadian economy posted blockbuster monthly growth of 0.6 per cent in January, double the consensus expectations of economists. Growth was lead by higher output in the manufacturing, natural resource extraction, and wholesale trade industries. 

January's outsized GDP number confirms the early tracking data pointing to very strong growth in the first quarter of 2017. The Canadian economy is estimated to have expanded close to 4 per cent in the first quarter of the year.

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Canadian inflation, as measured by the Consumer Price Index (CPI),  registered 2 per cent in the 12-months to February following a 2.1 per cent increase in January. Excluding the effect of rising gasoline prices, the CPI rose just 1.3 per cent. The Bank of Canada's new core measure of inflation, called CPI-common which it says better tracks the underlying trend in prices, was up 1.3 per cent, matching the rate of inflation in January.   In BC, provincial consumer price inflation was 2.3 per cent in the 12 months to February.

Inflation in Canada continues to trend near the Bank of Canada's 2 per cent target, though largely due to higher gasoline prices. Trend measures of inflation that exclude often volatile energy prices continue to show muted levels of inflation. However, If the Canadian economy continues to grow at an above trend rate, as it has over the past three quarters, then we could see a pick up in inflation by the end of the year.

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Retail sales started the year strong, rising 2.2 per cent on a monthly basis in January.  That strength was broad-based with 10 of 11 retail sub-sectors reporting higher sales with the largest gains coming from motor vehicle and parts dealers.  Although we have limited information for the first quarter, very strong economic data thus far has growth in the Canadian economy tracking at close to 4 per cent to start the year. 

In BC, a robust labour market continues to fuel consumer spending with retail sales rising 2.9 per cent on a monthly basis and 6.6 per cent year-over-year in January.  Retail sales grew 6.5 per cent in 2016, the second consecutive year of 6 per cent or greater growth in retail sales. 

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The US Federal Reserve's Open Market Committee (the Fed) raised its target overnight rate to between 0.75 and 1 per cent this morning.  In the statement accompanying the Fed's decision, it was noted that the labour market continues to strengthen and economic activity is expanding at a moderate pace. Moreover, inflation has increased in recent quarters and near-term risks to the economic outlook appear balanced. The committee expects that economic conditions will evolve in a manner that warrants gradual increases in its target rate, but it was also noted that rates will remain below long-run levels for some time.

Today's action on interest rates by the US federal reserve, particularly the signaling of further rate increases to come this year, will put upward pressure on long-term rates in both the US and Canada.  A tightening cycle in the United States may be further compounded by US monetary and fiscal policy acting at cross purposes, with the Fed trying to cool the economy while the Trump administration embarks on deficit widening tax and spending measures. In all, we expect the consequence of these actions will be higher Canadian mortgage rates by the end of the year.   

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Vancouver, BC – March 15, 2017. The British Columbia Real Estate Association (BCREA) reports that a total of 6,580 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in February, down 31.7 per cent from the same period last year. Total sales dollar volume was $4.53 billion, down 39.7 per cent from February 2016. The average MLS® residential price in the province was $688,117, an 11.7 per cent decrease from the same period last year.

“Consumer demand has returned to a more typical level over the first two months of the year," said Cameron Muir, BCREA Chief Economist. "While the home sales have declined nearly 32 per cent from the extraordinary performance of a year ago, last month's activity reflected the average for the month February since the year 2000."

“The average MLS® residential price for the province was down nearly 12 per cent from a record $779,419 in February 2016. However, this change is largely the result of a decline in the proportion of provincial sales originating from the Vancouver region. Last month, 37 per cent of BC home sales occurred in the Real Estate Board of Greater Vancouver's area, compared to 44 per cent in February 2016.

Year-to-date, BC residential sales dollar volume was down 38.5 per cent to $7.3 billion, when compared with the same period in 2016. Residential unit sales declined 28.5 per cent to 11,067 units, while the average MLS® residential price was down 14.1 per cent to $660,943.

Canadian housing starts were essentially flat compared to January, albeit up slightly to 210,207 units at a seasonally adjusted annual rate (SAAR) in February. The six-month trend in Canadian housing starts continues to rise with new home construction on a 204,700 unit pace. 

In BC, total housing starts were slowed substantially by snowfall in February which prompted starts to decline 45 per cent year-over-year  Single detached starts were down 24 per cent while multiple unit starts were down 51 per cent year-over-year. We expect that construction will pick up significantly with the onset of spring.

Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA were down 52 per cent year-over-year as unusually snow conditions slowed the pace of homebuilding. In the Victoria CMA, housing starts fell 5 per cent year-over-year, though starts of single detached units actually increased by 20 per cent. New home construction in the Kelowna CMA declined 29 per cent compared to last year due to a drop in multiple unit starts. Housing starts in the Abbotsford-Mission CMA fell 89 per cent as weather conditions halted most new construction.

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The Canadian economy expanded at a 2.6 per cent annual rate in the fourth quarter, beating expectations of 2 per cent growth.  Economic growth continues to be led higher by strong household consumption spending, though an uptick in exports was also a significant contributor. Due to a slow start to the year and disruptions caused by the Alberta wildfires,  the Canadian economy grew just 1.4 per cent overall in 2016.
 
There are clear signs of momentum in the Canadian economy, with strong hiring and economic growth over the past six months and we expect the Canadian economy will post significantly stronger growth in 2017 about 2.1 per cent.  That rate of growth should be enough to put the economy on a path toward eliminating excess slack in the economy by mid 2018, pushing inflation back to its 2 per cent target. If so, we expect the Bank of Canada may consider raising its overnight rate early next year while long-term rates and mortgage rates may creep higher in 2017. 

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The Bank of Canada announced this morning that it is holding the target for its overnight rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that growth in the economy is improving and recent higher CPI inflation should be only temporary, reflecting increased energy costs.  The Bank stated that it is remaining attentive to significant uncertainties weighing on its outlook.

While the Canadian economy is showing signs of improving, with strong hiring and faster than expected growth in real GDP, the outlook remains clouded by uncertainty over trade and tax policy in the United States.  If economic growth and inflation evolve as the Bank currently projects,  the Bank would likely be contemplating raising its overnight rate some time in early 2018.  However, given that we have no more clarity now than at the time of the Bank's previous rate decision regarding changes to trade agreements or the stance of US fiscal policy, the Bank will remain sidelined until the path forward becomes more clear.

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