The Bank of Canada under the new governor, Tiff Macklem, wants to be “unusually clear” that interest rates will remain low for a very long time. To do that, they are using “forward guidance”–indicating that they will not raise rates until capacity is absorbed and inflation hits its 2% target on a sustainable basis, which they estimate will take at least two years. As well, they indicate that the risks to their “central” outlook are to the downside, which would extend the period over which interest rates will remain extremely low. The Bank also made it clear that they are not considering negative interest rates. The benchmark interest rate remains at 0.25%, which is deemed to be its the lower bound.

The Bank is also continuing its quantitative easing (QE) program, with large-scale asset purchases of at least $5 billion per week of Government of Canada bonds. The provincial and corporate bond purchase programs will continue as announced. The Bank stands ready to adjust its programs if market conditions warrant.

With the benchmark rate at its effective lower bound, the Bank’s quantitative easing is the way it is lowering mid- to longer-term interest rates, reducing the borrowing costs for Canadian households and businesses. The Bank assumes that the virus will be with us for the entire forecast range, which is two years.

The Bank released its new economic forecast in today’s July Monetary Policy Report (MPR). The MPR presents a central scenario for global and Canadian growth rather than the usual economic projections. The central scenario is based on assumptions outlined in the MPR, including that there is no widespread second wave of the virus in Canada or globally.

The Canadian economy is starting to recover as it re-opens from the shutdowns needed to limit the virus spread. With economic activity in the second quarter estimated to have been 15 percent below its level at the end of 2019, this is the most profound decline in economic activity since the Great Depression, but considerably less severe than the worst scenarios presented in the April MPR. Decisive and necessary fiscal and monetary policy actions have supported incomes and kept credit flowing, cushioning the fall and laying the foundation for recovery.

Mincing no words, the MPR acknowledged that the COVID-19 pandemic has caused a “worldwide health-care emergency as well as an economic calamity.” The course of the pandemic is inherently unknowable, and its evolution over time and across regions remains highly uncertain.

In Canada, the number of new COVID-19 cases has fallen sharply from its April high, and the economic recovery has begun in all provinces and territories and across many sectors. Consequently, economic activity is picking up notably as measures to contain the virus are relaxed. The Bank of Canada expects a sharp rebound in economic activity in the reopening phase of the recovery, followed by a more prolonged recuperation phase, which will be uneven across regions and sectors (Figure 1 below). As a result, Canada’s economic output will likely take some time to return to its pre-COVID-19 level. Many workers and businesses can expect to face an extended period of difficulty.

There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output. In the central scenario, roughly 40 percent of the collapse in the first half of the year is made up in the third quarter. Subsequently, the Bank expects the economy’s recuperation to slow as the pandemic continues to affect confidence and consumer behaviour and as the economy works through structural challenges. As a result, in the central scenario, real GDP declines by 7.8 percent in 2020 and resumes with growth of 5.1 percent in 2021 and 3.7 percent in 2022. The Bank expects economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures.

Bottom Line

Governor Macklem said in the press conference that what he wants Canadians to take away from today’s Bank of Canada’s actions is “Canadian interest rates are very low and will remain very low for a very long period”. The reopening of the Canadian economy is well underway. Economic activity hit bottom in April and began expanding in May and accelerated in June. About 1.25 million of the 3.0 million jobs that were lost in March-April, were added in May and June.

Some activities, including motor vehicle sales, have already seen a strong pickup since April. Likewise, housing activity fell sharply during the lockdown but is beginning to recover quickly. In contrast, some of the hardest-hit businesses, such as restaurants, travel and personal care services, have only just started to see improvements in recent weeks and are expected to continue to face significant challenges.

The chart below, from July’s MPR, shows that household spending patterns have shifted since the onset of the pandemic. Some of these shifts might last. In the central scenario, the effects of the downturn and lower immigration hold down housing activity over the next few years. After a near-term boost from pent-up demand, residential investment slowly increases as income and confidence recover.

There was more good news today on the housing front. Home sales rebounded by a further 63% in June, returning them to normal levels for the month–150% above where they were in April when the pandemic-induced lockdown paralyzed the economy (see chart below). Data released this morning from the Canadian Real Estate Association (CREA) showed that for Canada’s largest housing markets, activity was strong. Sales rose 83.8% (month-over-month) in the Greater Toronto Area (GTA), 75.1% in Montreal, 60.3% in Greater Vancouver, 99.7% in the Fraser Valley, 54.9% in Calgary, 59% in Edmonton, 22.5% in Winnipeg, 34.8% in Hamilton-Burlington, 67.9% in London and St. Thomas, 55.6% in Ottawa and 43.6% in Quebec City. These m-o-m gains reflect the pent-up demand from what would have been a stellar spring housing season.

On a year-over-year basis, national home sales were up 15.2% in June.

Anecdotal evidence suggests that home sales continued to be robust in the first weeks of July. Daily tracking thus far this month indicates that activity has strengthened further in July.  According to Costa Poulopoulos, Chair of CREA, “realtors across Canada are increasingly seeing business pick back up”.

New Listings

The number of newly listed homes shot up by another 49.5% in June compared to the prior month with gains recorded across the country.

The national sales-to-new listings ratio tightened to 63.7% in June compared to 58.5% posted in May. There were only 3.6 months of inventory on a national basis at the end of June 2020 – a 16-year low for this measure.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) climbed 0.5% in June 2020 compared to May (see Table below). Of the 20 markets currently tracked by the index, 17 posted m-o-m gains.

Generally speaking, prices are re-accelerating east of Manitoba, except Toronto for now. B.C. prices are also picking up except for Vancouver. Home prices are declining in Calgary, while elsewhere on the Prairies, prices are either flat or rising.

As usual, the price movements announced by the local real estate associations (for example, TREB in Toronto) were misleading because they are greatly affected by the types and sizes of housing sold during any month. The MLS® HPI provides a more accurate way to gauge price trends because it corrects for the changes in the mix of sales activity from one month to the next.

The actual (not seasonally adjusted) national average price for homes sold in June 2020 was almost $539,000, up 6.5% from the same month the previous year.

The national average price is heavily influenced by sales in the Greater Vancouver and the GTA, two of Canada’s most active and expensive housing markets. Excluding these two markets from calculations cuts more than $107,000 from the national average price. In the months ahead, the extent to which sales fluctuate in these two markets relative to others could have significant compositional effects on the national average price, both up and down.

Bottom Line

CMHC has recently forecast that national average sales prices will fall 9%-to-18% in 2020 and not return to yearend-2019 levels until as late as 2022. I continue to believe that this forecast is overly pessimistic. Here we are in the second half of 2020, and the national average sales price has risen 6.5% year-over-year.

The good news is that the housing market is contributing to the recovery in economic activity. While the course of the virus is uncertain, Canada’s government has handled the COVID-19 situation very well from both a public health and a fiscal and monetary perspective. You only need to look at the debacle south of the border to see how well we have done. The future course of the economy here will depend on the virus. While no one knows what that will be, suffice it to say that Canada’s economy is en route to a full recovery, but it may well be a long and bumpy one.

The Bank of Canada had its first meeting today with Tiff Macklem at the helm. The Bank of Canada said full recovery from the virus would take two years (more on that in the next email).