While central banks hold overnight rates at record lows, anchoring short-term interest rates and the prime rate, mid-to-long-term government yields have been rising since early this month. As the chart below shows, the 5-year Government of Canada bond, upon which mortgage rates are generally tethered, are currently at 0.69%, up 27 basis points since January 29th. This is the highest 5-year yield since late-March 2020.  Canadian bond yields have increased more than in the US, perhaps due to the surge in commodity prices, most notably oil, which has climbed 16.9% in just the past month, taking the year-to-date gain to 27%.

Growing government debt arising from fiscal measures to cushion the blow of the pandemic and stimulate the economy has set the stage for higher government bond yields in much of the developed world.

Inflation concerns are mounting. In a rare move, yesterday Statistics Canada revised up its estimate of core inflation–unveiled only five days ago–from 1.5% to 1.77%. The result is an inflation picture that is more elevated than reported last week, at a time when investors are becoming more worried about global price pressures. The core CPI is the Bank of Canada’s preferred measure of underlying inflation, and it has rattled markets that it now appears to be running at nearly a 1.8% year-over-year pace.

While inflation is expected to accelerate in the coming months on higher energy costs, policymakers led by Governor Tiff Macklem see little immediate threat from rising prices, even with extraordinary levels of stimulus coursing through the economy. Despite a temporary pickup early this year, the Bank of Canada doesn’t anticipate inflation will sustainably return to its 2% target until 2023. Macklem speaks in Calgary later today, and he is likely to suggest that the Canadian economy is still far from an inflationary threshold.

Keep in mind that Canada’s economy has considerable slack with unemployment rising in recent months and the lockdown continuing for at least a couple more weeks in the GTA. Moreover, Canada has fallen far beyond other countries in the vaccine rollout.

The biggest vaccination campaign in history is currently underway. More than 209 million doses have been administered across 92 countries, according to data collected by Bloomberg News. The latest pace was roughly 6.24 million doses a day. Israel has administered more than 82 doses of vaccine per 100 people, the UK is at 27.5, and the US is at 19.3. Canada, on the other hand, has administered only 4.1 doses per 100 people, now ranking 43rd in the world (see chart below).

This slow start to the rollout likely portends a longer period of economic underperformance.

Bottom Line

Some upward pressure on fixed mortgage rates might be in store, although the Big Five Banks have yet to respond, and the qualifying rate remains at 4.79%, well above contract rates. Without any prospect of near-term tightening by the Bank of Canada, variable rate mortgage rates–typically tied to the prime rate–will remain stable. But mortgage rates have moved up at some of the non-bank lenders. No question, the economy’s trajectory and interest rates will be linked to the return to the ‘new normal’ following the pandemic. Good news on the pandemic front inevitably means higher mortgage rates in 2022-23–if not sooner.

Today the Canadian Real Estate Association (CREA) released statistics showing national home sales hit another all-time high in January 2021. Canadian home sales increased 2.0% month-on-month (m-o-m) building on December’s 7.0% gain. On a year-over-year (y-o-y) basis, existing home sales surged 35.2%. As the chart below shows, January activity blew out all previous records for the month.

The seasonally adjusted activity was running at an annualized pace of 736,452 units in January, significantly above CREA’s current 2021 forecast for 583,635 home sales this year. Sales will be hard-pressed to maintain current activity levels in the busier months to come, absent a surge of much-needed new supply; However, that could materialize as current COVID-19 restrictions are increasingly eased and the weather starts to improve.

A mixed bag of gains led to the month-over-month increase in national sales activity from December to January, including Edmonton, the Greater Toronto Area (GTA), and Chilliwack B.C., Calgary, Montreal and Winnipeg. There was more of a pattern to the declines in January. Many of those were in Ontario markets, following predictions that sales in that part of the country might dip to start the year with so little inventory currently available and many of this year’s sellers likely to remain on the sidelines until spring.

Actual (not seasonally adjusted) sales activity posted a 35.2% y-o-y gain in January. In line with activity since last summer, it was a new record for January by a considerable margin. For the seventh straight month, sales activity was up in almost all Canadian housing markets compared to the same month the previous year. Among the 11 markets that posted year-over-year sales declines, nine were in Ontario, where supply is extremely limited at the moment.

CREA Chair Costa Poulopoulos said, “The two big challenges facing housing markets this year are the same ones we were facing last year – COVID and a lack of supply. It’s looking like our collective efforts to bring those COVID cases down over the last month and a half are working. With luck, some potential sellers who balked at wading into the market last year will feel more comfortable listing this year.”

New Listings

The dearth of new listings continues to be the biggest problem in the housing market. As we move into the spring market and continue to see fewer COVID cases, the likelihood is that new supply will emerge. But for now, the number of newly listed homes plunged 13.3% in January, led by double-digit declines in the GTA, Hamilton-Burlington, London and St. Thomas, Ottawa, Montreal, Quebec and Halifax Dartmouth.

With sales edging higher and new supply falling considerably in January, the national sales-to-new listings ratio tightened to 90.7% – the highest level on record for the measure by a significant margin. The previous monthly record was 81.5%, set 19 years ago. The long-term average for the national sales-to-new listings ratio is 54.3%.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about 20% of all local markets were in balanced market territory in January, measured as being within one standard deviation of their long-term average. The other 80% were above long-term norms, in many cases well above. This was a record for the number of markets in seller’s market territory.

There were only 1.9 months of inventory on a national basis at the end of January 2021 – the lowest reading on record for this measure. At the local market level, some 35 Ontario markets were under one month of inventory at the end of January.

Low available supply is the reason property values will continue to go up. Strong demand pre-pandemic and the historic market rally since summer have cleaned up inventories in many parts of the country. Relative to the 10-year average, active listings had plummeted between 50% and 61% in Ontario, Quebec and most of Atlantic Canada, and 29% in BC by the late stages of 2020. And that’s despite a surge in downtown condo listings since spring in Canada’s largest cities. With so few options to choose from (outside downtown condos), buyers will continue to compete fiercely. Buyers in the Prairie Provinces, and Newfoundland and Labrador, however, will feel less pressure to outbid each other given supply isn’t quite as scarce in these markets.

Home Prices

Viewed from another angle, sellers enter 2021 holding a powerful hand when setting prices in most of Canada. We see this continuing during most of 2021. We expect provincial sales-to-new listings ratios—a reliable gauge of price pressure—to generally stay above the threshold (0.60) where sellers have historically yielded more pricing power. In several cases (including BC, Ontario and Quebec), ratios are well above the threshold, providing plenty of buffer against demand-supply conditions flipping in favour of buyers.

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1.9% m-o-m in January 2021. Of the 40 markets now tracked by the index, prices were up on a m-o-m basis in 36.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 13.5% on a y-o-y basis in January – the biggest gain since June 2017.

The largest y-o-y gains – above 30% – were recorded in the Lakelands region of Ontario cottage country, Northumberland Hills, Quinte & District, Tillsonburg District and Woodstock-Ingersoll.

Y-o-y price increases in the 25-30% range were seen in Barrie, Niagara, Grey-Bruce Owen Sound, Huron Perth, Kawartha Lakes, London & St. Thomas, North Bay, Simcoe & District and Southern Georgian Bay.

Y-o-y price gains followed this in the range of 20-25% in Hamilton, Guelph, Oakville-Milton, Bancroft and Area, Brantford, Cambridge, Kitchener-Waterloo, Peterborough and the Kawarthas, Ottawa and Greater Moncton.

Prices were up 16.6% compared to last January in Montreal. Meanwhile, y-o-y price gains were in the 10-15% range on Vancouver Island, Chilliwack, the Okanagan Valley, Winnipeg, the GTA and Mississauga. Prices rose in the 5-10% range in Victoria, Greater Vancouver, Regina and Saskatoon. Home prices were up 2% and 2.2% in Calgary and Edmonton, respectively.

Bottom Line

The rollercoaster that was 2020 left Canada’s housing market more or less where it started the year: full of bidding wars, escalating prices and exasperated buyers unable to find a home they can afford. The pandemic changed some dynamics—it drove many buyers to the suburbs, exurbs and beyond, ground immigration to a virtual halt, triggered a downturn in big cities’ rental markets and caused households to build up their savings—but it didn’t dial down the market’s heat.

The marked shift in housing strength from urban centres–Toronto, Vancouver, Montreal–to perimeter cities is ongoing. For example, Toronto’s prices are up ‘only’ 11.9% y-o-y, but Barrie (+27%) and London (26%) have far outpaced these gains.

Condo price growth has slowed to just 3.1% y-o-y, or a record 14.3 percentage points below the price gains in single-detached homes. That’s by far the widest gap in 20 years and reflects the hunt for space and social distancing.

Housing starts (reported yesterday by CMHC) surged to 282,428 annualized units in January, the second-highest monthly posting since 1990. This figure could be distorted upward by the unseasonably mild January weather in much of the country. But the new high in starts is in line with record sales and solid building permits.

For policymakers, it doesn’t appear that there’s much interest in leaning against a sector that is helping to prop up the economy, especially with years of tightening mortgage rules already in place.

There appears to be little on the horizon to stop sales or prices from reaching new heights in 2021. Yet, cooling signs will emerge as the year progresses, which will come into fuller view next year. The foremost restraining factors will be a rise in new listings, waning pandemic-induced market churn, a modest creep-up in interest rates and an erosion of affordability. Call it a 2022 soft landing.

This morning, Statistics Canada released the January 2021 Labour Force Survey showing the negative economic impact of extended lockdowns in Ontario and Quebec. The closing of all in-person dining, nonessential retail, recreational facilities and personal care services in these provinces and Alberta and Manitoba took its toll on the labour markets.

Employment fell by 212,800 (-1.2%) in January, much weaker than generally expected. Losses were entirely in part-time work–full-time jobs actually rose 12,600–and were concentrated in the Quebec and Ontario retail trade sectors. As a result, hours worked somehow managed to rise 0.9% in the month.

Friday’s report wipes out months of gains, leaving employment about 4.5% shy of February 2020 pre-COVID levels.

The decline in January followed a revised 52,700 drop (-0.3%) in December and brought employment to its lowest level since August 2020.

Once again, job losses were heavily concentrated in retail and wholesale trade and hotels and restaurants. It is worth noting that 8 of the 16 industrial sectors saw job gains last month.

The unemployment rate rose 0.6 percentage points to 9.4%, the highest rate since August. That unemployment rate is now 3.7 ppts above the pre-COVID level, while the U.S. rate of 6.3% is 2.8 ppts higher over that period. This second consecutive monthly increase brought the unemployment rate to its highest level since August 2020. The number of long-term unemployed (people who have been looking for work or have been on temporary layoff for 27 weeks or more) remained at a record high (512,000)—a reminder that as unemployment has increased in recent months, many people affected by the initial COVID-19 economic shutdown have yet to return to work.

Still, Canada’s labour market is faring better now than it did during the first wave of restrictions in March and April when employment fell by 3 million.

By April 2020–one month into the pandemic–5.5 million workers had been directly affected by the initial widespread COVID-19 economic shutdown, which resulted in a drop in employment of 3.0 million and an increase in COVID-related absences from work of 2.5 million. In January, the equivalent number of affected workers was 1.4 million, including a decrease in employment of 858,000 and a COVID-related increase in absences of 529,000.

Once again, declines in employment occurred mostly among youth and women in the core working age of 25 to 54. These groups also recorded large decreases in part-time employment during the initial downturn in March and April 2020, reflecting that they are more likely to work part-time in industries directly affected by COVID-19 public health measures, including retail trade, and accommodation and food services.

Some industries with a high proportion of full-time employment—including professional, scientific, and technical services; finance, insurance, real estate, rental and leasing—have recovered to pre-COVID employment levels in recent months and were unchanged in January.

Among Canadians who worked at least half their usual hours, the number working from home increased by nearly 700,000 to 5.4 million in January, surpassing the previous high of 5.1 million in April during the first wave of the COVID-19 pandemic.

Average hourly wages bounced up again to 6.2% y/y, but that strength is due to the loss of lower-paying jobs in the retail and restaurant industries.

The employment losses were entirely in the two provinces that had the toughest restrictions—Ontario and Quebec—as jobs rose in 7 of the 10 provinces. The table below shows the jobless rate fell in Alberta, New Brunswick, Nova Scotia, Manitoba, PEI and Saskatchewan.

Bottom Line

With the decline in COVID cases in recent weeks, there is some hope that restrictions will be eased. Quebec has already announced it will start to loosen some restrictions on gyms, restaurants and bars in the coming days, and Ontario is on pace to reopen more schools. However, public health officials warn that new variants of the virus remain a risk and urge for continued lockdowns.

There is no question that the bright light at the end of the very dark pandemic tunnel is a widely distributed vaccine. On that score, Canada is faring badly. The Biden administration is working hard to step-up vaccine distribution, but Canada apparently placed its vaccine orders well after the US and UK. Production issues have harshly slowed Canada’s supply of vaccines. While the US and UK have already broadened distribution to all people aged 65 and over, Canada hasn’t even finished vaccinating health care workers and long-term care residents. Reports suggest that significantly more supply will not be forthcoming until April.

The chart below describes the Canadian vaccine rollout. We now rank 34th in the world in terms of total vaccination doses administered per 100 people.

In its latest policy announcement today, the Bank of Canada held its target for the overnight rate at the effective lower bound of 0.25%, with the bank rate at 0.5% percent and the deposit rate at 0.25% percent.

“The bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program, which continues at its current pace of at least $4 billion per week,” the BoC said.

The BoC cited the mass roll-out of effective COVID-19 inoculations along with further fiscal and monetary policy support as major factors contributing to a more positive medium-term outlook for growth, hence the rate hold.

“Beyond the near term, the outlook for Canada is now stronger and more secure than in the October projection, thanks to earlier-than-expected availability of vaccines and significant ongoing policy stimulus,” the central bank said. “Consumption is forecast to gain strength as parts of the economy reopen and confidence improves, and exports and business investment will be buoyed by rising foreign demand.”

The impact of the second wave of coronavirus infections cannot be understated, however.

“Canada’s economy had strong momentum through to late 2020, but the resurgence of cases and the reintroduction of lockdown measures are a serious setback,” the BoC warned. “Growth in the first quarter of 2021 is now expected to be negative. Assuming restrictions are lifted later in the first quarter, the bank expects a strong second-quarter rebound.”

Taking into account the projected weakness of near-term growth and the protracted nature of the recovery, the bank said the Canadian economy will continue to require “extraordinary” monetary policy support, adding that “the Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved.”

In its January Monetary Policy Report, the central bank estimated global growth to average just over 5% annually in 2021 and 2022, before slowing to just under 4% in 2023.

“Global financial markets and commodity prices have reacted positively to improving economic prospects,” the BoC said. “A broad-based decline in the US exchange rate combined with stronger commodity prices have led to a further appreciation of the Canadian dollar.”

The bank’s next policy announcement is scheduled on March 10.

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.

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.

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.

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.

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.

Gary Mauris had a one-on-one sit-down with Prime Minister Justin Trudeau and asked him about one issue that seems to perennially be on every broker’s mind. Did his answer satisfy?

“The biggest issue and the biggest challenge that I see in this country right now and the one area I believe you can really, really help with is regulating credit card debt,” the president of Dominion Lending Centres said to Trudeau during a special CBC segment, entitled Canadians interview the prime minister about issues that matter to them. “If you’ve looked at a credit card statement these days, if you make the minimum payment, it takes you 125 years to pay off your credit card.”

Mauris continues: “Canadians are getting absolutely buried, strangled in credit card debt and it’s the one area that no government has actually focused on and you could actually leave your DNA in this country, you could make such an impact, just by shoring up that one area.”

Excluding mortgages, Canadians hold an average of $21,028 in debt.

And while the government has implemented various plans to curb mortgage debt, brokers have long been frustrated by the government’s inaction when it comes to minimizing this more cumbersome debt.

It’s an issue Trudeau said the government is taking seriously.

“You highlight the challenge of household debt and personal debt. We’re working with banks and making sure regulations are in place that will keep Canadians safe,” Trudeau told Mauris. “Get people the financial literacy needed to know that you can’t borrow now and hope that you’ll be OK later.”

Trudeau failed to go into specifics, even after being asked by Peter Mansbrige in a followup question whether the Prime Minister is worried about the amount of credit card debt in Canada – and what he plans to do about it.

“This is a real challenge but the easy solution of suddenly legislating something like that is not necessarily going to have the consequences people want,” Prime Minister Trudeau said. “We have to be very, very thoughtful about when and how we regulate financial institutions and banks and make sure we’re doing it in a way that is actually going to help Canadians.

“And scapegoating different institutions when it’s about personal responsibility as well … these are things that all go together.”

For his part, Mauris was unsatisfied with Trudeau’s answers.

“He gave a political answer by putting some of the responsibility back on the consumer,” Mauris told MortgageBrokerNews.ca. “I would have liked to hear him say he will get the ministers together to review this and see how it is impacting Canadians, as well as an action plan to say steps are being taken to learn more about the impact, and to put together a framework to oversee it.”

Still, he was impressed with the Prime Minister’s willingness to subject himself to such a rigorous interview process.

“It was unprecedented in this country – most politicians are well-insulated and avoid the tough questions,” Mauris said. “Doing this was a real feather in his cap.”

Federal Reserve officials, meeting for the last time under Chair Janet Yellen, left borrowing costs unchanged while adding emphasis to their plan for more hikes, setting the stage for an increase in March under her successor Jerome Powell.

“The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,” the policy-setting Federal Open Market Committee said in a statement Wednesday in Washington, adding the word “further” twice to previous language.

The changes to the statement, collectively acknowledging stronger growth and more confidence that inflation will rise to the 2 percent target, may spur speculation that the Fed will pick up the pace of interest-rate increases. Officials also said inflation “is expected to move up this year and to stabilize” around the goal, in phrasing that marked an upgrade from December.

At the same time, the Fed repeated language saying that “near-term risks to the economic outlook appear roughly balanced.”

With her term ending later this week after President Donald Trump chose to replace her, Yellen is handing the reins to Powell, who has backed her gradual approach and is widely expected to raise interest rates at the FOMC’s next meeting for the sixth time since late 2015. Fed officials are hoping to keep a tight labor market from overheating without raising borrowing costs so fast that it would stifle the economy.

“Gains in employment, household spending and business fixed investment have been solid, and the unemployment rate has stayed low,” the Fed said, removing previous references to disruptions from hurricanes. “Market-based measures of inflation compensation have increased in recent months but remain low.”

With a gradual pace of rate increases, policy makers want to nudge inflation back up to their 2 percent target, a goal they have mostly missed for more than five years. Even with a brightening outlook for global growth and Fed tightening, financial conditions continue to ease.

What Our Economists Say

The FOMC is more confident in the inflation outlook, but is not looking to deviate from its gradual path of policy normalization. The economic assessment acknowledged straightforward improvements in economic conditions, but the tone in no way hints of concerns about the economy overheating. The Fed is on track to raise rates in March. — Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Economics

The vote by U.S. central bankers to keep the benchmark overnight lending rate in a 1.25 percent to 1.5 percent target range was unanimous. Fed officials also voted to continue with their program to reduce the central bank’s balance sheet, which began in October.

The FOMC said in a separate statement Wednesday that it elected Powell as its chairman, effective Feb. 3. He will be sworn in as chairman of the Board of Governors on Feb. 5.

“On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent,” the FOMC said, removing a previous reference to declines in inflation in 2017.

Inflation has picked up slightly since the middle of 2017 while remaining short of the central bank’s 2 percent goal. The Fed’s preferred price gauge, a Commerce Department index linked to consumer spending, rose 1.7 percent in the 12 months through December. Excluding volatile food and energy costs, inflation was 1.5 percent.

Yellen isn’t scheduled to hold a press conference after this meeting; her final such event was in December. Fed policy makers will update their economic projections in March, when Powell is also expected to hold his first press briefing as chairman.

New Members

An annual rotation among the 12 regional Fed presidents who vote on the FOMC saw Loretta Mester of Cleveland, Thomas Barkin of Richmond, Raphael Bostic of Atlanta, and John Williams of San Francisco join as members at this meeting. Barkin and Bostic are voting for the first time since taking their posts.

The committee also reviewed its long-run policy goals statement at the January meeting and reiterated its support for the 2 percent inflation target, approving a statement that updated the long-run normal rate of unemployment to 4.6 percent — the median in projections from December.

Several Fed officials have called for a rethink of the central bank’s policy framework, which could include aiming for a higher inflation target, or allowing prices to rise faster to make up for the time that they were too low.

During Yellen’s four years at the helm, U.S. unemployment has fallen to 4.1 percent, the lowest since 2000, as she navigated the Fed away from its crisis-era emergency policies and inched interest rates away from zero. Yellen exploited low inflation to maintain low interest rates that helped pull millions of more Americans back into jobs, and the Fed under her leadership began to pay more attention to labor-market inequality.

“She is going out on a high note,” Diane Swonk, chief economist for Grant Thornton LLP in Chicago, said before Wednesday’s decision.

Powell takes over an economy that expanded at an annualized 2.6 percent pace in the final three months of the year, helped by stronger business investment and consumer spending. Tax cuts signed into law by Trump in December are also likely to lift growth in 2018, though the Fed and most analysts see little long-term boost, if any, to the economy.

The Fed statement didn’t contain any reference to the tax legislation.