Not any more

Paul Krugman: ‘Canadians borrow an awful lot’

In Canada on August 16, 2010 at 18:53

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Krugman warns Canada
Noted economist Paul Krugman praises Canada’s economy and the soundness of its financial system, but warns the country isn’t immune and shouldn’t be complacent. The Nobel laureate said Canadians cannot be complacent in the face of disturbingly bleak global conditions, because they spend too much relative to their household incomes and the country’s housing sector has yet to burst. Canadian housing prices did not take off in the mid-2000s the way they did in the United States and Europe, Mr. Krugman said, but neither did they come down sharply during the recession, as they did elsewhere in the Western world. These issues aren’t scary but they are “disturbing,” he told the Canadian Bar Association yesterday.

“Canada is by no means insulated,” he said. “Canadians borrow an awful lot. Savings rates have been very low. Household debt relative to income is very high here.”

Canadian residential average price change

House prices forecast to sink further
Canada’s housing market is sinking, as expected, having surged in the first half of the year as real estate staged a spectacular post-recession comeback. Sales of existing homes fell 30 per cent in July from a year earlier, driven by slowdowns in Ontario and B.C., though the average resale price was still 1 per cent higher, the Canadian Real Estate Association said today. Month over month, the average price dipped 3.5 per cent.

“While the softening in sales is very real, we continue to view it as a giveback (a big giveback, admittedly) to the surge in sales in the first half of the year,” said BMO Nesbitt Burns deputy chief economist Douglas Porter. “Anyone who wanted to buy a home this year seems to have done so already.”

Mr. Porter said that while the downturn has been deeper than most expected, “I think the main message is that anybody who wanted to buy this year bought in the first half of the year.” That was due to warnings that interest rates would rise and the coming of the harmonized sales tax in B.C. and Ontario. With rates still low, and the labour market still sturdy, he does not expect a marked decline going forward.

Canadian average house price

Economist Grant Bishop of Toronto-Dominion Bank, stressing that Canada’s dip isn’t a U.S.-style crash, said he expects prices to sink more through next year and then stagnate for several years, moving in line with inflation. Since the peak in February, Mr. Bishop said, the average price in Canada has declined by 5 per cent, and he expects a further 5-per-cent dip by mid-2011. There will probably be a modest rebound in 2012, though not more than around the 3-per-cent range, he added, followed by inflation-level increases for years. Household debt and debt-servicing levels in Canada, Mr. Bishop said, point to slower sales and prices because of what Canadian buyers can handle.

“The excessive pricing of Canadian housing in relation to fundamentals is now clearly correcting, and we expect a moderate contraction in prices over the coming year,” he said. “Affordability was steadily eroded during the house price surge of late 2009 and early 2010, with carrying costs on a standard mortgage on an average priced home rising relative to average household incomes. The current level of household debt flags the need for households to slow their borrowing, and, coupled with tightened standards for mortgage insurance, this has necessarily slowed homebuying. With housing 10-15 per cent overpriced, we expect a downward correction of nearly 10 per cent in the monthly average prices, followed by several years of stagnation of price growth at the rate of inflation, in order to bring Canadian house prices back to balance.”

Share of world GDP

China, India on the rise
Faltering growth in Japan in the second quarter – GDP rose just 0.1 per cent or 0.4 per cent annualized – means China is now the world’s second-largest economy behind the U.S. That’s not surprising but it does symbolize the stunning emergence of China as one of the world’s economic superpowers. China’s economy is now $1.33-trillion (U.S.), marginally ahead of Japan’s $1.28-trillion.

China is part of the so-called BRIC group of emerging economies that also includes Brazil, Russia and India. And as China takes its place in a new world economic order, so does India. In a report titled India and China: New Tigers of Asia, Part III, Morgan Stanley economists projected today that India could surpass China as the fastest growing major economy in the world by 2015, Bloomberg News said.

China’s ascendancy, however, is being measured strictly by the size of its economy, but it still has a ways to go in terms of living standards, Scotia Capital noted today.

“In purchasing power parity terms, China long ago became the world’s third-largest economy behind the EU and U.S., so kudos to the country for remaining on course with reforms that have catapulted its economy in recent decades,” said economists Derek Holt and Gorica Djeric. “But the distance from the U.S. and EU in PPP terms remains massive, as China is about 40 per cent smaller. On a GDP per capita basis at PPP rates of currency exchange, however, China has a long, long way to go to catch up to living standards in the west. By this measure, it stands at about one-seventh of U.S. incomes, and about one-thirteenth of Qatar, the richest country. China’s advantage is its massive population of over 1.3 billion people, but to be classified as a rich nation, China clearly has a long way to go in raising average incomes across a broader cross-section of its economy.”

Consumer price index

Markets await inflation data
Investors won’t have much in the way of economic data to sink their teeth into this week. Tomorrow brings a reading of housing starts in the U.S. for July, and Canadian manufacturing sales for June. Notable, though, will be Friday’s report from Statistics Canada on consumer prices, which is expected to show a spike in the country’s inflation rate, driven by the introduction of the harmonized sales tax in Ontario and B.C., and an increase in the existing HST in Nova Scotia.

Economists believe the annual inflation rate spiked to 2 per cent, or possibly 2.1 per cent, July, double the June rate of 1 per cent. The impact of the HST on the rate of inflation will last for a year until the increase drops out.

That shouldn’t trouble the Bank of Canada, whose favoured measure of the rise in consumer prices factors out volatile items and indirect taxes. The so-called core rate is projected to tick up to 1.8 per cent or 1.9 per cent from 1.7 per cent in June, still shy of the 2-per-cent mark that guides the central bank, but moving closer.

It also shouldn’t have any major impact on labour contracts that still include cost-of-living allowances, said economist Erin Weir of the United Steelworkers. Many union-company pacts have not included such provisions in newly-organized workplaces, and many contracts, though not all, likely have higher threshholds, he said. Provisions also differ among various contracts in terms of how they calculate allowances.

Month-over-month, economists expect consumer prices rose 0.6 per cent to 0.8 per cent in July. “More expensive gasoline also added to upward price pressures nationally while food prices, which have been tame in recent months, may finally show some heat as imported fresh produce responds to a weaker Canadian dollar,” said CIBC World Markets economist Krishen Rangasamy.

Hulu plans to go public
Hulu, the online TV and movies hub owned by News Corp., Walt Disney Co., NBC Universal and providence Equity Partners, plans an initial public offering that could value the joint venture at more than $2-billion (U.S.), The New York Times reports. Hulu, formed three years ago and meant to rival YouTube and others, has been successful in streaming popular television shows such as Modern Family and Glee, and an IPO would mark “one of the most prominent media offerings” this year, the newspaper said. Hulu also plans a subscription service at $9.99 a month, it said.

Agrium bids down under
Agrium Inc. AGU-T is borrowing a line from singer-songwriter Stephen Stills: If you can’t be with the one you love, love the one you’re with. Or hope to be. Spurned repeatedly in his attempts to acquire CF Industries Holdings Inc., chief executive officer Mike Wilson is now courting Australia’s biggest wheat producer, AWB Ltd. Agrium is bidding $1.1-billion (U.S.) in cash but has a rival suitor, GrainCorp Ltd. Agrium’s bid, topping GrainCorp’s by a wide margin, sent AWB shares surging today. “Agrium is in discussions with AWB with the intention of agreeing to a proposal that the AWB Board would recommend to its shareholders,” the company said in a statement.

Over the past several years, Agrium has done nine deals worth almost $3.4-billion. “According to [Agrium], the transaction would continue to grow its retail business as [Agrium] sees significant potential to enhance the product and service mix to the Australian and New Zealand markets,” said Desjardins analyst John Restone. “… [Agrium] has been very successful with its growth-through-acquisitions strategy – an example is the United Agri Products (UAP) acquisition. [Agrium] has successfully completed $3.4-billion in acquisitions during the last six years.”

From today’s Report on Business

And, read our Streetwise blog and Your Business section

This article has been corrected from an earlier version


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