This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Construction Industry Forecasts

Notes from Alex Carrick - Apr 18, 2012

Alex Carrick
U.S. Inflation Low in March; Canada’s Central Bank Looking to Raise Rates

The year-over-year performance of the general price level in the U.S. moderated again in March to +2.7% from +2.9% in February, according to the Bureau of Labor Statistics. The all-items inflation rate had been as high as +3.9% in September of last year.

While overall price increases have been decelerating, the core rate – which omits food and energy – has been creeping higher. In March, the “core” rate of inflation was +2.3%.

The U.S. inflation numbers in March are a close match for the Canadian figures in February. (The inflation rate for each month is usually published a little earlier in the U.S. than it is in Canada.)

Canada’s all-items inflation rate in February was 2.6% and the “core” rate – which omits eight of the most volatile sub-components – was +2.3%.

Gasoline prices in the U.S. were +9.0% year over year in March. In Canada in February they were +8.9%.

The bottom line is that despite exceptionally low interest rates in both countries and large increases to the money supply in the U.S., inflation remains relatively tame at this time.

Longer-term inflationary prospects are another matter. There is the risk that even modest global growth may see a return to significantly higher commodity prices. This is made more likely by the tidal waves of cash that many governments have been dispensing to prop up their economies.

According to the International Monetary Fund (IMF), China’s GDP advance this year will drop to 8.2%. While that will be a letdown from 2011’s +9.2% and 2010’s +10.4%, it will be a substantial step forward nonetheless. Furthermore, the IMF expects 2013 Chinese growth to pick up again, to +8.8%.

Not so surprisingly, the Governor of the Bank of Canada, Mark Carney, has indicated a willingness to raise interest rates earlier than in the United States.

He must feel some frustration over the fact most people have been thinking his hands are tied – that he can’t take separate action from the U.S. Federal Reserve.

The Fed has been quite vocal in making its aggressive monetary policy clear. It intends to keep its key policy-setting interest rate – the federal funds rate – in a range between 0.00% and 0.25% until the end of 2014.

Should this come to pass, it would mark six years of the official U.S. interest rate near zero percent. That’s an unprecedented amount of monetary stimulus and no-one knows what the implications might be.

Such a policy course is the subject of increasing debate among the Fed’s Board of Governor members as well as the Reserve bank presidents.

Isn’t Mr. Carney worried about the frailty of Canada’s recovery? After all, a climb in interest rates will push the value of the Canadian dollar up and have negative consequences for our manufacturing sector.

Yes, that’s a problem, but Mr. Carney has been emboldened by two factors. First, the economy is continuing to demonstrate resiliency. The latest labour market report from Statistics Canada set out the creation of 82,000 net new jobs in March.

That’s a strong jump in employment. Another indication of the tighter labour market can be found in the jobless rate. It has fallen to 7.2% from a high of 8.7% during the worst of the recession.

The unemployment rate in Canada never falls much below 6.0% even during the best of times.

The BoC is projecting that GDP growth in Canada both this year and next will be +2.4%. The International Monetary Fund’s (IMF) forecasts for Canada are +2.1% in 2012 and +2.2% in 2013.

The BoC is expecting the Canadian economy to return to full capacity in the first half of 2013.

Second, there is no doubt that Mr. Carney has become concerned about Canada’s bubbling-over housing market.

The household debt to disposable income ratio has risen above 150% and the primary reason has been the assumption of more and bigger mortgages. The era of very low interest rates has encouraged a frenzy of activity in residential real estate markets.

Home prices in most major cities in Canada have continued on an upward trajectory. It’s in the nature of economic swings that this will assuredly come to a stop. The risk lies in the speed and degree of the correction.

The BoC would like to achieve a soft landing. That means bringing to a halt the buying binge. One way to get people’s attention would be to raise interest rates.

On April 17, the BoC announced that it would be holding its key policy-setting interest rate, the overnight rate, at 1.00%. It’s been at that level since September 2010. (The BoC did implement an increase from 0.25% to 1.00% in the summer of 2010.)

But there are a couple of back-to-back lines in the press release that indicate change is in the wind.

The BoC is very careful in choosing its wording. There can be little uncertainty about what the following portends.

“In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary stimulus may become appropriate, consistent with achieving the 2% inflation target over the medium term.”

The next sentence reads, “The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”

So a rate increase before the end of the year now seems more likely, although not assured.

This may be one more example of Canada acting more prudently when it comes to financial matters than many other nations.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.


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Read Other Recent Alex Carrick Posts

05/04 - U.S. Employment Rose by a Mediocre 115,000 in April
04/27 - U.S. GDP +2.2% in Q1 2012 and Alberta led Canadian Provinces in 2011
04/12 - Canada’s Trade Surplus in February Declined but Business is Optimistic
04/03 - A Tale of Two Budgets
03/29 - A strong year for new construction investment intentions in 2012
03/21 - Leading Indicator Series Add to Good News about the U.S. and Canadian Economies
03/06 - Three key trends, more forays into high-tech and the importance for construction
02/29 - Two important sources of strength: share prices and non-residential construction
02/22 - Home resale market may be picking up in the U.S. while flattening in Canada
02/16 - Good news on U.S. housing and employment is positive for Canada as well
02/08 - Home starts and job levels diverge in Canada and the U.S.
02/03 - Canada’s labour market flat in January but U.S. on a roll
01/23 - Canada’s leading indicator series continued to charge ahead in December
01/12 - 2012 holds promise but there’s no denying the uncertainty (part 2)
01/11 - 2012 holds promise but there’s no denying the uncertainty (part 1)
01/04 - How stock prices have performed depends on the timing of the data points
12/22 - Canada stands firmly in the middle of the road as it enters 2012
12/14 - Trade issues climb the agenda in both Canada and the U.S.
12/05 - Finding Fault with Canada’s Carbon Footprint is Absurd
11/23 - Mixed-to-slightly-positive Messages on the U.S. Economy

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