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For the past several months there has been a disconnect in the Canadian economic data.
While most measures (GDP growth, income growth, inflation) have shown our economic momentum to be slowing for some time, we have still managed to generate a surprisingly robust average of 27,000 new jobs each month over the most recent six months. But sooner or later the data had to converge and when Statistics Canada released its latest employment report on Friday of last week, they did just that.
Here is a summary of the important details in the January report:
- The Canadian economy lost 21,900 jobs for the month and 18,800 of those jobs were full-time positions.
- The manufacturing sector lost 21,600 jobs in January and that marked the second monthly decline over the last three months. Manufacturing jobs are important because they produce a powerful multiplier effect that spreads throughout the broader economy. (This was highlighted in a report by the Department of Finance last year which estimated, for example, that each manufacturing job in the automotive industry produces 3.6 other jobs, 2.4 of which are in non-manufacturing sectors.)
Last Friday we also received new data that showed a sharp drop in housing starts in December , most specifically for condominiums in the Toronto area. On the one hand, construction spending has served as a key source of economic growth for some time, so a significant slowdown in this sector will take some wind out of our economic sails. But on the other hand, the federal government has been bound and determined to slow multi-residential development in Toronto and Vancouver. If the latest rule changes achieve that desired effect, another round of mortgage rule changes (which would have otherwise been inevitable) becomes less likely.
Five-year Government of Canada (GoC) bond yields were nine basis points lower for the week, closing at 1.44% on Friday. Five-year fixed-mortgage rates were largely unchanged for the week and can still be found in the sub-3% range. While last week’s drop in GoC bond yields should reduce the risk of an imminent hike in fixed-mortgage rates, borrowers are still well advised to lock in a pre-approval nonetheless to eliminate the risk of any unexpected short term rises.
Five-year variable-rate mortgages are still offered in the prime minus 0.40% range for qualified borrowers (which works out to 2.60% using today’s prime rate). While the spread between five-year fixed and variable rates is narrow using historical comparisons, variable rates are still cheaper and data like the latest employment numbers bolster my view that they will remain so for the foreseeable future.
The bottom line: When the Bank of Canada finally softened its interest-rate language in its last policy statement, I saw that as a sign that subsequent pieces of key economic data, like employment, would show more signs of our economy downshifting. Violà.
The good news is that interest rates do not look to be going anywhere for a while yet; the bad news is that, at least in the short term, our economy doesn't look to be going anywhere either.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave