DundeeWealth Economic Forecast

The march edition of the Economic Monitor by DundeeWealth has been released. Interesting read as it tries to forecast both short and long term economic implications of the situations in Libya and Japan. Below are excerpts from the report as it relates to Real Estate.

The BANK OF CANADA is expected to remain on hold over the summer, raising rates again in September, December and March 2012 – by 25 basis points each time. While economic growth is expected to accelerate (a spillover from accelerating US growth), domestic growth is likely to be only modest, with high consumer indebtedness and the recent tightening of mortgage regulations curbing domestic demand somewhat. Domestic credit growth has been flat (apart from home mortgages) and inflation has been lower than expected, notwithstanding fairly strong wage growth. Core inflation fell to just 0.9% in February, well below the Bank’s 2.0% target. The core rate is not expected to exceed 1.5% until near year-end. The Bank is likely to be wary of increasing interest rates before the Fed does as it could cause a further rise in the Canadian dollar, which would further dampen domestic growth prospects.

The FED Funds target rate is likely to remain in the 0% to 0.25% range for the remainder of this year, though the Fed may encourage a rise to the top of that range toward September whilst it contemplates the prospects for growth and employment, and inflation into 2012. At this point we have the Fed raising rates by 25 points in January and again

in April 2012. The Fed is expected to end its current round of quantitative easing as scheduled in June, even though the pace of economic growth is improving and is set to benefit further as a result of the 2011 payroll tax holiday and a new measure to allow much faster depreciation this year. Despite the improving growth picture, unemployment remains high and core inflation very low, although rising energy and food prices have already pushed headline CPI up to 2.1%.

The CANADIAN DOLLAR is expected to trend relatively flat, somewhat above parity, during the next six months or so, then move higher. While the Fed’s quantitative easing program could help boost commodity prices and the loonie further in the near term, a modest slowdown in emerging market economic growth is likely to serve as a counterweight. Mid-east unrest is a wild card. Extended political troubles in Libya and elsewhere could add to upward pressure on oil prices and also the loonie, whereas an early resolution could see oil prices and the Canadian dollar both fall. In any event, periodic commodity price corrections are expected in the first half of the forecast.

The complete report can be found here

Calgary Economic Outlook

Provided below are economic outlooks provided by both Calgary Economic Development and the City of Calgary. I encourage everyone to follow the link and read the full report. I have highlighted specific parts that pertain to this blog.

Calgary Economic Development

Highlights

"Calgary will experience a Charlie Brown economy in 2010; an economy that
experiences variable performance with ups and downs, similar to the pattern on his shirt. This is a result of Calgary’s economy being dependent upon the state of the U.S. economy and energy markets."

"Calgary, despite best efforts, is still essentially an oil and gas economy, reliant upon the state of energy markets. So, ultimately, as energy prices rise and fall, so does the economic activity in Calgary. We try hard to find new economic activities to strengthen, such as technology or creative industries. We work to put strategic infrastructure in place to make Calgary a more attractive place to work and live, such as airport enhancements and public transit. We are the volunteer capital of Canada. However, we can’t escape a global recession. When oil and gas prices fall and capital dries up, the economy is affected as companies cut spending and jobs. All across the value chain the impacts are felt. Cuts to oil sands capital expenditure result in the loss of work and jobs for engineers, lawyers, accountants, financiers, manufacturers, and transporters. When wages are lost or cut, housing markets are affected and retail spending is curtailed."

"There is great risk in believing that this economic recession is done and gone, for that may create complacency. We risk going back to our former ways. Some people have been more greatly impacted than others - mostly those that have lost jobs - but, in Calgary, for 93 per cent of the labour force, very little has changed in the grand scheme of things. Humans learn from mistakes by adapting behaviour. If we assume all is well there is a risk that we will not have learned our lesson well enough. It is interesting to reflect that we will never claim that we are in recession until there is irrefutable proof of at least two consistent quarters of negative performance. Yet, before we are actually even out of recession we proclaim we are out of recession. Human nature. Cautious on the negative; optimistic on the positive. Again, this approach sets us up for greater challenges ahead, if we don’t truly reflect on the impacts, and adapt behaviour accordingly. More meaningful and sustained recovery is ingrained in a greater and more robust scorecard than currently being watched by the majority of the developed world. We celebrate with one day’s worth of positive data, only to sink the following day on negative performance of some other data."

"Recovery is going to happen. When exactly, no one knows. Balance sheet recessions, like the one we are in, have proven historically to be longer and slower to recover. It might take another 6, 12 or 18 months before we can truly say that the worst might be behind us. And when it does, it likely will be a slow, steady recovery that will look incredibly modest. In the long-term however, more modest growth rates might become the new norm, and ultimately be what we need to keep us honest."



City of Calgary

Highlights

"The Calgary market is struggling with opposing forces. Investors and builders wish to see continued and sustained price increases. First-time buyers in 2010 are facing increased prices that are testing their ability to pay while new federal legislation has more stringent mortgage qualifying requirements. The downturn in energy prices has also put a pause on the residential market while anticipated interest rate hikes are resulting in a short term increase in demand as buyers seek to get in while they still can."

"After dropping 14 per cent from peak prices in July 2007, average prices in Calgary rose throughout 2009 by 5.4 per cent, which is almost double the average price appreciation experienced in the 1990’s. Th e wildcard for the future is interest rates. If they go up too high too quickly they will dampen sales activity, but our expectations are for the prime interest rate to be stepped up in small increments, with a muted impact on posted mortgage rates over the next year. The outlook for housing prices in Calgary is a short run-up in anticipation of increased interest rates, then a market pause after June and a normal annual cyclical pattern returning to the market with September being the hot month of the year for sales. Continued weakness in job creation may pose a downside risk to the forecast."

Economic forecast & rate increase July 2010

Calgary Mortgage Rates


Effective: July 20, 2010
Term Market Rate** Best Rate***
Adjustable Prime Prime - 0.60%
6 month 4.85% 3.95%
1 year 4.05% 2.54%
2 year 4.55% 3.20%
3 year 5.21% 3.60%
4 year 5.74% 4.09%
5 year 6.25% 3.99% Quick Close
4.19% Pre-approval
7 year 6.59% 5.00%
10 year 6.90% 5.20%
Prime 2.50%

Rate Increase from Bank of Canada!


Bank of Canada Increases Overnight Rate Target to 3/4 Per Cent

OTTAWA, July 20

The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the bank Prime rate is now 2.7 per cent.

Economic activity in Canada is unfolding largely as expected, led by government and consumer spending. Housing activity is declining markedly from high levels, consistent with the Bank's view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010. While employment growth has resumed, business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession.

The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April.

Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

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 next scheduled date for announcing the overnight rate target is Sept. 8