GLOBAL CAUTION

Bank of Canada raises policy rate on the strong domestic economy but cautious about global events
RBC ECONOMICS RESEARCH - DAILY ECONOMIC UPDATE – June 1, 2010

The Bank of Canada boosted the overnight rate by 25 bps to 0.50% this morning, hinting that further reductions in amount of stimulus are forthcoming but providing no concrete timetable for additional rate increases. While the domestic economy is performing in line with the Bank's forecast, the external environment remains volatile, with the Bank pointing to tensions in Europe and the continued deleveraging across the global economy as likely to "temper the pace of global growth." "Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," the Bank said. Additionally, the Bank highlighted that, even with today's rate increase, there remains "considerable monetary stimulus in place.”

The Bank also announced that it is re-establishing its standard operating framework for implementing monetary policy. The 50 bps operating band for the overnight rate was re-established.

The economy posted a solid 6.1% annualized growth rate in the first quarter of 2010 building on an already impressive 4.9% increase in the fourth quarter of 2009. The solid gains during these two quarters provided strong evidence that the stimulative monetary and fiscal measures helped to pull the Canadian economy out of the recent slump. The 0.6% gain in March’s GDP indicated strong momentum late in the first quarter setting up for the strength to be maintained in the second quarter. The surge in payrolls in April also corroborates this view with a smaller, but still positive, report for May expected on Friday, June 4, 2010.

While the global environment presents risks to Canada's economic outlook, the strength in the domestic economy and a core inflation rate that is only marginally below the 2% target took precedence in today's rate decision. Furthermore, the statement indicates that the strength of the domestic economy will see the Bank continue to reduce the amount of stimulus, although the statement did not provide clear guidance about the pace of interest rate increases. So far, the Bank assesses that the effects of external events on Canada's economy have "been limited." On balance, the statement supports our view that the Bank views domestic economic conditions as strong enough that the ultra-low level of interest rates is no longer needed and that the recovery can withstand a gradual rise in interest rates going forward. To that end, we expect that the Bank will raise the policy rate to 1.5% in 2010 and that the tightening will continue in 2011 as the Bank moves the policy rate closer to neutral by the time Canada's output gap is eliminated.

Dawn Desjardins, Assistant Chief Economist, RBC Economics

Photo By: Picture Perfect Pose

BOOM BOOM POW

Boomer effect could put pressure on deficit
Posted: February 04, 2010, 11:37 AM
by David Pett
Economy, Market Call, Ian McGugan
For years, policymakers have been warning that things will be different when boomers start retiring in large numbers. You’ve probably heard the phrase so often that it’s lost all impact. But guess what? It’s no longer a matter of “when.” It’s a matter of now that the boomers are retiring in large numbers.

Stephen Gordon, a professor of economics at Laval, has the numbers (as well as a scary chart) on Worthwhile Canadian Initiative, the excellent blog on Canadian economics which he co-authors. His post shows that the working-age population as a percentage of the total population is beginning a sharp decline. Since 2005, the data have been at the extreme bad end of the 13 scenarios imagined by Statistics Canada.

Gordon figures the decline in the size of the labor force is going to cut per-capita GDP growth rates by about 0.4% a year. While Gordon doesn’t go into all the ramifications, it seems safe to assume that an aging population and slower economic growth will put pressure on the government’s deficit projections—not to mention Canada’s booming real estate market.

COULD IT?

Signs of recovery starting to sway the skeptical
Looks like a V shaped recovery afterall
Paul Vieira, Financial Post
Published: Friday, January 29, 2010

OTTAWA -- Despite all the angst in financial markets over sovereign debt and the populist influence on banking reform proposals, the economies in the United States and Canada have chugged along the road to recovery at a pace that's surprising even the most skeptical of analysts.

Data released Friday indicate U.S. GDP grew in the fourth quarter, an estimated 5.7%, at its fastest pace in six years. Meanwhile in Canada, data show November growth was stronger than expected, at 0.4%, while revisions to September and October figures indicate the economy was much stronger than earlier thought.

"It couldn't have been that easy, could it?," asked Stewart Hall, economist at HSBC Securities Canada, who in previous notes had expressed caution about a slow, uneven recovery. "Yet charting out the month over month GDP looks an awful lot like a "V" shaped recovery."

Prior to the release of this data, markets had been consumed with worries in the aftermath of the financial crisis, be it the debt levels of industrialized countries; a slowdown in Chinese growth as Beijing looks to tighten credit conditions, and measures proposed by the U.S. White House that could scale back the size of U.S. banks, leading them in the meantime to restrict credit growth as given their uncertain future.

"One of the important lessons of the crisis was that it was often helpful to focus squarely on more comprehensible macro-cyclical dynamics than on the noise and complexity of these other areas," Dominic Wilson, director of global macro and markets research for Goldman Sachs, said in a note this week.

"The latest focus on the banks might inadvertently restrict credit or tighten financial conditions in ways that do alter the macro path. But we think it makes sense to stay more focused on the economic news rather than shifting views too much on the basis of handicapping the twists and turns of possible legislation and the inevitable news from Washington."

As for the nuts and bolts of the data, analysts had mixed views.

In the U.S., economists at Capital Economics argued the big estimated headline gain was largely due to inventory rebuilding – hence, there's some skepticism that will kickstart a self-sustaining recovery.

But Dawn Desjardins, assistant chief economist at Royal Bank of Canada, said the U.S. data suggest "the consumer, after being in hiding the previous-six quarters, re-emerged in the second-half of 2009. ... This was a reflection of rising confidence that the recession was ending, the effect of government programs and a very low interest rate environment. Going forward, we expect that consumer spending will remain positive but that increases will be moderate as the hangover from the buying binge in previous years constrains activity."

It is not just the consumer. Business investment also surprised on the strong side, with growth of 2.9% after a 5.9% drop in the previous quarter. Investment in equipment and software jumped 13.3%, well above the 1.5% expansion in the third quarter. Net exports also added to U.S. GDP, in a sign that the country is beginning capitalize on its weaker currency and stellar productivity when it comes to trade.

In Canada, the surprisingly strong November data – and upward revisions to September and October – have economists indicating that the recovery is for real, with some now penciling in growth of at least 4% for the fourth quarter, or above the Bank of Canada's own projections. And remember, the central bank's forecast is at the upper end of market projections.

"This is one of the most convincing signs so far that the Canadian recovery is for real, and neatly dovetails with the robust U.S. GDP result," said Douglas Porter, deputy chief economist at BMO Capital Markets.