The risk of a real estate crisis and the rise of the loonie are good news for the Canadian economy



Bank of Canada Governor Tiff Macklem made optimistic comments when he met with reporters on Wednesday following his latest monetary policy report. But, as usual, the risks to the economy make it much more interesting to read.

One of those risks could start to show up in the real estate data expected later today.

When the Canadian Real Estate Association releases its latest prices and sales figures for resale homes, there could be early signs that a moderate drop in housing demand could turn into what the bank has warned. that it could become a “sharp slowdown”.

As usual, smart as they are, the smart folks who advise Canada’s largest central banker can only make educated guesses about what the future holds for the national and global economy, based on the data. that they are collecting now.

But overall, a recently announced reduction in the Bank of Canada’s bond buying stimulus – from $ 3 billion to $ 2 billion a week – indicates growing confidence from Macklem and his advisers that the economy Canadian is on the mend.

Canadians more confident

“Canadians and Canadian businesses are more confident and this we believe will be reflected in their spending and investment decisions,” Macklem told reporters Wednesday at the bank’s virtual press conference.

In fact, Macklem predicts a strong consumer-led economic boom – an economic boom he said he contributed to himself.

When asked if he would suggest consumers go out and shop, Macklem declined to offer personal advice. Except for example. “I bought an exercise bike and I admit it helped me get through this crisis,” he replied.

Part of Macklem’s optimism is that an expected increase in consumer spending will help motivate companies to invest to increase capacity. And a strong U.S. economy, where most of Canada’s exports go, means businesses here will also be looking to prepare for foreign markets.

Bank of Canada Governor Tiff Macklem says he’s optimistic about the Canadian economy, but it’s not yet time to cut interest rates. (Blair Gable / Reuters)

A sharp rise in inflation south of the border this week, hitting a new 13-year high of 5.4%, is a sign that the US economy is struggling to meet demand in its own expanding economy .

Maybe Canada can help.

“It is clear that the US economy is experiencing capacity constraints,” Macklem said. “We expect demand for our exports to be stimulated by this strong US economy.”

Like his US counterpart, Fed Chairman Jerome Powell, Macklem has again insisted that inflation remains temporary and is expected to return to 2% by 2024 once the pandemic disruptions end.

But when reporters asked questions that suggested inflation would go away so easily, Macklem revealed that the Bank of Canada has its own uncertainties.

In fact, the central bank‘s monetary policy statement, issued before Macklem’s intervention, made it clear how much inflation remains a moving target.

Inflation still transient

“The factors driving inflation are transitory, but their persistence and magnitude are uncertain and will be watched closely,” he said.

One question Macklem did not directly address was how inflationary pressure on wages might be affected by so-called transient price increases. As we have seen previously, even if they last only a year or two, rising prices at rates of four and five percent lead to sharp reductions in the purchasing power of employees. And whether individually or as part of a union, workers will negotiate to recover this purchasing power.

Rather than address these future wage demands and their impact on the trajectory of inflation, Macklem’s response was retrospective. “At this point the wages are really pretty low,” he said.

As mentioned, some of the most interesting parts of this week’s policy report were in the final section which listed “risks to the inflation outlook”.

A few months ago, an unsold home in parts of Toronto would have been scarce. But as we prepare for a post-pandemic reality, people may not need that much space. (Don Pittis / CBC)

These risks could lead to higher-than-expected inflation, including a sharper-than-expected consumer spending boom, or longer lasting bottlenecks for parts or labor, which will drive up costs.

On the darker side, things that could pull inflation below the bank’s current expectations include a new outbreak of COVID-19 infections, especially among the unvaccinated; weaker-than-expected exports, potentially worsened by the loonie’s rise; and a slowdown in global growth that the bank has currently set at seven percent for this year.

But for many Canadians, one of the most worrying risks could be something the central bank also addressed in a May report on the country’s economic vulnerabilities: house prices.

While the central bank and many others would be delighted to see some of the fever emerge from Canada’s notoriously hot real estate sector, the risk is that a drop will go too far.

Whether in the ACI numbers today or in the months to come, many expect prices and sales to start to moderate.

People don’t need that much home

“The base case projection includes a gradual moderation in housing market activity,” this week’s MPR said. “There is a risk that the adjustment will be faster or more pronounced.”

Such a reversal, Macklem said, could be the product of otherwise benign economic forces, as families are no longer forced to expand their living space as this is where most of their lives have been spent. , from work to school to leisure.

“Now that we can go to restaurants, do you still want a bigger kitchen?” Macklem asked rhetorically, by way of explanation.

WATCH | The economic dangers of soaring house prices:

Home sales and prices have hit year-over-year records in the Greater Toronto Area, and experts warn this is a dangerous trend across the country, threatening the global economy . 2:04

“A rapid adjustment in the housing market could also have negative effects on consumption, and these could be even worse if house prices were to fall,” the policy report warned.

In an economy where housing plays such an important role, this could be a big setback, especially as total employment and business investment are still significantly below capacity before the pandemic.

This is one of the reasons the Bank of Canada, while acting slowly to reduce stimulus in the form of bond purchases, insists it is far from ready to start raising. interest rates.

Instead, Macklem chose a midpoint between pumping up the economy and releasing some air.

Follow Don Pittis on Twitter @don_pittis


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