Economic Outlook – Nov 2013

I originally was going to write about this at the beginning of November but procrastination got the best of me…

The Calgary Real Estate Forum was held on October 29 and it brought with it some rather predictable economic data. There is still plenty of optimism out there but any single negative event, it seems, could send us back into tough times. The program consisted of economist Warren Jestin of Scotiabank giving his evaluation; a presentation from CAPP on the energy markets; an interesting presentation on Mixed Use development from Larry Beasly, former Chief Planner of the City of Vancouver; the various concurrent sessions; and the executive roundtable finishing the event. In this post I will only focus on Warren Jestin’s presentation with subsequent posts for the other portions.

Economic Outlook

The title of Warren Jestin’s presentation was “Global Outlook — More of the Same, Only Different” which alludes to the fact that we have been going through the same pace of events but we have ventured into uncharted waters with the various monetary policies being implemented such as Quantitative Easing (QE) combined with historically low interest rates. Political decision making is becoming more important than ever, which has many people worried. However the economy is changing and it is to the benefit of Western Canada and more specifically Alberta.

The upside is that Canada and the US are projected to have higher GDP growth in 2014 and Europe is coming out of its longest post-war recession in its history. The US consumer is back Рthis is shown in car and home sales Рhowever employment still needs to improve. Canada is lagging behind US performance mainly because we have already got back to pre-recession levels early on.

China has been perceived as a worry due to slower growth – a comment made was that 1.5% growth in Europe is good but 7% growth in China is bad – but the demand is changing in China’s economy. It has transformed from an economy who’s primary driver was through exports to one where domestic demand is fuelling growth. Raw materials, manufacturing, sale of luxury goods, and tourism are all contributing to their growth. There is still huge momentum coming out of this economy. However, any previous optimistic forecasting for commodity prices will most likely not be realized. This will have an impact on the CAD and will continue to push our currency downwards.

Turning to the housing market, mortgage delinquencies in Canada remain exceptionally low and he does not believe there is a housing bubble, the fundamentals are not there. In the US, mortgage delinquencies remains high but the trend is downward and prices continue to increase. Housing starts are increasing as well meaning lumber producers in Canada are benefiting. However, household debt is increasing in Canada due to historically low interest rates and high employment.

On the fiscal side of things, government deficits in the US are reducing despite the conflict between Republicans and Democrats being unable to agree to anything. This is due in large part to the sequester that was implemented. With respect to the debt ceiling, the US will not default on its debt, it is the richest country in the world. The business sector’s balance sheets are the strongest he has ever seen and the consumer sector is coming back. It has generally come down to political issues with midterm elections coming in 2014. To try to understand the reasoning behind the decisions being made you have to look at it through a political lens: “Pipelines make economic sense they may not make political sense”.

Inflation is not a worry in the near term but past 2015 it may become more of a factor. Interest rates will remain where they are in the US until employment improves past 6.5% and Canada will remain on hold for as long as the US does. An important difference between monetary policy of the US and Canada is that the US prints money through QE, Canada does not. $85 billion in bond purchases per month by the Fed equates to over $1 trillion a year put onto the balance sheet of the Fed. When the Fed made mention that it would consider tapering back its bond purchases, we went through an important beta test, when the Fed tapers bond yields go up. Therefore the forecast for bond yields will continue to rise.

Specifically to Alberta, population growth is three times the national average and three times the growth than British Colombia. This has huge implications on retail sales, car sales, and housing sales. Provincial migration continues to be quite large in Alberta as well. Hosing prices and home sales in Calgary and Edmonton continues to be a top performer in Canada. ¬†Finally, Alberta’s earning power continues to the lead the way as well.

The powerpoints from Warren Jestin and the energy sector update can be downloaded here (they are large files):

Economic Outlook – Warren Jestin

CAPP Review – Greg Stringham

Energy Markets – Martin Molyneaux