BMO released their North American outlook today. Some of the more pertinent points are highlighted below.
“Canada’s economy has slowed in response to waning pent-up demand and a strong currency. Following the fastest growth in more than a decade in Q1, GDP grew just 2.0% in Q2. The trade deficit subtracted nearly three percentage points from growth. Consumer spending moderated in the face of softer employment and higher debts. Home sales weakened from record highs to more normal levels, as demand was previously pulled forward ahead of tighter monetary policy, stricter mortgage rules and the HST.”
Of course by ‘more normal levels’ they mean ‘levels last seen a decade ago‘.
“Despite low borrowing costs, consumer spending will remain moderate, as households need to corral record-high debts.”
Has Sherry Cooper been reading this blog? This has been my position, except that I see the logical result of this ‘corraling’ being the start of a deflationary period.
“Because of high debts, spending will be sensitive to rising interest rates, one reason the Bank of Canada has opted to suspend its tightening cycle. Meantime, housing markets should stay subdued due to a lack of pent-up demand and valuation concerns. Although houses remain reasonably affordable because of low long-term mortgage rates, prices are elevated relative to incomes.”
‘Subdued’ housing market is banker speak for ‘correction’. Remember, they can’t possibly tell the truth when it comes to real estate. As far as home prices being ‘elevated’ relative to incomes, that may be a bit of an understatement.
The report highlighted the following risks: (do they sound familiar?)
“Canadian household debt hit record highs in Q2, and is approaching U.S. levels in relation to income. Continued rapid credit growth would likely put a significant number of households under stress in the event of an adverse shock, such as a large increase in interest rates or another recession.”
“The recent cooling in Canadian house prices has reduced the risk of a housing bubble. However, some further moderate weakness appears necessary to restore valuations to more normal levels relative to household incomes.”
So, Sherry, just how much consumer spending stands to be wiped out of the economy as house prices return to ‘more normal levels’? Your colleagues over at CIBC recently calculated that every 5% drop in home prices erases $10 billion in associated consumer spending. So how does that jive with your prediction of +2% growth?