2 april 2010
This tendency needs to continue, when the government limits the stimulus measures and raise record-low interest rates.
“Now the recovery concerns only consumer spending and housing sphere,” said Douglas Porter, deputy chief economist at BMO Capital Markets. “The main question is whether we can stimulate the recovery of other spheres, e.g. manufacturing and exports. That will be the main sign of the recovery.”
One of the early signs is the manufacturing coming back, with carmakers General Motors and Honda announcement of adding shifts and output increase in Ontario.
The January GDP numbers, published by Statistics Canada on Wednesday, surpassed all expectations of a 0.5% month-over-month gain, and helped set new benchmarks. For example, it was the best one-month gain in GDP in more than three years. Moreover, it was the best six-month performance, 5% annualized, since 2000 (with its dot-com boom); and growth at a robust 6.9% annualized pace for the three-month period ended Jan. 31. It compares favorably to the 5.1% expansion in the third quarter of 2000, but it’s still below the record 14% gain reached in the fourth quarter of 1963.
“This is exactly what we’ve expected to see. It is even higher than we’ve been looking for,” said Craig Wright, chief economist at Royal Bank of Canada (his forecasts are considered to be the most reliable on Bay Street).
“It’s huge, and it adds fuel to the fire for the Bank of Canada,” said Eric Lascelles, TD’s chief economics. “Only some unexpected economic shock can make the Bank of Canada raise rates any later than July”
The next Bank of Canada rate announcement is April 20. The central bank is expected to explain the details of its updated forecast. In January, the first-quarter growth was expected to reach the level of 3.5%. Almost no one expects the Bank of Canada to raise rates in April, though there is a possibility to get the signals as to when it can start. The central bank promised to keep the rate at a historic low of 0.25% until July. Inflation, however, has come in firmer than expectations as well.
In addition to it, chartered banks are not waiting for the central bank to start acting. They have begun raising fixed five-year mortgage rates. Mortgage rates depend on bond yields, which have increased lately, because investors expect rate increases in the nearest future.
From the very beginning the active housing market and strong consumer demand stimulated the economic growth. Recent real estate industry numbers showed the cooling of housing market – home sales were going down for two months already.