Garry Marr, Financial Post
Not that there are a lot of people buying houses these days, but the answer to the age-old question of whether to go long or short on your mortgage is unclear yet again.
The Bank of Canada’s second quarter-of-a-point rate increase in the past two months is likely not going to do much to boost a real estate market that saw sales drop almost 20% across the country in June from a year ago.
The popular variable-rate product tied to prime that helped people buy a lot more house with more debt is going up too. The prime rate at the major banks, which tracks the Bank of Canada’s rate, is now at 2.75%.
But a funny thing happened as the Bank of Canada was raising rates. With much of the credit crisis seemingly behind us, the discounts on short-term borrowing are increasing as the cost of funds for banks also fall. Instead of borrowing at 100 basis points above prime, it’s now 70 basis points off prime.
At 2.05%, a variable-rate product today may look as attractive as ever, but the five-year fixed-rate closed mortgage is falling fast. It can now be had for a shade under 4%, says Rob McLister, editor of Canadian Mortgage Trends.
“Bond yields have fallen out of bed and nobody expected that,” said Mr. McLister, adding the spread between the five-year Government of Canada bonds and five-year mortgages is still large enough that the banks may reduce long-term rates even more. However, at about 4%, the five-year closed fixed-rate mortgage isn’t far off its record low.
Bank of Montreal senior economist Sal Guatieri does agree that variable-rate products have worked out better than fixed-rate mortgages throughout history, but says the tide may be turning.
“Given that the central bank has already raised rates a couple of times now and will likely continue to raise rates, it probably is a correct assumption to make,” says Mr. Guatieri, noting variable usually works in a declining interest-rate environment. “The next five years might not quite follow the past. You could probably argue it’s wiser to lock in now. It’s a close call.”
Bank of Montreal is forecasting another 25 basis point move in September and says rates will climb another 1.5 percentage points by the end of 2011. If Mr. Guatieri and others are right, by 2012, the variable-rate products out today would clock in at just above 3.75%, if the discounting remains the same.
“If you are still in that variable-rate product then, you’d have to sweat out the next three years because there would still be possibly more increases,” says Mr. Guatieri, who adds his bank sees the overnight rate eventually going to 4% in the following three years. Based on the present gap between the Bank of Canada and prime, that would place the variable-rate product you get today at 6% by around 2015.
Fears of such a scenario are driving people into fixed-rate products again. That, plus new mortgage rules that make it easier to qualify for a mortgage if you go for a fixed-rate product with a term of five years or longer.
“The Bank of Canada is doing what it said — it’s going ahead with rate increases. If I was counselling someone, the prediction is rates are going up, so now is a good time to consider locking in for a term,” says Don Lawby, president of Century 21 Canada.
It makes sense, but with variable rate still at around 2%, it’s easy to see why people wouldn’t want to lock in. Even Mr. Guatieri says if you are secure in your financial situation and don’t need to fix your mortgage payments, “you might just want to let it ride.”
There just never seems to be a clear answer on whether to lock in or stay variable.
Wednesday, July 28, 2010
Tuesday, July 27, 2010
Canadian banks leap at U.S. rivals’ weakness
Grant Robertson, From Monday's Globe and Mail Published on Monday, Jul. 26, 2010
Canadian banks that covet a bigger slice of the U.S. market have identified a small window of opportunity to potentially steal corporate business from troubled American banks.
Now some are pulling out all the stops – using top bank brass to wine and dine the heads of small U.S. companies and flying in analysts from Canada to provide market insight – in an attempt to convince those businesses to change bankers.
Corporate banking is known for being a tough market in which to grow, since companies often stay with one primary lender for decades. But past recessions have shown economic downturns produce temporary upheaval, which can be fertile ground in the hunt for new business.
“Almost all of the market share gains that banks got over the last 30 to 40 years have come in this window of three months to 15 months out of the recession,” said David Casper, Bank of Montreal’s co-head of investment and corporate banking in the United States.
“I can’t quantify how much we can gain, but I strongly believe that now is the opportunity to gain that market share.”
Though they are relatively smaller players in the U.S. market, Toronto-Dominion Bank, HSBC Bank Canada, BMO and other Canadian lenders are selling themselves as more stable and willing to offer credit than their American rivals.
“We want to take part in this expansion,” said Miguel Barrieras, national head of business banking at HSBC Bank Canada who added that a sharp drop in business lending in the U.S. should create opportunities. Lending to small- and medium-sized businesses in the U.S. fell to $670-billion (U.S.) from $710-billion over the past year.
But this window of opportunity comes with risks for the banks. Many companies now looking for credit are not the most attractive borrowers. The goal is to weed out the good from the bad.
“Like everyone else, we’ve had to make sure that we’re doing our research and understand what’s going on ... everyone can potentially get into trouble,” said Suzanne Poole, executive vice-president of retail sales strategy and small business at TD. “We’ve certainly viewed the downturn as an opportunity.”
Amid the wooing, business owners are now finding themselves in unusual situations, and competition for their attention is fierce. When Chicago-based Continental Packaging Solutions began looking to sever its ties with Bank of America, amid concerns about the upheaval in the U.S. banking sector, the company was courted by at least six different banks, including Canadian institutions.
To win over the company, BMO brought in the vice-chairman of its U.S. division, Harris Bankcorp Inc., for a series of personal dinner meetings with Continental’s chief executive officer Mark Giesen, convincing him to move to the Canadian bank. In an interview, Mr. Giesen acknowledged it was unusual to be getting such hands-on attention from a bank’s upper management.
The Canadian banks’ campaign won’t be enough to cause a major shift in the overall business lending picture in the United States. The decrease in lending over the past year has raised concerns with the U.S. Federal Reserve, which has conducted more than 40 meetings with businesses across the country since February to discuss the implications it could have on an economic recovery.
Companies with 500 employees or less make up half the U.S. labour force and Fed chairman Ben Bernanke said this month those firms will be looked upon to play a key role in job creation as the country attempts to pull itself from the recession. To do that, they will need access to credit.
“It seems clear that some creditworthy businesses, including some whose collateral has lost value but whose cash flows remain strong, have had difficulty obtaining credit that they need to expand – and in some cases, even to continue operating,” Mr. Bernanke said.
Canadian banks that covet a bigger slice of the U.S. market have identified a small window of opportunity to potentially steal corporate business from troubled American banks.
Now some are pulling out all the stops – using top bank brass to wine and dine the heads of small U.S. companies and flying in analysts from Canada to provide market insight – in an attempt to convince those businesses to change bankers.
Corporate banking is known for being a tough market in which to grow, since companies often stay with one primary lender for decades. But past recessions have shown economic downturns produce temporary upheaval, which can be fertile ground in the hunt for new business.
“Almost all of the market share gains that banks got over the last 30 to 40 years have come in this window of three months to 15 months out of the recession,” said David Casper, Bank of Montreal’s co-head of investment and corporate banking in the United States.
“I can’t quantify how much we can gain, but I strongly believe that now is the opportunity to gain that market share.”
Though they are relatively smaller players in the U.S. market, Toronto-Dominion Bank, HSBC Bank Canada, BMO and other Canadian lenders are selling themselves as more stable and willing to offer credit than their American rivals.
“We want to take part in this expansion,” said Miguel Barrieras, national head of business banking at HSBC Bank Canada who added that a sharp drop in business lending in the U.S. should create opportunities. Lending to small- and medium-sized businesses in the U.S. fell to $670-billion (U.S.) from $710-billion over the past year.
But this window of opportunity comes with risks for the banks. Many companies now looking for credit are not the most attractive borrowers. The goal is to weed out the good from the bad.
“Like everyone else, we’ve had to make sure that we’re doing our research and understand what’s going on ... everyone can potentially get into trouble,” said Suzanne Poole, executive vice-president of retail sales strategy and small business at TD. “We’ve certainly viewed the downturn as an opportunity.”
Amid the wooing, business owners are now finding themselves in unusual situations, and competition for their attention is fierce. When Chicago-based Continental Packaging Solutions began looking to sever its ties with Bank of America, amid concerns about the upheaval in the U.S. banking sector, the company was courted by at least six different banks, including Canadian institutions.
To win over the company, BMO brought in the vice-chairman of its U.S. division, Harris Bankcorp Inc., for a series of personal dinner meetings with Continental’s chief executive officer Mark Giesen, convincing him to move to the Canadian bank. In an interview, Mr. Giesen acknowledged it was unusual to be getting such hands-on attention from a bank’s upper management.
The Canadian banks’ campaign won’t be enough to cause a major shift in the overall business lending picture in the United States. The decrease in lending over the past year has raised concerns with the U.S. Federal Reserve, which has conducted more than 40 meetings with businesses across the country since February to discuss the implications it could have on an economic recovery.
Companies with 500 employees or less make up half the U.S. labour force and Fed chairman Ben Bernanke said this month those firms will be looked upon to play a key role in job creation as the country attempts to pull itself from the recession. To do that, they will need access to credit.
“It seems clear that some creditworthy businesses, including some whose collateral has lost value but whose cash flows remain strong, have had difficulty obtaining credit that they need to expand – and in some cases, even to continue operating,” Mr. Bernanke said.
Thursday, July 15, 2010
Recession-battered Canadians growing more conservative with savings
By Sunny Freeman, The Canadian Press
TORONTO - Recession-battered Canadians are growing more conservative with their money and turning away from high risk investments to the safety of savings accounts — a trend that banks are cashing in on, industry insiders say.
Canadians this year have opened about 20 per cent more chequing and savings accounts than last — a giant leap from the average three to five per cent annual increase, said financial services consultant David McVay.
"Canadians are more conservative than they were in 2007," McVay said, adding that more consumers are paying off debt, opening RRSPs and tax-free savings accounts than they were a year ago.
"We're seeing a shift from stock investing into keeping more money in savings accounts because of the financial crisis," he said.
The shift to safer investments is being driven by a nervous baby boom generation who "have lost their mojo" after the plunging stock market wreaked havoc on their retirement investments, McVay said.
They no longer want to take on the risk of a crash that could force them to work another five or 10 years.
"The banks are marketing to the uncertainty that Canadians have about their savings and retirement plans caused by the financial crisis," McVay said.
Banks are looking to capitalize on the conservative shift in consumer sentiment because they can make more money from savings accounts than they can when stocks and bonds are in vogue, he added.
The 20 per cent increase in retail accounts amounts to about $100 billion in business — and Canadian banks are fighting aggressively for customers with cash-back and points incentives, McVay said.
TD Bank economist Grant Bishop agrees that the trend away from risky equity markets has increased competition for deposits.
"You did see banks increasing the attractiveness in order to get the largest bulk of that cash flowing in," Bishop said.
But the rush into precautionary savings during the initial phases of the recession, has since dropped off, he added.
As the early stages of recovery took hold, consumers began to take advantage of historically low interest rates and favourable borrowing conditions.
"We did see households, spurred by ultra-low interest rates, accumulating debt, largely for the purpose of home ownership," he said.
"But going forward that does need to slow and households do need to save more in order to rebalance their finances and bring down the potential vulnerabilities that households would face as interest rates rise."
As interest rates on loans begin a cycle of gradual hikes, borrowing will become more expensive. As the same time, that should eventually translate into higher interest on savings accounts.
Scotiabank released results of a survey of Canadians' savings habits Tuesday that found nearly one-third of Canadians do not have a savings plan in place even though almost everybody —94 per cent— said they feel better when they have a safety net of savings.
That means there is still a large untapped market of Canadians who are looking for help with their savings.
"We did have a tough period in the last few years and I think now is a great time to really focus on this and get people thinking about how they can save," said Gillian Riley, Scotiabank senior vice-president of retail deposits, payment and lending.
"Over the last year we certainly have seen some movement towards savings as a flight to safety," Riley added.
About 55 per cent of the 1,000 Canadians surveyed by Harris/Decima for Scotiabank in March told pollsters they save on a regular basis. Still, nearly one-in-five Canadians said they don't have any rainy day savings at all.
Household consumption had been growing at a faster rate than income growth, indicating that Canadians were taking on more debt to fuel domestic spending, Bishop said, adding that TD predicts that the pace of credit growth will slow in the near future.
The personal debt to income ratio has climbed dramatically in the past year, Bishop said. It sits at around 147 per cent, meaning for every dollar of income households earn, they hold about $1.47 in debt.
"That reflects that households still do need to save a larger portion than they were during the pre-recession period ... in order to pay down debt."
TORONTO - Recession-battered Canadians are growing more conservative with their money and turning away from high risk investments to the safety of savings accounts — a trend that banks are cashing in on, industry insiders say.
Canadians this year have opened about 20 per cent more chequing and savings accounts than last — a giant leap from the average three to five per cent annual increase, said financial services consultant David McVay.
"Canadians are more conservative than they were in 2007," McVay said, adding that more consumers are paying off debt, opening RRSPs and tax-free savings accounts than they were a year ago.
"We're seeing a shift from stock investing into keeping more money in savings accounts because of the financial crisis," he said.
The shift to safer investments is being driven by a nervous baby boom generation who "have lost their mojo" after the plunging stock market wreaked havoc on their retirement investments, McVay said.
They no longer want to take on the risk of a crash that could force them to work another five or 10 years.
"The banks are marketing to the uncertainty that Canadians have about their savings and retirement plans caused by the financial crisis," McVay said.
Banks are looking to capitalize on the conservative shift in consumer sentiment because they can make more money from savings accounts than they can when stocks and bonds are in vogue, he added.
The 20 per cent increase in retail accounts amounts to about $100 billion in business — and Canadian banks are fighting aggressively for customers with cash-back and points incentives, McVay said.
TD Bank economist Grant Bishop agrees that the trend away from risky equity markets has increased competition for deposits.
"You did see banks increasing the attractiveness in order to get the largest bulk of that cash flowing in," Bishop said.
But the rush into precautionary savings during the initial phases of the recession, has since dropped off, he added.
As the early stages of recovery took hold, consumers began to take advantage of historically low interest rates and favourable borrowing conditions.
"We did see households, spurred by ultra-low interest rates, accumulating debt, largely for the purpose of home ownership," he said.
"But going forward that does need to slow and households do need to save more in order to rebalance their finances and bring down the potential vulnerabilities that households would face as interest rates rise."
As interest rates on loans begin a cycle of gradual hikes, borrowing will become more expensive. As the same time, that should eventually translate into higher interest on savings accounts.
Scotiabank released results of a survey of Canadians' savings habits Tuesday that found nearly one-third of Canadians do not have a savings plan in place even though almost everybody —94 per cent— said they feel better when they have a safety net of savings.
That means there is still a large untapped market of Canadians who are looking for help with their savings.
"We did have a tough period in the last few years and I think now is a great time to really focus on this and get people thinking about how they can save," said Gillian Riley, Scotiabank senior vice-president of retail deposits, payment and lending.
"Over the last year we certainly have seen some movement towards savings as a flight to safety," Riley added.
About 55 per cent of the 1,000 Canadians surveyed by Harris/Decima for Scotiabank in March told pollsters they save on a regular basis. Still, nearly one-in-five Canadians said they don't have any rainy day savings at all.
Household consumption had been growing at a faster rate than income growth, indicating that Canadians were taking on more debt to fuel domestic spending, Bishop said, adding that TD predicts that the pace of credit growth will slow in the near future.
The personal debt to income ratio has climbed dramatically in the past year, Bishop said. It sits at around 147 per cent, meaning for every dollar of income households earn, they hold about $1.47 in debt.
"That reflects that households still do need to save a larger portion than they were during the pre-recession period ... in order to pay down debt."
Wednesday, July 14, 2010
Upbeat survey may pave way for interest rate hike
By Julian Beltrame
OTTAWA — Canadian firms are giving the recovery a vote of confidence in a key quarterly survey, paving the way for the Bank of Canada’s expected interest rate hike next week.
The central bank’s quarterly survey, released Monday, showed firms were concerned about the fallout from the European sovereign debt mess, but still generally upbeat about the coming year.
“Overall, (business executives) are positive about the outlook for business activity over the next 12 months,” the bank wrote.
“For the first time in two years, firms, on balance, reported an improvement in their past sales activity.”
The bank’s governing council next interest rate announcement is next Tuesday.
Following a strong jobs report last week, the survey likely represents the last piece of evidence governor Mark Carney was looking for to confirm a predisposition to continue raising rates.
“I’d say there’s a 75 or 80 per cent probability they will hike next week by 25 basis points,” said Derek Holt, vice-president of economics with Scotia Capital.
“I think they’d want to avoid the perception that they just came out with a whole new round of bullish forecasts and then got wobbly knees after just one quarter-point hike (in June).”
What could stay Carney’s hand, economists say is the unknown factor of what will happen to the global economy as governments move from spending to restraint later this year and next.
Canada’s domestic economy appears well grounded. Statistics Canada reported on Friday that an additional 93,000 jobs were added in June, bringing total re-hiring since the recession’s end to over 400,000.
And the business outlook survey showed that 50 per cent of firms surveyed said they planned to add workers over the next 12 months, as opposed to only 10 per cent that planned to cut their workforce.
TD Bank economist Diana Petramala viewed that finding as the strongest in the report, although she said it might indicate some hiring that’s already taken place.
While an increase in the bank’s policy rate to 0.75 per cent will raise short-term interest rates for consumers, most economists say it is unlikely to have much of an impact on longer-term, fixed mortgage rates. Many see a hike at this time as not applying the brakes to growth, since the rate would remain near the historic low, but as a judgment by the bank that the recovery is taking hold.
Not all agree, however. A bearish minority argue that Canada still faces considerable headwinds from the European situation and ongoing U.S. weakness, and that Carney should refrain from adding a further impediment to growth.
But failing a climb down from its forecast of 3.7 per cent growth this year, and 3.1 per cent next year, the bank appears on track to take interest rates a little higher next week, analysts say.
“With price pressures expected to rise in the production line, excess economic slack continuing to melt away, and credit and lending conditions continuing to ease, the survey results weigh on the tightening side,” noted economist Michael Gregory of BMO Capital Markets.
The summer poll, and a separate survey of loan officers also released Monday, found sentiments positive, if not deliriously so, across a range of topics.
The bank said credit conditions appear to be easing, especially for larger corporations, a critical prerequisite for expansion.
The balance of opinion was also positive on questions of sales volume prospects for the coming year, and future investment intentions.
Not all doubts have vanished, however.
Business executives expressed concerns about “recent global economic and financial uncertainties and possible spillover effects in Canada.”
And although on the plus side of the ledger, expectations on future sales and investment intentions were softer than three months ago. That’s partly because of the way the Bank of Canada couches its questions, contrasting expectations to what they were in the earlier survey.
The bank noted the responses suggest that firms that have already experienced strong sales growth from recession lows now believe that the growth rate will slow to more sustainable levels, but remain positive.
And many firms that do not expect to increase spending on new machinery have already made those investments, particularly firms in the services sector.
On other elements of business activity, executives said they expect the cost of their inputs to increase at a greater rate during the next 12 months, and plan to pass on these cost increases to their customers.
But the inflationary expectations over the next two years were modest, within the central bank’s one-to-three per cent range.
OTTAWA — Canadian firms are giving the recovery a vote of confidence in a key quarterly survey, paving the way for the Bank of Canada’s expected interest rate hike next week.
The central bank’s quarterly survey, released Monday, showed firms were concerned about the fallout from the European sovereign debt mess, but still generally upbeat about the coming year.
“Overall, (business executives) are positive about the outlook for business activity over the next 12 months,” the bank wrote.
“For the first time in two years, firms, on balance, reported an improvement in their past sales activity.”
The bank’s governing council next interest rate announcement is next Tuesday.
Following a strong jobs report last week, the survey likely represents the last piece of evidence governor Mark Carney was looking for to confirm a predisposition to continue raising rates.
“I’d say there’s a 75 or 80 per cent probability they will hike next week by 25 basis points,” said Derek Holt, vice-president of economics with Scotia Capital.
“I think they’d want to avoid the perception that they just came out with a whole new round of bullish forecasts and then got wobbly knees after just one quarter-point hike (in June).”
What could stay Carney’s hand, economists say is the unknown factor of what will happen to the global economy as governments move from spending to restraint later this year and next.
Canada’s domestic economy appears well grounded. Statistics Canada reported on Friday that an additional 93,000 jobs were added in June, bringing total re-hiring since the recession’s end to over 400,000.
And the business outlook survey showed that 50 per cent of firms surveyed said they planned to add workers over the next 12 months, as opposed to only 10 per cent that planned to cut their workforce.
TD Bank economist Diana Petramala viewed that finding as the strongest in the report, although she said it might indicate some hiring that’s already taken place.
While an increase in the bank’s policy rate to 0.75 per cent will raise short-term interest rates for consumers, most economists say it is unlikely to have much of an impact on longer-term, fixed mortgage rates. Many see a hike at this time as not applying the brakes to growth, since the rate would remain near the historic low, but as a judgment by the bank that the recovery is taking hold.
Not all agree, however. A bearish minority argue that Canada still faces considerable headwinds from the European situation and ongoing U.S. weakness, and that Carney should refrain from adding a further impediment to growth.
But failing a climb down from its forecast of 3.7 per cent growth this year, and 3.1 per cent next year, the bank appears on track to take interest rates a little higher next week, analysts say.
“With price pressures expected to rise in the production line, excess economic slack continuing to melt away, and credit and lending conditions continuing to ease, the survey results weigh on the tightening side,” noted economist Michael Gregory of BMO Capital Markets.
The summer poll, and a separate survey of loan officers also released Monday, found sentiments positive, if not deliriously so, across a range of topics.
The bank said credit conditions appear to be easing, especially for larger corporations, a critical prerequisite for expansion.
The balance of opinion was also positive on questions of sales volume prospects for the coming year, and future investment intentions.
Not all doubts have vanished, however.
Business executives expressed concerns about “recent global economic and financial uncertainties and possible spillover effects in Canada.”
And although on the plus side of the ledger, expectations on future sales and investment intentions were softer than three months ago. That’s partly because of the way the Bank of Canada couches its questions, contrasting expectations to what they were in the earlier survey.
The bank noted the responses suggest that firms that have already experienced strong sales growth from recession lows now believe that the growth rate will slow to more sustainable levels, but remain positive.
And many firms that do not expect to increase spending on new machinery have already made those investments, particularly firms in the services sector.
On other elements of business activity, executives said they expect the cost of their inputs to increase at a greater rate during the next 12 months, and plan to pass on these cost increases to their customers.
But the inflationary expectations over the next two years were modest, within the central bank’s one-to-three per cent range.
Tuesday, July 13, 2010
Canada safe from U.S. double dip
David Pett - Financial Post
Add Moody’s to the list of those who think Canada’s economic recovery is safe, even if the U.S. economy falls back into recession.
In the wake of last Friday’s stunning jobs report that saw 93,200 new jobs created in June, Jimmy Jean, an economist at Moody’s Economy.com said a “collective effort” in dealing with the financial crisis has made Canada less vulnerable to U.S. shocks than it used to be.
“It is often thought that when the U.S. sneezes, Canada catches a cold, but with the shift toward a service-oriented economy over the last three decades, Canada has grown more immune to U.S. woes,” he said in a report.
“The last two U.S. recessions are solid proof that Canada is now better able to withstand strong headwinds from the south. Not that they’ve decoupled altogether, but should a downside mild double-dip U.S. recession materialize, Canada’s recovery would very likely survive.”
In addition to the country’s strong commodity sector, Mr. Jean said the success of Canada’s recovery is thanks to policy makers acting quickly in the depth of the crisis, consumers who shrugged off the recession and started spending again and employers who believed in the recovery and hired backed their workforce swiftly.
Add Moody’s to the list of those who think Canada’s economic recovery is safe, even if the U.S. economy falls back into recession.
In the wake of last Friday’s stunning jobs report that saw 93,200 new jobs created in June, Jimmy Jean, an economist at Moody’s Economy.com said a “collective effort” in dealing with the financial crisis has made Canada less vulnerable to U.S. shocks than it used to be.
“It is often thought that when the U.S. sneezes, Canada catches a cold, but with the shift toward a service-oriented economy over the last three decades, Canada has grown more immune to U.S. woes,” he said in a report.
“The last two U.S. recessions are solid proof that Canada is now better able to withstand strong headwinds from the south. Not that they’ve decoupled altogether, but should a downside mild double-dip U.S. recession materialize, Canada’s recovery would very likely survive.”
In addition to the country’s strong commodity sector, Mr. Jean said the success of Canada’s recovery is thanks to policy makers acting quickly in the depth of the crisis, consumers who shrugged off the recession and started spending again and employers who believed in the recovery and hired backed their workforce swiftly.
Friday, July 9, 2010
IMF sees global pullback in 2011
Latest report highlights risks in banking system, fiscal and monetary policies
Tara Perkins, From Thursday's Globe and Mail
Positive signs in countries such as Canada, China and India should inflate global economic growth this year, but the forecast for 2011 is less sanguine.
The International Monetary Fund is now projecting world growth of about 4.5 per cent for 2010, up from its prior estimate of roughly 4 per cent. But that comes with a proviso: a new wave of financial turbulence has bolstered downside risks.
That is casting a shadow over 2011. Canada’s projected growth rate for 2010 has been ratcheted up to 3.6 per cent, from 3.1 per cent. But for 2011 it has dropped to 2.8 per cent from 3.2 per cent.
Here are some of the key risk areas the IMF is monitoring:
The banking system:There are early indications that banks in the euro area are tightening up their lending standards again. Those had been falling for about a year. It’s becoming harder to obtain a bank loan at the same time as non-financial corporate bond issuance has dropped in Europe. “If these tighter conditions continue, they could begin to have a significant impact on the availability of credit to corporates,” the IMF said.
It’s also concerned about bank funding. “Euro area banks are still hoarding liquidity and putting those funds in the ECB’s deposit facility,” it said. It called on policy makers not to delay reform of the financial system, which it said is urgently needed to restore the health of the banking system.
Fiscal policies:“Growth prospects in advanced economies could suffer if an overly severe or poorly planned fiscal consolidation stifles still-weak domestic demand,” the IMF warns. For politicians, “the overarching policy challenge is to restore financial market confidence without choking the recovery.”
Not an easy task. Even as it cautioned against dampening growth, it said that firm commitments to ambitious and credible strategies to lower fiscal deficits over the medium and long term are of the utmost importance.
“Most advanced economies do not need to tighten before 2011, because tightening sooner could undermine the fledgling recovery, but they should not add further stimulus,” the IMF said.
Monetary policies: Monetary conditions should generally remain highly accommodative for the foreseeable future to help mitigate the impact of fiscal consolidation and calm financial market jitters, the IMF said, adding that inflation pressures are subdued.
“If downside risks to growth materialize, monetary policy should be the first line of defence in many advanced economies. In such a scenario, with policy interest rates already near zero in several major economies, central banks may need to again rely more strongly on using their balance sheets to further ease monetary conditions.”
Tara Perkins, From Thursday's Globe and Mail
Positive signs in countries such as Canada, China and India should inflate global economic growth this year, but the forecast for 2011 is less sanguine.
The International Monetary Fund is now projecting world growth of about 4.5 per cent for 2010, up from its prior estimate of roughly 4 per cent. But that comes with a proviso: a new wave of financial turbulence has bolstered downside risks.
That is casting a shadow over 2011. Canada’s projected growth rate for 2010 has been ratcheted up to 3.6 per cent, from 3.1 per cent. But for 2011 it has dropped to 2.8 per cent from 3.2 per cent.
Here are some of the key risk areas the IMF is monitoring:
The banking system:There are early indications that banks in the euro area are tightening up their lending standards again. Those had been falling for about a year. It’s becoming harder to obtain a bank loan at the same time as non-financial corporate bond issuance has dropped in Europe. “If these tighter conditions continue, they could begin to have a significant impact on the availability of credit to corporates,” the IMF said.
It’s also concerned about bank funding. “Euro area banks are still hoarding liquidity and putting those funds in the ECB’s deposit facility,” it said. It called on policy makers not to delay reform of the financial system, which it said is urgently needed to restore the health of the banking system.
Fiscal policies:“Growth prospects in advanced economies could suffer if an overly severe or poorly planned fiscal consolidation stifles still-weak domestic demand,” the IMF warns. For politicians, “the overarching policy challenge is to restore financial market confidence without choking the recovery.”
Not an easy task. Even as it cautioned against dampening growth, it said that firm commitments to ambitious and credible strategies to lower fiscal deficits over the medium and long term are of the utmost importance.
“Most advanced economies do not need to tighten before 2011, because tightening sooner could undermine the fledgling recovery, but they should not add further stimulus,” the IMF said.
Monetary policies: Monetary conditions should generally remain highly accommodative for the foreseeable future to help mitigate the impact of fiscal consolidation and calm financial market jitters, the IMF said, adding that inflation pressures are subdued.
“If downside risks to growth materialize, monetary policy should be the first line of defence in many advanced economies. In such a scenario, with policy interest rates already near zero in several major economies, central banks may need to again rely more strongly on using their balance sheets to further ease monetary conditions.”
Thursday, July 8, 2010
Household credit growth slowing
Derek Abma, Financial Post
OTTAWA — Despite worries about the rise of household debt in Canada, a CIBC World Markets report says the rate of growth has recently slowed down.
Economist Benjamin Tal, the report’s author, said it’s a positive thing that the rate of household debt is slowing. He said the rate at which it grew during the recession and the early stages of the recovery were beyond what was healthy in the long term.
“That’s fine,” he said of the previous growth in debt, which helped mitigate effects of the recession in Canada. “That’s exactly what the Bank of Canada wanted to do. . . . The Bank of Canada cut interest rates during the recession to encourage you and me to go and spend, and that’s how you get out of recession.”
But the pace of growth in consumer credit is now slowing, said Mr. Tal, who pointed out the rise in Canadians’ credit for the six months ended in March was slower than the expansion of nominal gross domestic product, which include the effects of inflation, and it’s the first time in more than seven years that’s happened.
The CIBC report said mortgages are expanding at a rate of 0.6% per month, the slowest since 2003. Lines of credit are expanding at less than one per cent on a monthly basis, the most sluggish pace since 2007, it said. It added that the level of direct loans has flattened.
Credit-card balances, the report said, are rising at a “relatively soft rate” of 0.6% year-over-year with the pace not expected to quicken in the near future.
With the economic recovery now on solid footing in Canada, Mr. Tal said it’s positive that the rate at which household debt grows is slowing. He said the recent economic downturn marked the first recession on record in which overall household debt grew.
Barring another recession, Mr. Tal said he doesn’t anticipate a reversal of trends in which household debt actually shrinks. But he added it doesn’t have to, because the current trend is sustainable.
“Credit is good, credit is OK, credit is a normal thing in a functioning market,” he said. “It’s basically allowing people to purchase for the future using current cash flow to finance it. There’s nothing wrong with it.”
While debt continues to rise faster than income, Tal said what’s more important is that asset levels — which include investments and real estate — are growing at a faster pace than household debt.
OTTAWA — Despite worries about the rise of household debt in Canada, a CIBC World Markets report says the rate of growth has recently slowed down.
Economist Benjamin Tal, the report’s author, said it’s a positive thing that the rate of household debt is slowing. He said the rate at which it grew during the recession and the early stages of the recovery were beyond what was healthy in the long term.
“That’s fine,” he said of the previous growth in debt, which helped mitigate effects of the recession in Canada. “That’s exactly what the Bank of Canada wanted to do. . . . The Bank of Canada cut interest rates during the recession to encourage you and me to go and spend, and that’s how you get out of recession.”
But the pace of growth in consumer credit is now slowing, said Mr. Tal, who pointed out the rise in Canadians’ credit for the six months ended in March was slower than the expansion of nominal gross domestic product, which include the effects of inflation, and it’s the first time in more than seven years that’s happened.
The CIBC report said mortgages are expanding at a rate of 0.6% per month, the slowest since 2003. Lines of credit are expanding at less than one per cent on a monthly basis, the most sluggish pace since 2007, it said. It added that the level of direct loans has flattened.
Credit-card balances, the report said, are rising at a “relatively soft rate” of 0.6% year-over-year with the pace not expected to quicken in the near future.
With the economic recovery now on solid footing in Canada, Mr. Tal said it’s positive that the rate at which household debt grows is slowing. He said the recent economic downturn marked the first recession on record in which overall household debt grew.
Barring another recession, Mr. Tal said he doesn’t anticipate a reversal of trends in which household debt actually shrinks. But he added it doesn’t have to, because the current trend is sustainable.
“Credit is good, credit is OK, credit is a normal thing in a functioning market,” he said. “It’s basically allowing people to purchase for the future using current cash flow to finance it. There’s nothing wrong with it.”
While debt continues to rise faster than income, Tal said what’s more important is that asset levels — which include investments and real estate — are growing at a faster pace than household debt.
Subscribe to:
Posts (Atom)
