OTTAWA – Canada’s economy is steadily gaining strength but is still being constrained from robust growth by heavy household debt, a strong dollar, soft export markets and weak employment growth, the Bank of Canada said Wednesday.
Rising oil prices, which have been a significant contributor to the dollar’s strength, were also listed as a drag to the economy because higher costs for businesses and households is offsetting gains from crude exports.
Building on Tuesday’s policy rate announcement that predicted 2.4 per cent annual growth this year and next, the central bank’s quarterly monetary policy review provides a more in depth analysis.
It predicts the first three months of this year will see annualized growth of 2.5 per cent, well above the 1.8 level the Bank of Canada had expected in its January report.
The bank now says growth in subsequent quarters of 2012 will come in at similar levels, which will allow Canada’s economy to return to full capacity for the first time since the recession by the first half of 2013 — as much as six months earlier than anticipated. Then the expansion will moderate, but remain positive.
“This outlook for the Canadian economy is slightly firmer than in the January report, with greater momentum through 2012 than had been anticipated,” the bank said.
“The profile for growth in consumption and investment is more front-loaded than previously expected, in part reflecting a more rapid improvement in confidence.”
It also assumes the loonie will remain mostly above parity with the U.S. currency over the next couple of years, and despite March’s oversized 82,300 job gains —it rates employment growth in Canada as modest.
At its heart, the bank’s view is that Canada is doing well enough emerging from the recession, but also faces some challenges that it must confront.
First and foremost is high consumer debt, which was last measured at a near-record 151 per cent of disposable household income.
In a special section within the report, the bank estimates that Canadians are borrowing on rising home values to an unsustainable degree. Home equity lines of credit and mortgage refinancing has grown from about $8 billion in 2001 to $64 billion in 2010, with about half of that “equity extraction” going into consumption or to pay off other debt.
“Home equity extracted through additional borrowing cannot fund higher consumption indefinitely,” the bank warns.
“With less equity in their homes, households would also be more exposed to a decline in house prices, which could further dampen consumption.”
In Tuesday’s interest rate announcement, the bank hinted strongly that it is uncomfortable with super-low rates that encourage Canadians to borrow more than they should, and that it may be ready to start bumping up rates soon.
But Wednesday’s monetary review, while not directly referring to its one per cent policy setting, gives some clues as to why it might be reluctant to do so.
“Growth in residential investment, which is currently supported by very favourable mortgage-financing conditions, is forecast to slow,” it states, but the ratio of household spending to GDP will likely remain high.
“In that context, the ratio of household debt to income is projected to rise further,” the bank concludes.
On Canada’s labour market, the bank suggests concerns from firms about labour shortages in Canada are a myth, at least for most of the country. It notes that both the employment and unemployment rate remain unchanged from their levels six months ago, and that the proportion of “involuntary part-time workers” has only partially recovered “pointing to the persistence of unused capacity in the labour market.”
