Six economic signs to watch for in the second half of 2015
U.S., Canada see different paths through end of year as all eyes on rates, job markets, inflation
At the halfway point of the year, the economic fortunes of Canada and the U.S. are a tale of two diverging countries.
South of the border, things are looking up. Unemployment is down, wages are rising, homebuilding is increasing, the economy has shaken off the severe winter that made it a cold start to the year. and interest rates are likely on the rise.
“I can’t give an ironclad promise, but if economic conditions unfold in the way that most of my colleagues and I anticipate, we see it as appropriate to raise rates,” Federal Reserve Chair Janet Yellen said following a recent monthly interest-rate meeting.
Here at home, things aren’t so rosy. The economy is muddling along, though it’s perhaps doing better than some thought it would back in January. Oil prices seem to have stabilized, but the impact of crude’s drop is still rippling through Western Canada, leading to job losses and sagging home prices in Alberta. Commodity prices are weak.
The slow start to the year is hurting trade with the U.S., our largest partner. Toronto and Vancouver are the only two housing markets still showing strong growth.
Job gains have been erratic and the 80-cent dollar’s effect on exports hasn’t yet been felt.
The story is told another way in the return on investments over the past 12 months. Year-over-year, through midJune, Toronto share prices have turned in the worst performance among major global stock exchanges. The TSX/S&P, the broadest measure of market activity, is down 3 per cent.
Looking to the rest of Canada’s year, CIBC chief economist Avery Shenfeld recently called it “half-steam ahead.”
Here’s what economists see: Mortgage rates: Five-year terms may start edging up in the fall. Banks match interest rates on longer-term mortgages with borrowing on the bond markets. This is a global marketplace, so if U.S. rates rise, that pushes up bond yields, and also longer-term mortgages. Other interest rates: The should be no increase in the Canadian central bank rate, which affects the prime rate (now 2.85 per cent), which in turn affects rates on lines of credit, car loans and shortterm mortgages.
The bet is that the U.S. faces two quarter-point bumps by year end, putting its prime at 3.75 per cent. But that’s only a guess. Meanwhile, CIBC sees the potential of a further rate cut in Canada if the Federal Reserve holds off on rate increases and our dollar appreciates too much. The dollar: The loonie should be weaker by year’s end. The greenback is gaining ground as the U.S. economy speeds up. That means our dollar will likely fall relative to the U.S. currency if we don’t match U.S. rate increases, which we have no plans to do. The consensus is a loonie sitting somewhere between 77 and 80 cents U.S. by the fall. That’s good news for exporters, bad news for tourists. Inflation: This is one to watch. May’s inflation reading showed the core rate was up nationally 2.2 per cent year-overyear, though it was up less than 1 per cent in Ontario. The 2.2-per-cent rate is above the Bank of Canada’s 2-per-cent target, where the bank would normally start raising rates.
“These numbers put the Bank of Canada between a rock and a hard place,” Scotiabank Economics said in a briefing note. “Growth is underperforming, but inflation remains decent. Not an enviable spot.”
In the U.S., the six-month trend is also edging higher. Its 2.1-per-cent core rate matches a three-year high. Job growth: This should pick up in both countries. Canadian job growth in May beat expectations, with a jobless rate of 6.8 per cent that is expected to fall slightly by year end. In the U.S., May numbers were strong, prompting Yellen to say if the trend continues, rising interest rates are coming. Overall growth: This was slow to nonexistent in the first half, but is getting better. Canadian GDP for the year rose between 1.4 and 2 per cent, lagging the U.S. rate of 2.6 per cent.
Putting all the above together, Canada’s hopes rest on an accelerated recovery in the U.S., with a lower dollar making our exports even more attractive. As always, forecasts are only a best guess, so expect the unexpected as the second half of the year unfolds. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Reach him at amayers@thestar.ca.