Canadian Fundamentals Are Strong, Yet Dependent On Others

Significantly, commission for mutual fund and brokerage services have grown

By Evelyn Jacks, President, The Knowledge Bureau

Following are details of some of the economic outputs and forecasts on the table for the rest of 2009 and 2010, as a result of those statistics. The message is strong: we're on the road to recovery, but with a caveat: as a trading nation, we need to continue to work with the G20 economies to strengthen our collective position in the global economy; and for us, particularly important is the ability for the US, our largest trading partner, to recover.

THE PRIVATE SECTOR HAD SOME POSITIVES

Canadian corporations earned $50.2 billion in operating profits in the second quarter of 2009, down 6.4% from the previous quarter. But this compared quite favorably against declines of 14.1% in the first quarter of 2009 and 19.2% in the fourth quarter of 2008.[1]

But, what's even more exciting is that Canada's real gross domestic product (GDP) increased 0.1% in June. This is the first monthly increase since July 2008. For the second quarter as a whole, real GDP decreased 0.9%, which represents a smaller decline than the 1.6% drop in the previous quarter. Also, final domestic demand increased slightly--0.1%--in the second quarter. [2]

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How did individuals fare? Well, we relied more heavily on credit, but it wasn't necessarily all ìbadî debt. In the second quarter of 2009, we borrowed to buy consumer goods and invest in mortgages, but while we did that, interest rates were reduced from 7.8% to 7.7% to cushion the blow.

Specifically, consumer credit increased by 19% while net new mortgage borrowings were up in excess of 30%. According to Stats Canada, both figures are well off the pace of borrowing set prior to the economic downturn. Second, the substantial increase in mortgage borrowing was related to increased activity in the resale housing markets, which was vibrant in the context of historically low borrowing costs.

Investment housing has increased 1.7% in the second quarter, and this trend reversed five consecutive quarterly declines. Ownership transfer costs related to housing resale activity rebounded by 40%. While we saw a decline in the value of new housing construction, renovation activity was also up (+2.2%) after weakening throughout most of 2008. It appears the federal government's introduction of the Home Renovation Tax Credit may be having some effect after all.

So while the Canadian housing market remains sound, what's important is that this is fundamentally different to what is happening in the United States. Canada's housing market growth was not created by the aggressive marketing of high-risk, sub-prime mortgage products which led the US growth, price increases and subsequent consumer credit crash. Even though in Canada overall we saw pre-summer declines in housing starts and modest declines in average house prices for resale homes, this happened primarily in Western Canada, where prices had increased sharply, and perhaps unsustainably in recent years.

Other emerging indicators from the end of second quarter [4] are more disturbing, however.

RED FLAGS FOR SAVERS

Therefore, while consumer spending is helping us out of our current fiscal crisis, savings rates need to increase to hedge against anticipated decreases in purchasing power from price increases and potentially increased taxes in the future, needed to cover budget deficits and the costs of serving an aging demographic.

The introduction of the Tax Free Savings Account in January 2009, should go a long way for average Canadians to start making up some of that anticipated shortfall. Therefore it appears that recent federal budget announcements have hit the mark in stimulating the savings rates. So what comes next for Canadian taxpayers?

Next time: THE ROLE OF GOVERNMENTS AND BUDGETS