Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News
Editor's Note: Dave's Monday Morning Interest Rate Update appears on
Move Smartly weekly. Check back weekly for analysis that is always
ahead of the pack.
Statistics Canada released its latest round of GDP data last Friday and it
provided further confirmation that our economy is hovering at just above stall
The report showed that our GDP actually declined by 0.2% in December,
bringing our fourth quarter GDP growth to a paltry 0.6% on an annualized basis.
While our economy registered total GDP growth of 1.8% over the full year, our
momentum slowed markedly in the second half.
As we piece together each new data point in our evolving economic picture,
signs of deceleration are everywhere. Our latest GDP, employment and inflation
reports merely confirm, at a macro level, the slowdown that we see in housing
starts, factory shipments, exports, retail sales and so on.
None of this should really come as a surprise. Every major economy in the
world has faced its own growth challenges since the start of the Great
Recession. While we weathered the initial storm better than most, our small,
open economy could not reasonably be expected to operate above trend
We initially used ultra-low interest rates to boost consumer spending and
this provided an effective buffer against falling export demand. But this
solution also led to sharply increasing household debt levels and real estate
prices, and was never intended to be a permanent fix.
As the Great Recession dragged on, the Bank of Canada (BoC) and the federal
government grew increasingly concerned about the risk of credit and housing
bubbles (rightly so in my opinion). In response, Federal Finance Minister Jim
Flaherty repeatedly took steps to slow household borrowing. The recent data show
that these steps are finally working – household debt levels are rising at their
slowest rate in more than a decade. But this development begs an important new
question: If consumer spending isn’t going to drive our economic growth in 2013,
Taking inspiration from a recent report by Bank of Montreal economist
Benjamin Reitzes, let’s take a look at the components that make up our GDP and
give a best-estimate forecast for each one over the next twelve months.
First, here is the basic formula for how GDP is calculated:
GDP = Consumer Spending + Investment + Government Spending + (Exports Minus
Consumer Spending: Consumer spending has been our primary economic
driver, making up about 55% of our overall GDP. As mentioned above, too much of
the rise in consumer spending since the start of the Great Recession has been
fueled by our rising (and now record) household debt levels. The goods news
today is that household borrowing rates have started to slow sharply. The bad
news is that this is negatively impacting consumer spending. Going forward,
other areas of our economy will have to pick up the slack if we are going to
sustain any GDP growth in 2013.
Investment: This GDP category measures a combination of spending on
residential construction and business investment, the latter of which can be
thought of as ‘productive investment’ because it measures the amount of money
that is used to increase future capacity and/or improve productivity.
Residential construction has finally begun to slow, as expected, and this means
that yet another long-standing driver of our economic growth is on the wane.
Conversely, overall business investment increased by 7.2% in 2012 and is
expected to increase again in 2013 (by about 2% this time). Businesses are awash
in cash and enjoy ready access to cheap credit, but many are keeping their
powder dry in the face of so much economic uncertainty, particularly in the U.S.
While that conservative approach is understandable, our economy needs robust
business investment to offset slowing economic momentum in so many other
Government Spending: Government spending accounts for about 25% of our
overall GDP and it too has been a source of support for our economy since the
start of the Great Recession. But with the federal government and nine out of
ten provinces running deficits (some of them at worrying levels), a significant
increase in federal or provincial government spending in 2013 isn’t in the cards
(or at least shouldn’t be).
Exports Minus Imports: Our exports to the U.S. are still well below
pre-recession levels, hampered by both reduced U.S. consumer demand and our
lofty Loonie. The U.S. economic recovery will need to gain a stronger footing
before we will see any material change in our export demand (there is still much
debate about the likelihood of that outcome anytime soon). And our high dollar
lowers the cost of our imports at the same time as it is raising the cost of our
exports, so current trends in this GDP category should continue for the
foreseeable future if our exchange rates remain relatively stable.
Five-year Government of Canada (GoC) bond yields were ten basis points lower
for the week, closing at 1.30% on Friday. This drop should trigger increased
mortgage-rate competition among lenders who typically allow their margins to
compress as the spring market approaches. Five-year fixed-rate mortgages are
available at sub-3% rates and ten-year fixed-rate mortgages are now widely
available in the 3.65% range (a record low). Both are offered by lenders with
Variable-rate mortgages are available in the prime minus 0.40% to 0.45%
range, depending on a number of factors such as down-payment amount, property
type and credit history.
The Bottom Line: I think we’re going to remain stuck in the economic
mud for some time yet, looking more like the economies around us as today’s
low-growth environment drags on. Against this backdrop there should be little
upward pressure on our mortgage rates for some time to come, making ultra-low
borrowing costs a silver lining in what will otherwise be our cloudy economic
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