New construction still strong but down from September’s ‘unbelievable’ gain
Eric Beauchesne
Sun
Wondering what the economy or government can do for an encore in the coming week, following the past week’s surprise announcement of $60 billion in tax relief, the news of a fall in the unemployment rate to a 33-year low, and the surge in the currency to a modern-day high?
How about a reality check, for a start.
“We’re expecting to see Canadian housing starts come back down to earth,” said TD Bank economist Jacqui Douglas, forecasting that the report from Canada Mortgage and Housing Corp. Thursday will show the annual pace of construction starts last month fell to a still-respectable 220,000 but well down from from the unsustainable 281,000 a month earlier.
“The gain in September was simply unsustainable, if not unbelievable,” Douglas said, echoing the skepticism with which a lot of analysts also greeted last week’s report of a 63,000 surge in employment and ensuing drop in the jobless rate to a modern-day low of just 5.8 per cent.
Nonetheless, BMO Capital Markets economist Douglas Porter noted that “against all expectations, it now looks possible” that housing starts this year will be higher than last year, which in turn were higher than the year before. It’s all in stark contrast to the expected 25-per-cent plunge in home-building in the U.S. this year, which follows a 13-per-cent drop the year before.
And other analysts, such as those at CIBC World Markets, also anticipate a further increase in building construction plans when Statistics Canada releases its building permits report Tuesday, suggesting that builders may need a reality check.
More in line with what one would expect in an economy with a currency now trading at $1.07 US level, exports and the merchandise trade surplus have been shrinking.
And analysts are expecting more of the same on Friday when Statistics Canada reports the latest trade figures for September.
What’s more surprising, again in light of the strong dollar which makes imports less costly and more competitive, is that some analysts, like Douglas, expect the report will show imports shrunk as well, albeit by less than exports.
“We expect to see the trade balance drop to $3.7 billion in September, from $4.1 billion in August,” Douglas said. “We expect to see declines in both exports and imports, largely due to the recent slowdown in manufacturing activity on both sides of the border.”
TD projects exports fell two per cent and imports by one per cent.
While BMO’s Porter also expects the trade surplus fell to just below $4 billion, he noted that’s “still a healthy sum” adding that’s in line with a $15-billion-a-year surplus in Canada’s overall dealings with the rest of the world, which includes goods and services trade and investment and currency flow.
And again, Canada’s trade performance, despite five years of a rising dollar against a depreciating greenback, remains healthy and in direct contrast to the U.S., where, as Johnny Cash might have lamented, they “ain’t seen” a surplus “since I don’t know when.”
Just how bad that trade deficit has become will be revealed Friday as well.
But Porter is putting the shortfall, which includes both goods and services, at $58 billion, up a notch from $57 billion in August which as staggering as it sounds was a seven-month low.
Greasing the projected slip back deeper into deficit was the sharp rise in oil prices during the month, which more than offset gains coming from the continuing increase in exports coming from the slide in the greenback against a number of currencies, he said.
CIBC World Markets is somewhat more pessimistic about the U.S. trade deficit projecting it will be nearly $60 billion, which it said could be a “slight negative” for the U.S. dollar .
So would be weaker-than-expected reports during the week on U.S. manufacturing activity or on consumer sentiment.
And that would translate into further upward pressure on the already stratospheric loonie.
Meanwhile, U.S. Federal Reserve Board chairman Ben Bernanke will give his take on the U.S. economy in a speech Tuesday and again during what might be more revealing testimony to Congress on Thursday.
Bank of Canada senior deputy governor Paul Jenkins will be in the U.S. this coming week giving a speech to Wall Street market players on Tuesday, at which he’s likely to suggest, as governor David Dodge already has, that the loonier is not worth as much as it’s trading for.
Back in Canada, Finance Minister Jim Flaherty will start the week by continuing to promote his mini-budget in a speech in Toronto, while at the same time continuing to warn taxpayers not to expect any more tax relief, suggesting that either he wants to surprise them again in a spring budget, or that he’s beginning to worry that he really has emptied the cupboard this time.
And on Bay Street, companies here will continue to roll out their third-quarter earnings, which will be scrutinized for evidence of dollar-damage.
© The Vancouver Sun 2007
