National economy buoyed by strong housing segment, among other developments

National economy buoyed by strong housing segment, among other developments

National economy buoyed by strong housing segment, among other developments In its latest report, Statistics Canada revealed that the national economy has entered “rarefied” territory, with economists forecasting an expansion in Q2 gross domestic product at about the same 3.7 per cent pace recorded in the first three months of this year.

Even with an anticipated second-half slowdown, that should leave Canada flirting with 3 per cent growth for all of 2017, Bloomberg reported.

This unprecedented pace could be attributed to consumption, which now accounts for about 57 per cent of real GDP. Growth in consumption has been forecast to surpass 3 per cent in 2017, the first time that’s happened since 2010. In a January survey of economists, the highest estimate for consumption growth was 2.2 percent, with a median forecast of 1.9 percent.

Among the main drivers of these better-than-expected numbers was the impact Prime Minister Justin Trudeau’s fiscal policy, particularly tax cuts and enhanced child benefits that came into effect last year.

Also, a surge in home prices and housing wealth in Toronto and Vancouver has seemingly prompted households to ramp up their spending, with the value of residential real estate nationally jumping by $384 billion in the year through March.

However, Statistics Canada warned that neither factor is a sustainable source of growth, and that a payback effect is expected in coming years. Economists estimated household spending growth will fall back below 2 per cent by 2018, which is a slower pace than the overall economy. For perspective, consumption has only lagged the economy once in the past 15 years.

Already, economists are forecasting a sharp decline this quarter, and the central bank is expecting growth to fall back quickly to about 2-per-cent levels next year. This figure would be closer in line with longer-term fundamentals, taking into account an aging labour force and falling productivity.

Mark Chandler, head of fixed income research at Royal Bank of Canada, said that residential investment and the wealth impact of housing have been accounting for about half a percentage point of growth.

“A good chunk of it has been tied to house prices,” Chandler explained. “Our best guess that starts to roll off in the second half of this year.”

 


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