Household debt will remain a risk for years to come

The news earlier this week that household debt had edged down to 168.0% of disposable incomes in the first quarter, from 169.7% in the final quarter of last year, was greeted by some as confirmation that the Bank of Canada had somehow engineered a soft landing in the housing market. It hasn’t. Debt usually surges in the fourth quarter ahead of the Holiday season and falls back in the first quarter, as people pay down their credit cards. Moreover, by focusing on debt exclusively, those commentators also conveniently failed to note that overall household net worth declined to a two-year low of 857% of disposable income.
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Canada Economic Outlook

Supply shortages limiting economic growth

We now expect GDP growth to be 4.8% in 2021, rather than 5.0%, and 3.5% in 2022, down from 4.0%. Worsening labour shortages imply that spare capacity has been rapidly absorbed and point to a sharp acceleration in wage growth. In that environment, we now think the Bank of Canada will raise interest rates around mid-2022. We do not expect the Bank to hike by as much as markets are pricing in, however, as higher borrowing costs will hit residential investment hard.

20 October 2021

Canada Data Response

Consumer Prices (Sep.)

Inflation rose further to 4.4% in September due to both renewed supply disruptions and the easing of travel restrictions. We do not expect the various supply disruptions that are pushing up goods prices to ease until well into 2022, which suggests that inflation will remain above 4.0% into next year.

20 October 2021

Canada Data Response

Business Outlook & Consumer Expect. Surveys (Q3)

The Bank of Canada’s quarterly surveys point to significant upside risks to wage growth. That said, as wage growth was still low in September and the surveys suggest that longer-term inflation expectations remain well-anchored, we don’t expect the Bank to turn more hawkish next week.

18 October 2021

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US Economics Weekly

Stronger growth not generating major imbalances

After the Fed’s decision to raise interest rates by another 25bp, Fed Chair Jerome Powell claimed in the post-meeting press conference that “the economy is doing very well” – we couldn’t agree more. That view was bolstered by May’s retail sales figures, which suggested that both consumption and GDP growth will rebound strongly in the second quarter, to above 4% annualised. The Fed’s financial account data, released last Friday, illustrate that the economic expansion is not being accompanied by a sharp rise in private sector debt. Rising household wealth is prompting households to save less of their incomes and firms have plenty of resources to fund investment, not least thanks to the 2017 tax reform. The main vulnerability is a renewed surge in Federal debt, but even that wasn’t as bad as it looked, because it was boosted by the suspension of the debt ceiling and partly matched by a rise in assets held in the Treasury account at the Fed.

15 June 2018

Commodities Weekly Wrap

Fears of protectionism weigh on prices

The Fed’s decision to hike its target rate by 25bp and the announcement that the US was going to press ahead with a 25% tariff on imports of Chinese goods prompted a rally in the dollar, which in turn weighed on commodity prices. China has already said it will retaliate, notably with a 25% tariff on soybeans, which was a key factor in the 4% slump in their price this week. Softer Chinese activity data for May, released on Thursday, also worried investors, particularly in the industrial metals markets.

15 June 2018

China Economics Focus

Headwinds mount

A trade spat with the US is one of a number of headwinds facing China’s economy over the coming year. They point to a slowdown not a slump. But the outlook further ahead is no better. Policymakers’ reluctance to allow market forces to determine economic outcomes is eroding the advantages that have kept China an economic outperformer for so long. China’s average growth over the coming decade is likely to be much weaker as a result.

15 June 2018
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