DLC UPDATE: Canadian Jobs Market Tanked in December

General Mark Goode 11 Jan

Canadian Jobs Market Tanked in December

Canadian employment fell 62,600 last month, a bit weaker than expected, following seven months of recovery (see chart below). The rapid rise in COVID cases and the ensuing lockdown measures in many key regions caused the net loss in jobs in the mid-December survey.  Especially hard hit were workers at restaurants and hotels who suffered a hefty 56,700 employment loss.

The jobless rate rose a tick to 8.6%–well below the peak of 13.7% in April–but still three percentage points above its pre-pandemic level.

However, there were some bright spots as several sectors churned out small gains (see second chart below).  Among them were finance, insurance and real estate, as well as scientific and tech services. Manufacturing rose 15,400, and public administration reported solid gains.

On a positive note, full-time jobs actually rose 36,500, and average wages pushed back up and are now 5.6% higher than one year ago. This outsized gain, in part, reflects the loss in so many low-wage jobs.

Part-time jobs were down sharply in December, led by losses among workers aged 24 and under and those aged 55 and older. Also, the number of self-employed workers fell by 62,000, its lowest point since the pandemic began.

The December loss of jobs left employment down 571,600 (or -3.0%) from year-ago levels, the deepest annual decline since 1982–but far better than the April reading of -15% y/y. The 2020 job loss in Canada of -3.0% is also a relatively mild downturn compared to today’s US job market release for December, which reported a -6.2% y/y drop in employment. In Canada, the 332,300 y/y loss in accommodation and food services employment alone accounted for 58% of our annual job loss.

Employment was down in nine out of ten provinces last month. The lucky exception was British Columbia. None of the provinces stood out on the low side. The table below shows the unemployment rate by province. Jobless rates rise and fall with labour force participation rates. You are not considered unemployed if you are not seeking work. The number of people counted as either employed or unemployed dropped by 42,000 (-0.2%) in December, the first significant decline since April. Core-aged women and young males were largely responsible for the fall.

Bottom Line 

It certainly doesn’t appear that the lockdowns will be lifted anytime soon. We keep hitting new records in the number of Covid cases, and the more contagious Covid variant is upon us. What’s more, the rollout of the vaccine has been disturbingly slow. So until winter is behind us, there is unlikely to be a meaningful opening of the economy. All things considered, Canada’s economy has been relatively resilient. That’s not surprising given the government income support–the most generous in the G7 countries. Moreover, financial conditions are extremely accommodative.

Although no one is coming through the pandemic unscathed, most of the employment losses have been lower-paying jobs. Many higher-income earners continue to work from home. And even though the pandemic is worsening, many of Canada’s housing markets recorded their strongest December ever. Rock-bottom interest rates, high household savings and changing housing needs turned 2020 into a spectacular year for housing activity.

According to local real estate boards, December resales were surprisingly strong for what is typically a quiet month. Existing home sales surged between 32% y/y in Montreal, Ottawa and Edmonton and 65% y/y in Toronto based on early results. More distant suburbs attracted many families looking for more space with less concern about long commutes when jobs can be conducted at home. Property values continued to appreciate at accelerating rates in most markets. Downtown condo prices still bucked the trend due to ample inventories in Canada’s largest cities—the downturn in the rental market has prompted many condo investors to sell. That said, softer condo prices are now drawing more buyers in. Existing condo sales soared virtually everywhere in December.

Housing is likely to continue to cushion the blow of the pandemic on the overall economy. And while not everyone is sharing in this windfall, it will ultimately help pave the way to better employment gains in the spring.

However, no question that the bright light at the end of the very dark pandemic tunnel is a widely dispersed vaccine. PM Trudeau reasserted this week that the vaccine will be available to all who want it by September 2021. At the pace, it is now getting into people’s arms, that will not happen. Just over 0.6% of Canada’s population was vaccinated as of Thursday, January 7. By comparison, the US had vaccinated 1.8% of its population by that date, and Israel had inoculated nearly 20%, according to Our World in Data, a nonprofit research project at the University of Oxford. The U.K. had vaccinated about 1.9% of its population by Jan. 3, the latest date for which vaccination numbers were available (see the chart below).

Canadian Home Sales Hit a New Record For The Month of November

General Mark Goode 16 Dec

Canadian Housing Remained Strong in November

Today’s release of November housing data by the Canadian Real Estate Association (CREA) shows national home sales continued to run at historically strong levels last month. Competition among buyers remains intense in the detached-home market and townhouses. Still, condo apartment sales-relative-to-new-listings have slowed as new listings surged, especially in the City of Toronto.

Thanks to the lack of tourism and the reduced influx of immigrants, rents in Toronto have declined, changing the economics of condo investing. Many Airbnb properties in the short-term rental pool are now available for long-term rental, and the supply of newly built condos continues to rise. Lower rents have created a negative cash flow situation for some investors who are now anxious to sell.  As the supply of condo listings rises, demand has also slowed as many buyers look for less densified space. Combine that with the dearth of tourists and new immigrants, and it’s no wonder that the condo sector–especially smaller condos, is the weakest in the housing market.

The Canadian federal government has committed to increased immigration targets for the next three years to make up for the shortfall in 2020. this was featured in a Government of Canada news release stating, “The pandemic has highlighted the contribution of immigrants to the well-being of our communities and across all sectors of the economy. Our health-care system relies on immigrants to keep Canadians safe and healthy. Other industries, such as information technology companies and our farmers and producers, also rely on the talent of newcomers to maintain supply chains, expand their businesses and, in turn, create more jobs for Canadians”. Canada aims to welcome 401,000 new immigrants in 2021, 411,000 in 2022 and 421,000 in 2023.

The newly available vaccine will also encourage a return of short-term renters, but probably not until 2022 at the earliest.

Home Sales

Home sales edged down moderately for extremely high levels in both October and November. Notwithstanding this, monthly activity is still running well above historical levels (see chart below).Actual (not seasonally adjusted) sales activity posted a 32.1% y-o-y gain in November – the same as in October. It was a new record for that month by a margin of well over 11,000 transactions. For the fifth straight month, year-over-year sales activity was up in almost all Canadian housing markets compared to the same month in 2019. Among the few markets that were down on a year-over-year basis, it is likely the handful from Ontario reflect a supply issue rather than a demand issue.

This year, some 511,449 homes have traded hands over Canadian MLS® Systems, up 10.5% from the first 11 months of 2019. It was the second-highest January to November sales figure on record, trailing 2016 by only 0.3% at this point.

Shaun Cathcart, CREA’s Senior Economist, said, “It will be a photo finish, but it’s looking like 2020 will be a record year for home sales in Canada despite historically low supply. We’re almost in 2021, and market conditions nationally are the tightest they have ever been, and sales activity continues to set records. Much like this virus, I don’t see it all turning into a pumpkin on New Year’s Eve, but at least vaccination is a light at the end of the tunnel. Immigration and population growth will ramp back up, mortgage rates are expected to remain very low, and a place to call home is more important than ever. On top of that, the COVID-related shake-up to so much of daily life will likely continue to result in more people choosing to pull up stakes and move around. If anything, our forecast for another annual sales record in 2021 may be on the low side.”

New Listings

The number of newly listed homes declined by 1.6% in November, led by fewer new listings in the Greater Toronto Area (GTA) and Ottawa.

With sales and new supply down by the same percentages in November, the national sales-to-new listings ratio was unchanged at 74.8% – still among the highest levels on record for the measure. The long-term average for the national sales-to-new listings ratio is 54.2%.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about 30% of all local markets were in balanced market territory in November, measured as being within one standard deviation of their long-term average. The other 70% of markets were above long-term norms, in many cases well above.

There were just 2.4 months of inventory on a national basis at the end of November 2020 – the lowest reading on record for this measure. At the local market level, some 21 Ontario markets were under one month of inventory at the end of November.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1.2% m-o-m in November 2020. Of the 40 markets now tracked by the index, all but one were up between October and November.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 11.6% on a y-o-y basis in November – the biggest gain since July 2017 (see chart below).

The table below shows the changing preferences of homebuyers for less densely populated areas outside the city core. With more people working from home, shorter commuting times don’t seem to be as important as before.

The largest y-o-y gains – between 25- 30% – were recorded in Quinte & District, Tillsonburg District, Woodstock-Ingersoll, and many Ontario cottage country areas.

Y-o-y price increases in the 20-25% range were seen in Barrie, Bancroft and Area, Brantford, Huron Perth, London & St. Thomas, North Bay, Simcoe & District, Southern Georgian Bay and Ottawa.

Y-o-y price gains in the range of 15-20% were posted in Hamilton, Niagara, Guelph, Cambridge, Grey-Bruce Owen Sound, Kitchener-Waterloo, Northumberland Hills, Peterborough and the Kawarthas, Montreal and Greater Moncton.

Prices were up in the 10-15% range in the GTA, Oakville-Milton and Mississauga.

Meanwhile, y-o-y price gains were in the 5-10% range in Greater Vancouver, the Fraser Valley, Chilliwack, Victoria and elsewhere on Vancouver Island, the Okanagan Valley, Regina, Saskatoon, Winnipeg, Quebec City and St. John’s NL. Price gains also climbed to around 1-2% y-o-y in Calgary and Edmonton.

The MLS® HPI provides the best way to gauge price trends because averages are strongly distorted by changes in sales activity mix from one month to the next.

The actual (not seasonally adjusted) national average home price was just over $603,000 in November 2020, up 13.8% from the same month last year.

Bottom Line

Housing strength is largely attributable to record-low mortgage rates and strong demand for more spacious accommodation by households that have maintained their income level during the pandemic. The hardest-hit households are low-wage earners in the accommodation, food services, non-essential retail and tourism-related sectors. These are the folks that can least afford it and typically are not homeowners. The good news is that the housing market is contributing to the recovery in economic activity.  

The level of sales is firm and holding up better than most pundits had expected. Despite the historic setback to the market earlier this year caused by the pandemic, CREA projects national sales will hit a record of 544,413 units in 2020, representing an 11.1% increase from 2019, and rise again next year by 7.2% to around 584,000 units.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca

DLC UPDATE: Jobs Growth Slows in November Struck By Second Wave

General Mark Goode 7 Dec

Canada’s Jobs Recovery Slowed Again in November With Second Wave

The November Labour Force Survey, released this morning by Stats Canada, showed an employment increase of 62,000 compared to 83,600 in October–well below the 378,000 gain in September.  This was the weakest job growth in the past six months since the economic recovery began (see chart below). The rapid runup in COVID cases continues to dampen the recovery.

Virtually all of the job gains last month were in full-time work. Among those who worked part-time in November, more than one-fifth (22.6%; 808,000) wanted full-time work (30 hours or more per week) but could not find it. This was up 5.2 percentage points from 12 months earlier, with above-average increases among men aged 25 to 54 (up 13.2 percentage points to 46.4%).

Among those who worked at least half of their usual hours, 4.6 million worked from home in November. This was an increase of approximately 250,000 from October and included 2.5 million who do not usually work from home. Among the same group, the number of people working at locations other than home fell by approximately 100,000 to 12.2 million.

The unemployment rate fell to 8.6% in November, compared to 8.9% in October–well below the record-high 13.7% in May.

HOSPITALS AND SCHOOLS DRIVE GROWTH IN PUBLIC SECTOR EMPLOYMENT

The number of public sector employees grew by 32,000 (+0.8%) in November and exceeded its pre-COVID February level by 1.5%. On a year-over-year basis, the number of public sector workers was up 61,000 (+1.6%), driven mostly by increases in hospitals and elementary and secondary schools (not seasonally adjusted).

The number of private-sector employees was little changed in November but was down by 411,000 (-3.3%) compared with 12 months earlier. This decline was largest in accommodation and food services, while employment in professional, scientific and technical services increased (see chart below).

Growth in self-employment stalled in November, and this group remained furthest from November 2019 (-4.5%; -131,000) and from the February pre-COVID level (-4.7%; -136,000).

EMPLOYMENT DECLINES IN LEISURE ACTIVITIES & ACCOMMODATION AND FOOD SERVICES

In November, employment in information, culture and recreation declined by 26,000 (-3.5%), the first notable decline for this industry since April. Employment fell for a second consecutive month in Quebec, where restrictions on public gatherings had been notably tightened as of the Labour Force Survey reference week. At the national level, employment in information, culture and recreation was 10.5% lower in November than in February (see chart below).

Employment in accommodation and food services declined for the second consecutive month, falling by 24,000 (-2.4%) in November, with the drop being shared between Ontario, Manitoba and Quebec. Nearly 1 in 10 (8.9%) employees in accommodation and food services worked less than half their usual hours in November—the third-highest share among all industries, following business, building and other support services (10.3%), and transportation and warehousing (9.2%) (not seasonally adjusted).

Statistics Canada conducted the Canadian Survey on Business Conditions to collect information on businesses’ expectations moving forward from mid-September to late October. Almost one-quarter of businesses in accommodation and food services (22.5%) expected to reduce their number of employees over the next three months, more than double the average across all businesses (10.4%).

SECOND CONSECUTIVE EMPLOYMENT INCREASE IN RETAIL TRADE

In retail trade, employment grew for the second consecutive month, rising 1.5% in November (+32,000), with most of the month-over-month increase in Ontario. Shutdowns of in-person shopping at non-essential retailers were introduced in Toronto and Peel on November 23, after the LFS reference week. They may be reflected in the December LFS results. December results may also shed light on the effect of tighter restrictions in other provinces such as Manitoba and Alberta.

At the national level, the employment increase in November brought retail trade within 3.7% of its pre-COVID employment level.

EMPLOYMENT GROWTH RESUMES FOR CONSTRUCTION AND TRANSPORTATION AND WAREHOUSING

Employment in construction rose by 26,000 (+1.9%) in November, the first increase since July, largely due to a 5.5% (+28,000) increase in Ontario. Nationally, employment in construction was 5.7% below its February level.

After pausing in October, employment growth resumed in transportation and warehousing in November (+20,000; +2.1%). The increase was largely the result of gains in Ontario and British Columbia, bringing employment in this industry to within 6.4% of its pre-COVID level.

FINANCE, INSURANCE, REAL ESTATE, RENTAL AND LEASING NOW EXCEEDING PRE-COVID EMPLOYMENT LEVELS

Employment rose for the third consecutive month in finance, insurance, real estate, rental and leasing, up by 15,000 (+1.2%). The recent employment growth in this industry pushed it fully into recovery territory, surpassing its February level by 2.3%.

EMPLOYMENT UP IN NATURAL RESOURCES FOR THE SECOND CONSECUTIVE MONTH

In natural resources, employment rose for the second consecutive month, rising 3.1% in November (+10,000) and returning to its pre-COVID level. The month-over-month gain was nearly equally split between Alberta and British Columbia. Data for this industry over the next few months may shed light on Alberta’s impact, ending its limits on oil production in December, allowing producers to utilize available pipeline capacity and increase employment.

Labour market conditions vary across provinces

Employment increased in six provinces: Ontario, British Columbia and in all four Atlantic provinces. Manitoba experienced its first employment loss since April, while the number of people with a job or business held steady in Quebec, Saskatchewan and Alberta.

By November, employment levels in Newfoundland and Labrador, Nova Scotia and New Brunswick had returned to pre-COVID levels. Employment was nearest February levels in British Columbia (-1.5%) in November and farthest in Manitoba (-4.8%) and Alberta (-4.9%).

EMPLOYMENT GROWTH CONTINUES TO SLOW IN CENTRAL CANADA

Following average monthly employment growth of 3.1% from June to September, Ontario saw slow growth in October. This continued in November, as employment rose by 37,000 (+0.5%), mostly in full-time work. Employment in the Toronto CMA was at a standstill in November after increasing for five consecutive months. The Ontario unemployment rate fell 0.5 percentage points to 9.1%.

The largest employment gain was in construction, an industry not affected by recent restrictions. Simultaneously, there were declines in accommodation and food services amid the tightening of public health measures in the City of Toronto and the Region of Peel.

Employment in Quebec was little changed for the second consecutive month. In the Montréal CMA, employment was flat for the second consecutive month following average monthly growth of 3.8% from May to September. The Quebec unemployment rate fell 0.5 percentage points to 7.2% as fewer people were on temporary layoff.

Employment fell in accommodation and food services and information, culture and recreation, coinciding with the targeted public health measures since October. Employment increased in professional, scientific and technical services.

CONTINUED EMPLOYMENT GROWTH IN BRITISH COLUMBIA

Just before the start of the LFS reference week of November 8 to 14, the Vancouver Coastal Health Region and the Fraser Health Region introduced new restrictions on social gatherings, travel, gyms, and indoor sports facilities as new COVID-related workplace safety requirements.

Despite these new restrictions, employment in British Columbia grew by 24,000 (+1.0%) in November, adding to the gains over the previous six months (+335,000). Losses in part-time employment partly offset gains in full-time work. Several industries saw increases, including accommodation and food services, transportation and warehousing, wholesale and retail trade, and construction. The unemployment rate fell 0.9 percentage points to 7.1%.

Employment grew (+1.2%) in the Vancouver CMA, albeit slower than in the previous two months.

MORE PEOPLE WORKING IN ATLANTIC CANADA

Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick all had employment gains in November.

Nova Scotia posted the largest employment increase among the Atlantic provinces, up 10,000 (+2.2%), continuing the upward trend since April. The increase in November was mostly in full-time work. The unemployment rate fell 2.3 percentage points to 6.4%, the lowest since March 2019 and the lowest among the provinces.

New Brunswick posted its first significant employment gain (+4,200; +1.2%) since the substantial increases in May and June. The increase in November was nearly all in full-time work, and the unemployment rate fell 0.5 percentage points to 9.6%.

Employment in Newfoundland and Labrador rose for the seventh consecutive month, up 2,300 (+1.0%) in November, and regained all of the losses sustained since February. The unemployment rate in November was little changed at 12.2%. Industries with employment losses at the start of the pandemic, such as natural resources, construction and manufacturing, saw small increases in subsequent months and offset the declines in March and April. Others, such as healthcare and social assistance and public administration, continued to gain employment in recent months, pushing their employment above February levels.

Prince Edward Island also had more people working in November (+1,000; +1.3%), and the unemployment rate was 10.2%.

EMPLOYMENT LOSSES IN MANITOBA

Employment in Manitoba decreased by 18,000 in November, nearly all in part-time work. This was the first notable decline since April and coincided with tighter public health measures introduced in early November for the Winnipeg metropolitan region and the rest of the province by the LFS reference week. The largest employment decrease was in accommodation and food services. The unemployment rate was little changed in November at 7.4% as fewer Manitobans participated in the labour market.

In both Saskatchewan and Alberta, there was little employment change in November. As of the LFS reference week of November 8 to November 14, both provinces had largely avoided introducing tighter public health measures. The unemployment rate in Saskatchewan increased 0.5 percentage points to 6.9%, with more people looking for work, while the Alberta unemployment rate was little changed at 11.1%.

Bottom Line 

The economic recovery remains dependent on the evolution of the pandemic. The best news we’ve had in the past month is the successful development of efficacious vaccines. The timing of approvals and distribution is uncertain, but it is safe to say that the worst of the pandemic will continue this winter, with a seasonal reprieve in the spring and summer. By then, the distribution of the vaccine will hopefully be well underway. That means that 2021 will be a transition year, and in 2022 we can expect the economy can move from recovery to expansion.

There was good news in this Labour Force Report. Although job gains slowed, total hours worked rose by an impressive 1.2% m/m. Following a decent 0.8% rise in the prior month, this big gain “builds in” a strong 14% annualized gain for all Q4 for hours worked. Note that total hours are one of Ottawa’s three new “guardrails” for judging when to rein in fiscal stimulus; both of the other two also improved, with unemployment falling 81,000 and the employment rate nudging up 0.1 tick to 59.5% (it’s still 2.3 ppt below pre-Covid levels). Average hourly wages eased again, as expected, but remain robust at 5.0% y/y.

We suspect the job cuts in the hospitality sector, and possibly retail, will bite much deeper in next month’s report, as restrictions tightened notably immediately after this survey period. Overall, the report is firmer than expected and suggests that the economy is dealing a bit better than anticipated with the early stages of the second wave.

Please Note: The source of this article is from SherryCooper.com/category/articles/

MARKET UPDATE: Q3 GDP Growth Hits Record High–Albeit Shy of Expectations

General Mark Goode 3 Dec

Rebounding Q3 Canadian Economy Stalls in Q4

The Canadian economy rebounded sharply in the third quarter, posting its most rapid expansion ever. Still, it was a lower than expected gain, and early data show that momentum is quickly fading in the face of a second wave of the pandemic.

Gross domestic product rose by a massive 40.5% annual rate in Q3, reversing much of the historic 38.1% plunge in Q2 (revised from -37.8%). No matter how impressive the Q3 bounce was, it fell short of well-telegraphed expectations—even yesterday’s Fall Fiscal Statement assumed a 47.5% surge, reflecting the widespread reopening of the economy. Still, thanks to the magic of upward revisions to prior quarters (stretching back years), it appears that the economy is headed for roughly an annual decline of about 5.7% this year. The rebound brings total output to 95% of pre-pandemic levels.

With the huge second wave in COVID cases, renewed restrictions have been implemented across the country in recent weeks, assuring that the Q3 rebound has stalled in the fourth quarter. Today’s news that September’s monthly GDP growth was a solid +0.8% and October’s first estimate is +0.2% is moderately encouraging. Even so, economic activity is likely to flatten in November and decline in December, holding Q4 growth to a 0-to- 2% annual pace.

The big bounce in Q3 left GDP down 5.2% from a year ago for the quarter. But the gain in October brings the latest monthly tally to down less than 4% y/y.

As shown in the table below, the big “miss” in Q3 GDP growth was mostly attributed to the decline in inventories. Otherwise, the picture was one of a massive snap-back in activity from the spring shutdowns. There were triple-digit annualized rebounds in housing, capital spending on machinery & equipment, and imports. Housing grew at a record 187.3% q/q annual rate, the strongest component of the economy. Housing was also up 9.5% year-over-year. 

Consumers Led the Way

Consumption, which led to the contraction in the second quarter, rose 63% (annualized) as consumers rushed to spend after being shutout from most stores during the lockdown period. Shifts in spending patterns due to health concerns and ongoing restrictions on businesses most affected by the pandemic (i.e. restaurants, travel, tourism) resulted in consumers spending lavishly on durable goods (+263%). Non-durables also saw strong growth for the quarter (+19%). The level of durables and non-durables spending was 7.7% and 3.7%, respectively above pre-pandemic levels. On the other hand, with the pandemic weighing on demand for high-contact services, total spending on services was still well below pre-pandemic levels (-12.4%), despite growing quickly in the third quarter (44.3%).

There has been intense focus on household finances through the pandemic, and while the savings rate pulled back in Q3, it remained at very high levels at 14.6% (versus the record 27.5% in Q2). Compared with pre-virus trends, household savings have swelled at least $150 billion above where they may have expected to have been in more normal times (i.e., excess savings). While disposable incomes dropped last quarter, they were still up a towering 10.6% y/y, compared with a modest 3.8% rise in 2019.

On top of that, overall consumer spending is still down 3.7% y/y in nominal terms, as services spending remains heavily constrained by circumstances. That yawning gap between an income spike and constrained spending has lifted savings massively, reflecting the government programs to cushion the pandemic’s blow, including mortgage and other deferrals and income support programs.

Yesterday’s federal fiscal update confirmed that the government support would be enhanced, taking the federal budget deficit to over $381 billion this year. Canada has already provided the largest COVID-related fiscal stimulus among the industrialized nations. We started the period with the lowest government-debt-to-GDP ratio in the G7 at 31%, but it is expected to rise to over 50% next fiscal year.

Like consumption, business investment also rebounded sharply, growing 82.4% annualized in the third quarter. Machinery and equipment (+91.8%) and intellectual property products (+30.8%) contributed to the pick-up, while investment in non-residential structures continued to decline (-1.2%). The main factor, however, fueling the increase was residential investment (+187.3%). The housing market ran red-hot as pent-up demand, low interest rates, and pandemic-induced shift in preferences sent sales and prices to record-levels this summer.

The upturn in housing investment was led by ownership transfer costs (+109.5%, q/q) and, to a lesser extent, renovations (+17.7%, q/q). The increase in ownership transfer costs was widespread, as home resale activities resumed across the country, with sharp increases in resale units and prices. New construction increased 9.7% q/q, after a 7.6% q/q decline in the second quarter. The increases coincided with low mortgage rates, improved job market conditions, and higher employee compensation in the third quarter.

In terms of trade, exports and imports grew strongly (exports: 71.8%; imports: 113.7%). Given that imports grew faster than exports, net trade weighed on the GDP calculation for the quarter.

Canada’s labour market regained almost a third of the jobs lost during March and April in the third quarter, and as such, compensation of employees rebounded for the quarter (+35.5%). Government transfers through employment insurance benefits, which supported income through the second quarter, declined by 91.9% but remained historically elevated. On the whole, household disposable income declined by 12% in the third quarter. However, the savings rate remained at 14.6% as the rebound in consumption was offset by the bounce back in compensation and still-high government transfers. Finally, the gross operating surplus, a measure of corporate profits, improved by 59.3% for the quarter.

Bottom Line

The Canadian economy will decline roughly 5.7% this year before rebounding 5.5% in 2021 (yesterday’s Fall Fiscal Statement was based on a 5.8% drop for 2020 and a 4.8% rise next year). The prior largest yearly decline was a drop of 3.2% in 1982, while the anticipated growth next year would be the best since 1984. And lest anyone doubt the ability of the economy to recover at that pace, consider: a) some of the growth rates seen in Q3, which could be a taste of what could lie ahead later in 2021; b) the added fiscal stimulus still on its way; and c) the degree of excess savings that households now have at their disposal to unleash in the coming year.

Please Note: The source of this article is from SherryCooper.com/category/articles/

Canada’s Fiscal Response to COVID is the Largest in the Industrialized World

General Mark Goode 3 Dec

Federal Fiscal Update–Finance Minister Freeland’s Debut

Justin Trudeau’s government, which has delivered the biggest COVID-19 fiscal response in the industrialized world, announced plans for another dose of stimulus and vowed to continue priming the pump as long as needed.

Finance Minister Chrystia Freeland unveiled $51.7 billion of new spending over two years in a mini-budget Monday, led by an enhanced wages subsidy for business. Freeland also pledged, without detailing, another $70 billion to $100 billion of additional stimulus over three years to spur the recovery.

But the finance minister clearly heeded calls for fiscal prudence. She put off any major structural spending announcements, promised any additional stimulus will be temporary and introduced new taxes on digital giants including Netflix, Amazon, and Airbnb, to help pay for it all.

“Our government will make carefully judged, targeted and meaningful investments to create jobs and boost growth,” Freeland said. It will provide “the fiscal support the Canadian economy needs to operate at its full capacity and to stop COVID-19 from doing long-term damage to our economic potential.”

Freeland revised higher the nation’s projected deficit this year to $381.6 billion, or 17.5% of GDP. That’s up from a deficit of 1.7% of GDP last year. According to estimates from the International Monetary Fund, no major economy will show a bigger fiscal swing in 2020.

The budgetary red ink is projected at $121 billion next year, before any additional stimulus. In total, spending linked to the government’s COVID response accounted for C$75 billion of this year’s deficit, and C$51 billion next year.

Based on Monday’s projections, the deficit is seen gradually narrowing to about $51 billion in two years and $25 billion by 2025.

The planned stimulus over the next three years will total no more than 4% of GDP, which the document said is in line with the Bank of Canada’s estimate of the level of slack in the economy. Freeland said, “fiscal guardrails” tied to the labour market would help determine the extent of the additional stimulus.

Among the measures announced today, Freeland boosted the government’s wage subsidy program (Canada Emergency Wage Subsidy, CEWS) to cover as much as 75% of payroll costs for businesses and extended its commercial rent subsidy and lockdown support top-ups until March. Both were slated to run out on December 20. The current cap on CEWS was 65%.

The federal government plans to create a new funding program to help restaurants, tourism companies and other businesses in industries hardest hit by COVID-19.

The Highly Affected Sectors Credit Availability Program (HASCAP), which was announced in the government’s fiscal update Monday, will offer eligible businesses loans of up to $1 million, with a 10-year term.

The money will be lent by banks or other financial institutions, but guaranteed by the federal government.

“We know that businesses in tourism, hospitality, travel, arts and culture have been particularly hard-hit. So we’re creating a new stream of support for those businesses that need it most — a credit availability program with 100-per-cent government-backed loan support and favourable terms for businesses that have lost revenue as people stay home to fight the spread of the virus,” Finance Minister Chrystia Freeland said in her prepared speech to the House of Commons.

Establishing a national childcare plan is a key long-term goal, with Freeland vowing a detailed plan in next year’s budget. In her forward to the fiscal update, she described the daycare strategy as “a feminist plan” that also “makes sound business sense.”

As a start, the Liberals are proposing in their fiscal update to spend $420 million in grants and bursaries to help provinces and territories train and retain qualified early childhood educators.

The Liberals are also proposing to spend $20 million over five years to build a child-care secretariat to guide federal policy work, plus $15 million in ongoing spending for a similar Indigenous-focused body.

The money is designed to lay the foundation for what will likely be a big-money promise in the coming budget.

Current federal spending on child care expires near the end of the decade, but the Liberals are proposing now to keep the money flowing, starting with $870 million a year in 2028.

There is also money for action on climate change. The government allocated C$2.6 billion in grants for homeowners to improve efficiency and $150 million over three years for electric vehicle charging stations.

The government also detailed some help for the hard-hit tourism sector, including funding for airports. But with Transport Minister Marc Garneau’s negotiations with airlines underway, there is no specific money for carriers including Air Canada and WestJet Airlines Ltd.

Bottom Line

There will continue to be great concern about the largest budget deficits since World War II. Does Canada really need the proportionately largest COVID fiscal response in the industrialized world?  The outlook is somewhat less dire than when the government released a fiscal snapshot in July. The unemployment rate at 8.9% is down materially from May’s 13.7% high but well above February’s 5.6%. The economy recovered ground through the third quarter, although the second wave of pandemic and ensuing restrictions undoubtedly will topple economic activity this quarter.

There is little worry that the government can sustain a massive deficit this year. It can, given low debt levels entering the crisis and historically low interest rates. But now that it has no fiscal guardrails, there’s a risk debt-to-GDP will continue to rise in the medium term if it continues to spend ambitiously.

The government is adding a new revenue source by taxing large digital companies. Still, in time, with this level of spending, they will be tempted to raise taxes on domestic sources, for example, hikes in the GST and higher capital gains taxes. This would be misguided, given the fragility of the recovery.

There is a greater risk that the government is overdoing the stimulus with vaccines on the horizon than undergoing it. Canada’s programs have been generous and household-focused compared to our G7 peers. The government must be strategic in assuring that new program spending is focused on future growth, beyond the pandemic, so that our debt-to-GDP will resume its downward trend. The risk is that once created; it is difficult to rein in spending.

DLC UPDATE: Canada’s Jobs Recovery Slowed in October With New Pandemic Restrictions

General Mark Goode 6 Nov

Canada’s Jobs Recovery Slowed in October With New Pandemic Restrictions

The October Labour Force Survey, released this morning by Stats Canada, showed an employment increase of 83,600–well below the 378,000 gain in September and average monthly gains of 395,000 over the past six months (see chart below). Several provinces tightened public health restrictions last month in response to a spike in COVID-19 cases. These measures were targeted at indoor restaurants and bars, and gyms.

Most of the job gains last month were in full-time work. Among those who worked at least half their usual hours, the number working from home increased by 150,000. Working remotely continues to be an important adaptation to COVID-19 health risks, with 2.4 million Canadians who do not normally work from home doing so in October.

The unemployment rate was little changed at 8.9% in October but remained well-below the May peak of 13.7%. In addition to the unemployed, 540,000 Canadians wanted to work in October but did not search for a job, down 39,000 from September and continuing a downward trend from a peak of 1.5 million in April. If people in this group were included as unemployed, the adjusted unemployment rate in October would be 11.3%.

Long-term joblessness—defined as unemployed and looking for work or temporary layoff for 27 weeks or more— increased again in October. Not surprisingly, more than half (53.3%) of the long-term unemployed were living in a household reporting difficulty meeting necessary expenses. As of October, the long-term unemployed totalled 448,000, or one-quarter of all unemployed people. September and October increases in long-term unemployment are by far the sharpest recorded since comparable data became available in 1976.

Job Gains Slow in Central Canada

Employment increased in the wholesale and retail trade industries in Ontario, two sectors largely unaffected by new COVID-19 restrictions. After five months of gains totalling 154,000, employment in Ontario’s accommodation and food services was virtually unchanged in the month and remained 15.7% below its pre-COVID February level. Employment declined in transportation and warehousing.

Following five consecutive months of gains, employment was little changed in Quebec in October, and the unemployment rate edged up 0.3 percentage points to 7.7%. Employment gains spread across several services-producing industries were partly offset by a drop of 42,000 in the accommodation and food services industry. The public health alert level in Montréal and Québec City was raised to “red” on October 1, which led to the closure of indoor restaurants and many cultural facilities. Travel between regions in the province was also discouraged. Over the subsequent two weeks, several other Quebec regions went to red alert, and additional measures were introduced.

Employment Grows in Alberta and BC

In British Columbia, employment grew by 34,000 (+1.4%) in October, adding to gains over the previous five months (+302,000). The unemployment rate fell for the fifth consecutive month, down 0.4 percentage points to 8.0% in October. In Vancouver, employment increased by 52,000 (+3.8%) and was within 4.3% of its pre-COVID level.

In Alberta, employment rose by 23,000 (+1.1%), the fifth increase in six months. Following large employment losses earlier this year, Calgary has posted four consecutive employment gains since summer, totalling 101,000 (+13.6%). Recent employment increases in Edmonton have been more modest, up 60,000 (+9.0%) since summer.

October employment gains in Alberta were spread across several industries, including healthcare and social assistance, transportation and warehousing, and wholesale and retail trade. Employment in natural resources edged up in the month but was down 5.2% on a year-over-year basis.

Employment Increases in Newfoundland and Labrador and PEI

In Newfoundland and Labrador, employment grew (+5,900) in October, while the unemployment rate fell 2.0 percentage points to 12.8%. Employment was also up in Prince Edward Island (+900), while the unemployment rate was virtually unchanged at 10.0%.

Hard-Hit Sectors of the Economy

The accommodation and food services industry was most directly affected by the recent tightening of public health measures—and, for the first time since April, employment declined in this industry in October. Employment in the arts, entertainment, and recreation sectors was farther from pre-COVID levels than any other sector in August. The next few months will shed light on the impact of public health restrictions on employment in this sector, which, like the accommodation and food services industry, has strong ties to travel and tourism.

With restrictions on travel and gathering still in place, the continuing impact of COVID-19 has been much more significant for the transportation of people than of goods. For example, the August Survey of Employment, Payrolls and Hours found that payroll employment in transit and ground passenger transportation was down by 17.8% from February to August, while payroll employment in truck transportation—primarily for goods—was down 7.9% for the same period. Similarly, in August, major Canadian airlines carried 86.8% fewer passengers than 12 months earlier, and Canadian railways carried 14.7% less freight.

In construction, employment was little changed for the third consecutive month in October, following increases totalling 190,000 (+16.2%) from April to July. Employment in construction was 7.5% (-112,000) below its February level in October. Recent data on housing starts showed a decline of 5.0% from September 2019 to September 2020, following two months of strong year-over-year increases.

Employment Growth Resumed in Retail Trade

Following a pause in September, employment growth resumed in retail trade, rising by 31,000 (+1.4%) in October, with most of the increase in Ontario. From February to April, employment declined by over one-fifth (-22.9%; -517,000) due to retail businesses’ closures during the first wave of COVID-19. In October, public health measures associated with the second wave did not include retail businesses’ requirements to close. Employment in this industry was 5.1% (-115,000) below its pre-COVID level and down by 2.4% (-54,000) compared with October 2019.

The Winners

Employment exceeded pre-COVID levels in three industries in October—wholesale trade; professional, scientific and technical services; and educational services.

In wholesale trade, employment increased by 15,000 (+2.3%) in October, driven by Alberta increases. Employment in this industry was 5.6% (+35,000) above its February level. The wholesale trade release’s latest results show that sales increased for the fourth consecutive month in August and were 1.7% above pre-COVID-19 levels.

Employment rose for the fourth consecutive month in professional, scientific and technical services, up 42,000 (+2.7%) in October and led by Ontario (+23,000). With this gain, this industry’s employment was 3.3% (+51,000) higher than its pre-COVID level. Job security among employees in this industry includes computer systems design and related services; architecture, engineering and related services; and legal services tend to be higher than in other industries.

Employment was little changed in educational services in October but exceeded its February level by 2.8% (+39,000). Compared with October 2019, employment in this industry increased by 32,000, in part a reflection of some jurisdictions increasing staffing levels to support classroom adaptations brought on by COVID-19.

Compared with other industries, a relatively high share of workers in educational services (25.8% in 2019) is temporary employees, reflecting the relatively high prevalence of teaching staff hired on a contract basis. While the number of temporary employees decreased markedly following the initial COVID-19 economic shutdown, it had rebounded in October (little changed on a year-over-year basis, not seasonally adjusted), helping to boost overall employment in the industry. Permanent employees in educational services also contributed to the recovery of this industry on a year-over-year basis. In October, the number of permanent employees was up 5.6% compared with 12 months earlier (not seasonally adjusted).

Bottom Line 

The economic recovery remains dependent on the evolution of the pandemic. It is likely that extensive lockdown measures, such as the widespread closures imposed early in the pandemic, will not be reintroduced. However, more localized and moderate containment measures will ebb and flow. The Bank of Canada suggests that vaccines and effective treatments will be widely available by mid-2022, at which time the direct effects of the pandemic on economic activity will have ended. However, households’ precautionary behaviour and the effects of the uncertainty surrounding COVID-19 are likely to linger.

The pandemic is also likely to have persistent effects on the preferences and behaviours of consumers and businesses. This could lead to lasting changes to the economy’s structure and could weigh on its potential output. The sizes and timing of such effects are difficult to estimate precisely. Given these considerations, the outlook for Canadian and global economic activity remains unusually uncertain.

The most recent COVID Consumer Spending Tracker, produced by the RBC economics group, that second wave worries have shifted more spending online. Household, clothing, and retail spending held steady, while travel spending continued to decline. Spending on dining out edged downward last month as cooler whether rendered outdoor dining less appealing. Entertainment expenditures ticked downward as well.

The regional real estate boards in Vancouver, Toronto and Montreal recently released their October housing reports showing continued sales activity and upward price prices except in the condo space, particularly smaller condos that were bought on spec for the rental market. With the nosedive in tourism, the short-term rental market has collapsed. Many of these former Airbnb properties are either for sale or have moved into the long-term rental space, driving down prices. The dearth of immigration this year has also exacerbated the decline in rent. Condo listings are rising faster than sales in many regions. In contrast, lower rise properties remain in very tight supply, and prices continue to rise. We will provide more details on housing trends with the release of the CREA data late next week.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca

 

BoC UPDATE: BANK OF CANADA HOLDS OVERNIGHT RATE AT 0.25% AND RECALIBRATES BOND-BUYING PROGRAM

General Mark Goode 29 Oct

Bank of Canada Recalibrates Quantitative Easing

As expected, the Bank held its target overnight rate at the effective lower bound of 25 basis points with the clear notion that negative policy rates are not in the cards. Instead, the central bank will continue to rely on large-scale asset purchases–quantitative easing (QE). The central bank is recalibrating its QE program as promised in recent weeks. In mid-October, it announced that it would end its Repo, Bankers Acceptance and Canada Mortgage Bond purchases this month, as they are no longer needed to assure liquidity in those markets. The volumes of purchases have declined sharply since April. This move will have minimal impact on market interest rates.

The Governing Council announced today it would also gradually reduce purchases of federal government bonds from at least $5 billion to at least $4 billion per week. “The Governing Council judges that, with these combined adjustments, the QE program is providing at least as much monetary stimulus as before.”

The PC opposition party has been warning Governor Macklem of the risks of financing Trudeau’s government spending. But the Bank has little alternative but to step-up its buying of newly issued benchmark bonds–those currently being sold by the government, as opposed to older debt that is becoming increasingly illiquid. As reported in Bloomberg News, “It means the bank’s quantitative easing program will increasingly mirror government debt sales at a time when opposition lawmakers are warning it against directly financing Prime Minister Justin Trudeau’s fiscal agenda.” (See chart below). The Bank already owns more than a third of all outstanding Government of Canada debt, proportionately more than most central banks because Canada ran budget surpluses, which paid down debt for so long.

Virtually every major central bank in the world is conducting an emergency QE program in response to the COVID-19 crisis. The Bank of Canada says its QE program reinforces its commitment to hold interest rates at historic lows over the next few years until the annual inflation rate is sustainably at its target 2% level. Today’s October Monetary Policy Report indicates they will likely keep the overnight rate at 0.25% until 2023.

The central bank has no intention of paring back stimulus, with risks to the economy growing amid the second wave of COVID-19 cases. “As the economy recuperates, it will continue to require extraordinary monetary policy support,” the bank said. “We are committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.”

October Monetary Policy Report

  • Following the sharp bounce back in growth that occurred when containment measures were lifted, and the economy reopened, the Canadian economy transitioned to a slower, more protracted recuperation phase of its recovery. The recovery phases are proceeding largely as described in the July Report, though the initial rebound was stronger than expected. Furthermore, the near-term slowing in the recuperation phase is likely to be more pronounced due to the recent increase of COVID-19 infections.
  • There is ongoing and significant slack in the Canadian economy. The gap between the actual output and the economy’s potential output is not expected to close until 2023. The economy is progressing unevenly, with some sectors and workers disproportionately affected by the virus–particularly those in accommodation, food, arts, entertainment and recreation, as well as global transportation. Many of those hardest-hit are low-income workers.
  • Oil prices remain below pre-pandemic levels and are assumed to remain around current levels, hitting Alberta hard.
  • Ongoing slack in the economy is expected to continue to hold inflation down into 2023.

The Bank of Canada’s forecast for Canadian growth is shown in the table below. The economic recovery is projected to be prolonged, underpinned by policy support but largely influenced by the evolution of the virus, ongoing uncertainty and structural changes to the economy. These changes could result in longer-term shifts of workers and capital across different regions and sectors of the economy. This adjustment process weighs on the Bank’s estimates of potential growth.

After declining by about 5 1/2 percent in 2020, the economy is expected to expand by almost 4 percent on average in 2021 and 2022. Two factors will likely lead to quarterly patterns of growth that are unusually choppy: localized outbreaks and containment measures and varied recovery rates across industries.

Inflation is expected to remain below the lower end of the Bank’s inflation-control target range of 1 to 3 percent until early 2021, largely due to the effects of low energy prices. Subsequently, inflation is anticipated to be within the target range, but economic slack will continue to put downward pressure on inflation throughout the projection period.

The Reopening Phase Was Strong But Uneven

Growth is estimated to have rebounded strongly in the third quarter, reversing about two-thirds of the decline observed in the first half of the year.  A sizable bounce back in activity resulted from a rebound in foreign demand, the release of pent-up demand for housing and some durable goods, and robust policy support.

Housing activity recovered sharply in the third quarter, supported by historically low financing costs, resilient incomes for higher-earning households, and extra sales and construction that made up for delayed spring activity (Chart 7). By September, cumulative resales are estimated to have compensated for the missed activity during the normally busy spring market. Housing activity may also be benefiting from changes in preferences. In particular, more than one-quarter of respondents to the Canadian Survey of Consumer Expectations in the third quarter of 2020 reported they would like to move to a larger or single-family home because of the pandemic. The strength of the housing market recovery, combined with a tight resale market, has led to the rapid growth of house prices in some markets. In contrast to the appreciation of house values observed in Toronto and Vancouver in 2016, price growth has been strongest in markets with moderate loan-to-income ratios, such as Ottawa, Montréal and Halifax.

Bottom Line

Interest rates will remain low for the foreseeable future. The pandemic will largely determine the growth of the economy and the government’s response. Experts suggest that this second wave will last for much of the winter and that a widely dispersed vaccine will not be available until at least well into 2021. As tough as that is to take, Canada is still doing a better job of containing the virus than the US, UK and the Euro area. Output is likely to remain below pre-pandemic levels everywhere through the end of 2022, the Bank of Canada’s forecast horizon.

MORTGAGE NEWS: Bank of Canada Discontinues Some Liquidity Operations

General Mark Goode 29 Oct

Bank of Canada Will Stop Buying Canada Mortgage Bonds

This Wednesday, the Bank of Canada will release its interest rate announcement and the October Monetary Policy Report. Most people expect the overnight rate to remain at 0.25%, where it has been since the pandemic hit. A few have suggested that the Bank could take a page from Australia and reduce overnight rates by 15 basis points. I don’t think so.

Canada’s economy is not as similar to Australia’s as you might think. Yes, both countries speak mostly English, are commodity exporters, and have a currency called the dollar. But that is where the similarities end. Australia is largely a supplier to China and East Asia, while the US dominates Canada’s exports. And our major resource is oil rather than metals. Most importantly, the Bank of Canada believes that lower rates would not be helpful, given the squeeze they put on the banking system’s workings.

The Bank has committed to staying at 0.25% until economic conditions would be consistent with a sustained 2% inflation rate. With the second wave of COVID cases and rolling shutdowns upon us, the economic rebound will slow in the coming quarters. Moreover, it is unlikely we will see inflation averaging above 2% or higher through 2022. The base case forecast for overnight rates by the Bank of Canada will remain at 0.25% until 2023 unless we see a miraculous end to the pandemic far sooner than most experts predict.

Where the Bank will make policy changes is in quantitative easing–the buying of financial assets to improve liquidity in financial markets. The Bank’s Governing Council has, for months, hinted at the need for the current structure of the QE program to be “calibrated.” While there have been few details on what this means, we interpret it to imply a move away from a QE program supporting ‘market-functioning’ to one that attempts to achieve a ‘monetary policy objective.’ To some degree, this has already started.

On October 15, the Bank announced it would retire the Repo purchase program, the Bankers’ Acceptance purchase Facility and the Canadian Mortgage Bond Purchase Program (CMBP). These areas of the Canadian fixed income market are fully functioning at present, and the Bank likely felt ongoing support was no longer necessary. The end of the CMBP got the attention of some mortgage market participants who argued it spelled the end of declining mortgage rates. I think this is a misinterpretation of the Bank’s actions.

As the chart below shows, the use of the CMBP has waned considerably since its introduction in March. It just isn’t needed any longer to assure liquidity in the CMB market. Since August, lenders have only been using about $70 to $190 million per week of the BoC’s $500 million capacity. The last time lenders fully utilized, it was in April when the emergency program was clearly needed. Ending this program should have little impact on mortgage rates.

“As overall financial market conditions continue to improve in Canada, usage in several of the Bank of Canada’s programs that support the functioning of key financial markets has declined significantly,” the Bank said in announcing the changes. The program, designed to provide much-needed liquidity to the banking system to keep credit flowing during the worst of the crisis, has “fallen into disuse as the stresses from the pandemic eased, and markets became much more self-sufficient.” 

The move follows the bank’s decision a month ago to reduce its purchases of federal government treasury bills and similar short-term provincial money market debt, citing improvements in the health of short-term funding markets.

The CMB purchase program is also dwarfed by the Bank’s Government Bond Purchase Program (GBPP), as the chart below shows. “The central bank has pledged repeatedly that it will maintain the highest-profile of its emergency asset-buying programs – its minimum $5-billion-a-week purchases of Government of Canada bonds – until the [economic] recovery is well underway. It has also so far maintained its two programs to purchase provincial and corporate bonds, even though both programs’ demand has been far below original expectations.

Mortgage rates in Canada have an 85% correlation with the 5-year Government of Canada bond yield, which has fallen sharply over the course of the pandemic crisis.

Bottom LineOf the three programs being wound down in the bank’s latest announcement, the biggest is the expanded term repo program, under which the central bank has purchased more than $200-billion of the short-term bank financing instruments since mid-March. The program hasn’t generated any purchases since mid-September.

The Bankers’ Acceptance Purchase Facility, involving short-term credit instruments typically used in international trade financing, was used heavily when introduced in March. Still, it hasn’t been tapped at all since late April. The central bank made about $47-billion in purchases under the program. However, all of those purchased assets have since reached maturity, meaning the central bank is no longer holding any bankers’ acceptances on its balance sheet.

The Canada Mortgage Bond Purchase Program predates the pandemic, but the Bank of Canada ramped up its purchases dramatically during the crisis. Since mid-March, it has accumulated about $8-billion of the bonds under its emergency measures through twice-weekly purchases directly from Canada Mortgage and Housing Corp. The size of the bank’s typical purchases in the past couple of months has been less than a quarter of what it was routinely buying in the spring.

These changes in the QE program will have little impact on interest rates and mortgage markets.

DLC UPDATE: STRONGER-THAN-EXPECTED CANADIAN JOBS REPORT IN SEPTEMBER

Latest News Mark Goode 14 Oct

Canada Has Recouped Three-Quarters Of Pandemic Job Losses

The September Labour Force Survey, released this morning by Statistics Canada, reflects labour market conditions during the week of September 13 to 19, six months after the onset of the COVID-19 economic shutdown. As Canadian families adapted to new back-to-school routines at the beginning of September, public health restrictions had been substantially eased across the country, and many businesses and workplaces had re-opened. Throughout the month, some restrictions were re-imposed in response to increases in the number of COVID-19 cases. In British Columbia, new rules and guidelines related to bars and restaurants were implemented on September 8. In Ontario, limits on social gatherings were tightened for the hot spots of Toronto, Peel and Ottawa on September 17 and the rest of the province on September 19.

Employment gains unexpectedly accelerated in September, increasing by 378,200, more than double the consensus forecast on a broadly based pickup in hiring. This was the fifth consecutive month of job gains, which has now retraced three-quarters of the 3 million jobs lost during March and April. The unemployment rate fell from 10.2% in August to 9.0% in September. Most economists had expected a job gain of 150,000 and a jobless rate of 9.8%.

Another piece of good news is that most of the net new jobs were in full-time work. The number of Canadians who were employed but worked less than half their usual hours for reasons likely related to COVID-19 fell by 108,000 (-7.1%) in September.

September gains brought employment to within 720,000 (-3.7%) of its pre-COVID February level. The accommodation and food services (-188,000) and retail trade (-146,000) industries remained furthest from full recovery, while youth employment was 263,000 (-10.3%) below February levels.

Among Canadians who worked most of their usual hours, the proportion working from home edged down from August to September, from 26.4% to 25.6%.

Employment increased in every province except New Brunswick and Prince Edward Island in September, with the largest gains in Ontario and Quebec.

As a result of the COVID-19 economic shutdown, the unemployment rate more than doubled from 5.6% in February to a record high of 13.7% in May. The 9.0% jobless rate in September marks a rapid improvement.  By comparison, during the 2008/2009 recession, the unemployment rate rose from 6.2% in October 2008 to peak at 8.7% in June 2009. It then took approximately nine years to return to its pre-recession rate.

Employment in accommodation and food services rose by 72,000 (+7.4%) in September. This was the fifth consecutive monthly increase and brought total gains since the initial easing of COVID-19 restrictions in May to 427,000. Nevertheless, this industry’s employment was the furthest from recovery in September, down 15.3% (-188,000) from its pre-pandemic February level.

The accommodation and food services industry is likely to continue to face many challenges over the coming months. While outdoor dining is likely to become impractical during the winter months and as some COVID restrictions are re-introduced, a recent study indicated that Canadians plan to reduce spending at restaurants.

Following four months of increases, employment in retail trade held steady in September. Compared with February, employment in this industry was down by 146,000 (-6.4%). After increasing sharply in May and June, following the initial easing of COVID-19 restrictions, retail sales slowed markedly in July.

IN CONSTRUCTION, A LONG ROAD TO RECOVERY REMAINS.

Employment in construction remained little changed for the second consecutive month in September and was down by 120,000 (-8.1%) compared with its pre-COVID level. Compared with February, employment in construction was down the most in Ontario (-54,000; -9.5%) and British Columbia (-39,000; -16.3%).

Construction consists of three subsectors: construction of buildings, heavy and civil engineering construction, and specialty trade contractors. According to the latest results from the Survey of Employment Payrolls and Hours, employment in construction fell from February to July in each of these subsectors, with the largest decline among specialty trade contractors. The release of investment in building construction for July showed that investment in building construction was slightly lower in July than in February.

MANUFACTURING EMPLOYMENT ALMOST FULLY RECOVERED, BUT LAGGING IN ALBERTA.

While some industries face a long recovery to pre-COVID employment levels, some sectors—including manufacturing—have almost fully recovered.

The pace of employment growth in manufacturing picked up in September (+68,000; +4.1%), following two months of modest growth over the summer. The September gains brought the total employment change in this industry to a level similar to that of February. While employment in manufacturing remained well below pre-pandemic levels in Alberta (-17,000; -12.1%) and to a lesser extent in Quebec (-15,000; -3.1%), employment was above the pre-COVID level in Ontario (+17,000; +2.3%).

EMPLOYMENT IN EDUCATIONAL SERVICES RISES IN SEPTEMBER AND SURPASSES PRE-COVID LEVELS.

Employment in educational services grew by 68,000 (+5.0%) in September, led by Ontario and Quebec. After declining by 11.5% from February to April, employment in the industry has increased for five consecutive months and has reached a level 2.6% higher than in February.

As students returned to school in August and September, some jurisdictions increased staffing levels to support classroom adaptations. On a year-over-year basis, employment in educational services was up by 32,000 (+2.3%) in September, driven by an increase in elementary and secondary school teachers and educational counsellors (not seasonally adjusted).

Bottom Line 
The labour market impact of the COVID-19 economic shutdown has been particularly severe for low-wage employees (defined as those who earned less than $16.03 per hour, or two-thirds of the 2019 annual median wage of $24.04/hour). From February to April, employment among low-wage employees fell by 38.1%, compared with a decline of 12.7% for all other paid employees (not seasonally adjusted).

Almost half of the year-over-year decline in low-wage employees in September was accounted for by three industries: retail trade; accommodation and food services; and business, building and other support services industries.

The pandemic has disproportionately hit low-wage workers and youth, explaining why housing activity has been so strong. Low-wage employees and youth are typically not homebuyers or sellers.

Moreover, the RBC COVID Consumer Spending Tracker for the week of October 5 shows that spending trends continued solid with few signs of second-wave worries impacting consumer confidence yet.

According to RBC:

  • “Among retail categories, clothing spending continued to climb, returning to year-ago levels.
  • Spending on apparel, gifts, and jewelry was up 1.5% relative to last year.
  • Other retail categories held on to gains from the past few months.
  • Despite plateauing in dollar terms, entertainment spending ticked up relative to last year.
  • During the summer, high golf spending likely continued into early fall— rather than slowing down as it would have in a normal year.
  • Slower spending on accommodation and car rentals accelerated a downward trend in travel-related purchases that have dominated in the last several weeks.
  • Travel spending had recovered partially from pandemic lows; it was still down about 60% in peak summer. It worsened again as the weather cooled.
  • Simultaneously, automotive spending fell slightly, in line with seasonal trends, as the summer road trip season came to an end.
  • Labour Day saw the strongest restaurant spending since before the pandemic, but the uptick was fleeting.
  • Spending on dining out quickly fell back to -6% relative to a year ago, a level it’s hovered around since July.”

Recently released data from the real estate boards in Toronto and Vancouver showed strong sales activity and significant further upward pressure on prices. In the GTA, a surge in new listings of high-rise condos meant that the upward pressure on home prices was driven by the ground-oriented market segments, including detached and semi-detached houses and townhouses. Home sales and new listing activity reached record levels in Metro Vancouver last month. The heightened demand from home buyers is keeping overall supply levels down. This is creating upward pressure on home prices, which have been edging up since the spring.

The CREA data for the whole country will be out on the 15th of October. This adjusts the price data for types of homes sold, giving us a better idea of how significant price pressures have been and in which sectors—more on that next week. 

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

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DLC UPDATE: ANOTHER RECORD-SETTING MONTH FOR CANADIAN HOUSING

General Mark Goode 16 Sep

CANADIAN HOUSING MARKET SETS RECORD HIGHS IN AUGUST

Today’s release of August housing data by the Canadian Real Estate Association (CREA) showed a blockbuster August with both sales and new listings hitting their highest levels in 40 years of data–exceeding the record July activity levels. This continues the rebound in housing that began four months ago.

National home sales rose a further 6.2% on a month-over-month (m-o-m) basis in August, raising them to another new all-time monthly record (see chart below).

Unlike the previous two months in which activity was up right across the country, sales in August were up in about 60% of local markets. Gains were led by the Greater Toronto Area (GTA) and British Columbia’s Lower Mainland. With ongoing supply shortages in so many parts of Canada, it is interesting to note that the GTA and Lower Mainland also saw a considerable amount of new supply become available in August.

Actual (not seasonally adjusted) sales activity posted a 33.5% y-o-y gain in August. It was a new record for the month of August, and the sixth-highest monthly sales figure of any month on record. Transactions were up compared to last August in almost all Canadian housing markets.

So far this year, over 340,000 homes have traded hands over the Canadian MLS Systems, which was up 0.8% from the same period in 2019 despite the COVID-19 pandemic-induced recession.

“It has been a record-setting summer in many housing markets across Canada as REALTORS® and their clients play catch up following the loss of so much of the 2020 spring market,” stated Costa Poulopoulos, Chair of CREA. “Many markets dealing with inventory shortages have been seeing fierce competition among buyers this summer; although, that was something that had been anticipated for 2020 prior to COVID-19. It really does seem that the spring market shifted into the summer”.

According to Shaun Cathcart, CREA’s Senior Economist, “Activity shows signs of moderating in September”.

New Listings

The number of newly listed homes posted a further 10.6% gain in August compared to July. New supply was up in close to three-quarters of local markets, led by gains in the Lower Mainland, GTA and Ottawa.

With the August increase in new supply outpacing the rise in sales for the first time since the rebound began in May, the national sales-to-new listings ratio eased to 69.4% in August compared to 72.3% posted in July. That said, it was still among the highest levels on record for this measure.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about a third of all local markets were in balanced market territory, measured as being within one standard deviation of their long-term average. The other two-thirds of markets were above long-term norms, in many cases well above.

The number of months of inventory is another important measure of the balance between sales and the supply of listings. It represents how long it would take to liquidate current inventories at the current rate of sales activity.

There were just 2.6 months of inventory on a national basis at the end of August 2020 – the lowest reading on record for this measure. At the local market level, a number of Ontario markets are now into weeks of inventory rather than months. So supply constraints are still prevalent in many parts of the country, especially in Ontario.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1.7% m-o-m in August 2020 (see chart and table below). This compares to a 2.3% m-o-m jump in July 2020 – the second largest increase on record (after March 2017) going back 15 years. Of the 21 markets currently tracked by the index, m-o-m gains were posted everywhere but Victoria and elsewhere on Vancouver Island.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 9.4% on a y-o-y basis in August – the biggest gain since late 2017.

The largest y-o-y gains were recorded in Ottawa (+19.9%) and Montreal (+16.4%), followed by increases in the 10% – 15% range in the GTA and surrounding Greater Golden Horseshoe markets. Moncton prices were also up in that range in August.

Prices were fairly flat on a y-o-y basis in Calgary, Edmonton and St. John’s, while climbing in the 3.5% – 5.5% range across B.C.

The MLS® HPI provides the best way to gauge price trends because averages are strongly distorted by changes in the mix of sales activity from one month to the next.

The actual (not seasonally adjusted) national average home price set another record in August 2020 at more than $586,000, up 18.5% from the same month last year.

Bottom Line

CMHC forecasted back in May that the national average sales prices will fall 9%-to-18% in 2020 and not return to yearend-2019 levels until as late as 2022. Instead, the national average sales price as of August has posted a 18.5% gain.

Housing strength is largely attributable to pent-up demand by households that have maintained their level of income during the pandemic. The hardest-hit households are low-wage earners in the accommodation, food services, and travel sectors. These are the folks that can least afford it and typically are not homeowners.

The good news is that the housing market is contributing to the recovery in economic activity.  


CMHC Annual Residential Mortgage Industry Report

The Residential Mortgage Industry report provides an in-depth view of the residential mortgage market in Canada: from mortgage origination to funding, covering insured and uninsured mortgages, and encompasses activity from all mortgage lender types. It is based on data available at the end of the second quarter of 2020. The following are key highlights:

Mortgage lender type trends

  • The report shows that in 2019, Canada’s big six banks maintained their strong foothold in the housing finance market, with a 67% market share of newly extended mortgages (see chart below).
  • Mortgage Finance Companies (MFCs) hold 20% of the insured mortgage space and credit unions stand at 12%.
  • Mortgage delinquencies of 90 days or more remained at low levels for all mortgage lender types, which suggests that a steady share of mortgage holders continued to be able to make their payments or were able to defer their mortgage payments.
  • MICs continued to represent 1% in nationwide outstanding mortgages, valued at approximately between $14 billion and $15 billion in mortgage debt.
  • Some MICs offered mortgage deferrals and other types of accommodations to financially strained mortgage consumers. An estimated 10% of mortgage consumers asked for a mortgage deferral.

Mortgage Funding Trends

  • Deposits continued to be the primary source of mortgage funding for the big six banks (66%) and credit unions (77%).
  • Covered bonds made up 17% of total mortgage funding for Canada’s big six banks at the end of the first quarter of 2020, representing an increase of 4% from 2019.
  • Private securitization continued to account for a very small share of the mortgage funding mix in Canada, with just 1.1%. However, the residential mortgage-backed securities market appears to be expanding.


 

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

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