Wednesday, March 14, 2007

Canadian Economy, Jobs and Stock Markets Rebound

- Canadian economy rebounding from a weak Q4
- North American job growth keeps humming along

- Equity markets back on track after last week’s shuffle

In so far as stock markets usually serve as media
focal points and headline grabbers, last week’s
equity selloff raised some concerns about financial
market volatility. But with no new major
developments coming out of China this week, some
solid economic data from both the U.S. and Canada,
not to mention a bullish statement from the European
Central Bank, provides comfort that the global
economy remains strong.

Neither the Federal Reserve nor the Bank of Canada
see last week’s stock market corrections as being
disruptive or shifting us away from solid
fundamentals. The major U.S. and Canadian stock
market indices gained some ground this week and have
already recovered a significant portion of last
week’s losses. As of Thursday’s close, the TSX had
gained back 40% of last week’s net loss while the
S&P500 and DJIA had recovered about 25% of their
respective drops.

North American job growth keeps humming along

Furthermore, U.S. employment prospects remain
healthy. 97,000 jobs were added to non-farm payrolls
in February. This was slightly below expectations,
but revisions to prior months’ data (+55,000 jobs)
put the latest numbers in line with trends seen in
the last couple of years. A massive shedding of
construction jobs (-62,000) was not enough to
overturn the gains from others sectors (+168,000). A
larger-than-usual portion (39,000) of those job
gains were in the public sector but we still see in
the net numbers a sign of the ability of the
private-sector economy to keep pumping out new jobs
in various sectors. This helps alleviate worries
that net job creation will suffer dramatically due
to a reversal of fortunes in construction
employment. The unemployment rate nudged down to
4.5% and wage growth held at 4.1% on an annual
basis, marking an ongoing concern for the Fed as it
tries to put a lid on potential cost-pull inflation.

American exporters also did well in February, with
their fortunes improving on the count of strong
European and Asian demand. The U.S. trade deficit
narrowed as we expected, and net exports contributed
positively to direct GDP growth accounting.

Housing is still expected to take a bite out of
overall economic growth in the first quarter, as
much as 1 percentage point. The jury is still out as
to whether or not the housing market has found a
bottom yet. The Federal Reserve’s Beige Book does
mention that there are signs of stabilization in
many districts, but the evidence is tenuous at best.
The knock-on effects to consumer spending are still
largely unseen however, and the combination of
decent trade and consumer spending growth should
keep the economy ticking at round 2.0-2.5% over the
next few quarters.

As the U.S. job market continues to turn out steady
performances, the Canadian job market remains in
overdrive. Even though the Canadian economy managed
to create only 14,000 net new jobs in February, this
respite was expected after job creation looked like
it was on steroids in the months prior. The 22,000
gain that had been made in manufacturing employment
in the last 3 months was unfortunately wiped out in
February as Qu├ębec alone shed 33,000 jobs in that
sector. How much of this loss is temporary and
related to the CN strike – which fortunately is
behind us now but did manage to cause disruptions in
supply and demand logistics across the country – is
something to sort out. Regardless, there is no
denying the long-term struggles that forestry and
manufacturing in particular are facing in Central
Canada. In other words, looking at the sectoral
distribution of job gains, we see the handoff from
goods to services continuing, as the goods-producing
sector – manufacturing in particular – continues to
shed jobs while the services industry picks up the
slack and then some. So overall, an average of
42,000 net new jobs have been created in Canada in
the last 6 months, which is strong by any measure –
recall that trend-like monthly averages are closer
to 15-20,000. Following in step, unemployment rates
across the country are at 30+ year lows with a
national average that now stands at 6.1%.

Canadian economy rebounding from weak Q4

The strong domestic outlook was also supported by
January’s international trade data. Export volumes
rose by 1.3% while import volumes declined by 3.8%,
resulting in an important boost to the Canadian
trade surplus. Most of the export growth was
destined for the U.S., whose domestic market
typically absorbs ¾ of our exports. The decline in
import volumes was broad-based. Beyond the often
noisy monthly changes, exports are picking up their
cruising speed as volumes have been on the rise in
the last 3 months and year-over-year as well. Tied
to a fairly optimistic and resilient U.S. consumer,
Canadian exporters’ fortunes still look positive
going forward, especially after going through a
steep appreciation of the Canadian dollar – which
has now stabilized in the 84-87 U.S. cents range.

After posting a meagre 1.4% real GDP growth in Q4,
the Canadian economy was already showing signs in
December that it would fare better in the first
quarter. This week’s round of data further
strengthens our view that the domestic economy is
rebounding. We expect first quarter real GDP growth
to come in above 3.0% at an annualized rate, which
is itself above potential and more than double the
rate observed in the fourth quarter.

Central bank meetings

So far then, the economy is tracking the Bank of
Canada’s (BoC) forecast rather well and, as such,
this means that the BoC is unlikely to change its
neutral stance any time soon. Choosing to maintain
the interest rate pause – as was unanimously
expected – the BoC left the interest rate target at
4.25% on Tuesday.

Other central banks also had rate setting meetings
this week. The Bank of England held its rate steady
at 5.25%, but will likely raise it by 25bp in its
next meeting on April 4. The European Central Bank
increased its key rate by 25bp to 3.75% and clearly
signalled that further increases are coming, so
there is at least another 25bp hike in the pipeline.
As a whole, the economies of the Euro-zone have been
growing at the decent pace of 2.5% recently and wage
inflation pressures loom as unions are looking to
flex their collective bargaining muscle,
particularly in Germany.

Article courtesy of R.Paul Chadwick Manager of Residential Mortgages, TD Canada Trust
Toronto Real Estate Board (TREB) Average Prices and Graph

For more information please contact A. Mark Argentino

A. Mark Argentino, Broker, P.Eng.,
Specializing in Residential & Investment Real Estate
RE/MAX Realty Specialists Inc., Brokerage
2691 Credit Valley Road, Suite 101, Mississauga, Ontario L5M 7A1

BUS. 905-828-3434
FAX. 905-828-2829

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