- The impact of rate hikes
- Markets at a glance
- Fiscal update: What economists say
- Tweet of the week
- Nissan board votes to oust Ghosn
Rate hike impact
CIBC World Markets has a warning for Canadians: “There’s already evidence that the effects of higher rates are showing up earlier and with more ferocity than in past cycles.”
That’s affecting us all, and there’s more to come.
Not only that, this earlier impact could also knock the Bank of Canada off course as it moves back to normal from the low-rate environment of the financial crisis and later oil shock, said CIBC senior economist Royce Mendes.
Mr. Mendes found in a study that the increase in rates is affecting auto and home sales, in particular, but other things we buy, as well. And those two sectors now account for a “substantial chunk” of the economy.
Residential investment and auto purchases as a share of GDP
Per cent
Canada
U.S.
12%
11
10
9
8
7
6
5
4
1961
1969
1977
1985
1993
2001
2009
2017
Total increase in rates during hiking cycles
Percentage points
Based on Bank of Canada 3% neutral rate
2.5 p.p.
2.0
1.5
1.0
0.5
0.0
1997
1999
2002
2004
2017
SOURCE: CIBC CAPITAL MARKETS
Residential investment and auto purchases as a share of GDP
Per cent
Canada
U.S.
12%
11
10
9
8
7
6
5
4
1961
1969
1977
1985
1993
2001
2009
2017
Total increase in rates during hiking cycles
Percentage points
Based on Bank of Canada 3% neutral rate
2.5 p.p.
2.0
1.5
1.0
0.5
0.0
1997
1999
2002
2004
2017
SOURCE: CIBC CAPITAL MARKETS
Residential investment and auto purchases as a share of GDP
Per cent
Canada
U.S.
12%
11
10
9
8
7
6
5
4
1961
1969
1977
1985
1993
2001
2009
2017
Based on Bank of Canada 3% neutral rate
Total increase in rates during hiking cycles
Percentage points
2.5 p.p.
2.0
1.5
1.0
0.5
0.0
1997
1999
2002
2004
2017
SOURCE: CIBC CAPITAL MARKETS
For example, Bank of Canada research indicates that the effect of rate hikes on auto sales peaks two years after the fact.
“Looking at this cycle, though, with eight months still to go before reaching the estimated time of peak impact from just the first rate hike, growth in auto sales has already turned negative,” Mr. Mendes said.
Wait, there’s more.
“A number of other durable goods categories, including building materials, electronics and appliances, have also slowed down more dramatically than other retail sales recently,” the CIBC economist said, noting that furniture sales have “fared slightly better, though could still feel a harder pinch as home sales slow.
“And remember, research suggests that there’s still a lot of time before sales feel the full effects of past rate hikes,” Mr. Mendes said.
“The fact that the effects are showing up sooner this time around could simply be a sign that the storm will pass quicker,” he added. “But more likely it’s a reflection that models based on historical evidence will tend to underestimate the effects of rate hikes on the Canadian household sector in its current indebted state.”
Housing, of course, isn’t all that easy to gauge because, along with rising rates, it has also been hit by federal mortgage-qualification and provincial-tax measures that have had a clear impact.
Nonetheless, the slowdown in credit growth has been “more precipitous,” Mr. Mendes said, basing his calculations on earlier estimates of the hit from the new mortgage rules, which came into effect at the beginning of the year.
“It’s hardly a stretch, then, to say that the housing market is already feeling some pressure from rate hikes, particularly since many mortgages are now rolling over at higher rates for the first time in a quarter-century.”
Models indicate the “peak impact from any monetary shock” comes six quarters later, Mr. Mendes noted. “But, even though the first rate hike of this cycle, let alone the subsequent moves, was administered less than six quarters ago … there’s already pain being felt.”
The Bank of Canada’s benchmark overnight rate now stands at 1.75 per cent, and economists are wondering whether the next increase, of a quarter of a percentage point, will come in December or January as policy makers aim for a rate around 3 per cent.
Observers forecast different timelines for how fast and how far central bank Governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues will go.
Interesting, too, according to Mr. Mendes, is the fact that the central bank says it has been moving gradually to gauge the impact of its rate increases on consumers, who are still juggling exceptionally high levels of debt.
But, actually, the pace of increases appears “pretty average.”
As the impact of all this gathers steam, the central bank “will ultimately fall short of reaching its goals for interest rates,” Mr. Mendes said.
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Markets at a glance
Read more
Economists on fiscal update
Economists are applauding Finance Minister Bill Morneau’s business-friendly moves in Wednesday’s fiscal update, though still troubled by budget deficits.
As The Globe and Mail’s Bill Curry reports, Mr. Morneau used the fall economic statement as more of a mini-budget, unveiling measures to help businesses be more competitive after the Trump administration’s tax reforms.
Aimed largely at spurring new investment, Ottawa suggested the measures will bring down the marginal effective tax rate on such spending to 13.8 per cent from 17 per cent. There are other measures, as well, including support for the media industry.
Finance Minister Bill Morneau delivers the fall economic update in the House of Commons, Nov. 21, 2018Adrian Wyld/The Canadian Press
Here’s what observers are saying:
“It took a bit longer than might have been expected, but these measures should help address the competiveness challenge by incentivizing further investment. Indeed, the government’s actions align closely with what we had counseled ahead of today’s update. Temporary, targeted tax measures like those introduced today have the advantage of encouraging new investment at a relatively small fiscal cost, particularly when compared with more broad-based tax cuts.” Brian DePratto, senior economist, Toronto-Dominion Bank
“While we are encouraged that the government has taken some steps to address Canada’s competitiveness challenges, we remain concerned by persistent deficits. Canada’s economy is operating at capacity and unemployment is at multi-decade lows. In the past, governments have taken advantage of a strong economic backdrop to return to a balanced budget or even run a surplus.” Josh Nye, senior economist, Royal Bank of Canada
“Will today’s steps be enough to quell the rising tide of competitiveness concerns? In a word: Probably not, at least not by themselves. Today’s announcement is a good first step in strengthening the business climate in Canada - but we would encourage an even more forceful response in coming months to the multitude of competitive challenges now facing the economy. While Ottawa will get yet another chance in next year’s pre-election budget, we suspect the focus will revert back to some key social policy goals (say, pharmacare?) and away from business challenges at that time.” Douglas Porter, chief economist, Michael Gregory, deputy chief economist, BMO Nesbitt Burns
“Something had to be done, and today’s announcement regarding the accelerated depreciation of capital spending is an important step toward creating a more level playing field with the US in attracting new business investments. Although the investments covered were slightly broader in scope than we had anticipated, we’d already factored most of this added stimulus into our forecast for 2019 business investment and GDP growth. As such, while important, it doesn’t change our expectations for growth or Bank of Canada policy going forward.” Andrew Grantham, senior economist, CIBC
“The government was in a difficult place heading into its fall fiscal update. There was an unquestionable need to shore up investor sentiment while also being mindful of the need to reduce its deficit. Furthermore, the government likely wanted to leave itself with some fiscal capacity to introduce new measures in its 2019 budget - the last fiscal projection before the next federal election.” Pedro Atunes, chief economist, The Conference Board of Canada
Read more
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- Campbell Clark: Morneau delivers a mini-budget to please Canada’s CEOs
- Daniel Leblanc: Media sector gets $595-million package in Ottawa’s fiscal update
- Barrie McKenna: Will Morneau’s tax breaks really spur new business investments?
Tweet of the week
Right, thank you, Saudi Arabia.
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Michael Babad