Stay Positive But Be Mindful of Inflation

The latest Canadian inflation figures are out and are the highest in a decade at 3.4%. Similar data release in the U.S. shows inflation rising above 4%. The increase in April set a new pandemic-era high for the third time in as many months and was the highest reading since May 2011, when the consumer price index posted a year-over-year gain of 3.7 per cent. Gasoline prices in April were up 62.5 per cent on a year-over-year basis, the largest annual increase on record as prices at the pumps rebounded from an 11-year low in April 2020. The consensus, for now, is that this inflation is temporary, and that it will subside – but this remains to be seen. If more people start going back to work and if the economy re-opens, that could open up a flood of activity that will exacerbate inflation – we will see.

In response to this, BOC Governor Macklem had the following to say: “There are far too many Canadians unemployed, and that is putting downward pressure on inflation. So, yes, we expect it to go up to around three (per cent) and then diminish thereafter.” But Macklem also warned that rates will have to go up eventually, a big change of tune from a couple of months ago – when the BOC said that low rates would remain for years to come. Here’s what he said on rates: “Interest rates have been very low, and at some point they are going to go back up.” South of the border in the U.S., where money printing has been more intense and inflation spikes more poignant, banks are raising red flags on the long term stability of the U.S. dollar.

At the same time, the BOC is voicing more anxiety over the quality of mortgage debt that has been issued over the pandemic: “The quality of new mortgage borrowing deteriorated during the pandemic. The share of newly issued mortgages with a loan-to-income (LTI) ratio above 450 per cent rose substantially in the second half of 2020.” But at the same time, the BOC is again pointing to the importance of higher real estate prices: “”If house prices and household incomes were to fall in the future because of a shock to the economy, some households could need to cut back on spending. This would slow the economy and possibly put stress on the financial system.”

A Welcome Economic Respite From a Cold COVID Winter

February was a solid month for job growth in Canada and Ontario. While we gained over 250,000 jobs nationally, Ontario gained 100,000 jobs. Over 20,000 youth jobs were created in Ontario, and over 40,000 of the jobs were gained by women. COVID-19 cost Ontario 1.1 million jobs from its onset in early March to the beginning of recovery in May. Over the last 9 months of recovery, Ontario has recovered 829,000 jobs. As Tembo has reported, another big piece of positive economic news is that almost 30,000 MORE people work in manufacturing in Ontario than they did before the onset of COVID – it’s not just real estate that’s resilient in these parts.

Ontario’s unemployment rate is now 9.2%, a bit higher than the national average, but well below its COVID peak of some 14%. Most sectors saw gains, from accommodation, to utilities, to retail trade and food services. Many more urban areas gained jobs than lost them, and rural Ontario overall has generally fared well compared to urban centers. throughout the pandemic. Ottawa and London saw the most gains at +13,000 and +4,000 respectively. It’s important to note that London’s economy has consistently created jobs month over month for nine months, underpinning that region’s resilience and attractiveness. The cities that did worse were Toronto, which lost almost 40,000 jobs (shutdowns), and St. Catharines/Niagara (dependent on tourism). Quebec did even better than Ontario, gaining over 113,000 jobs. Jobs were gained in British Columbia, Alberta, and Manitoba. Newfoundland saw some modest declines.

All of these figures are available on StatsCan. As long as cases don’t skyrocket and lockdowns aren’t implemented again, it is likely that these positive economic trends will continue, and that recovery will accelerate – fingers crossed!

Introducing the Ontario Small Business Support Grant

The Ontario Government has recently unveiled a grant to support businesses that have been forced to close or restrict their operations due to the recent lockdown. The grant ranges from a minimum of $10,000 up to $20,000 in support. It can be accessed at ontario.ca/covidsupport. Tembo encourages its readers who have businesses who have been impacted to check out the site and see if they qualify for the grant. Businesses must demonstrate they experienced a revenue decline of at least 20 per cent when comparing monthly revenue in April 2019 and April 2020. The program will financially support a variety of businesses, including restaurants, retail and personal care services. It will help them pay their bills and meet their financial obligations so they can continue to employ people and support their local communities once it is safe to do so. This time period was selected because it reflects the impact of the public health measures in spring 2020, and as such provides a representation of the possible impact of these latest measures on small businesses.

Once the application is successfully submitted an eligible business can expect to receive payment within approximately 10 business days. Applications with incomplete or incorrect information, or that require additional review, will experience a delay and will not receive payment within 10 business days. The province also recently announced that it would extend the off-peak rate of hydro electricity charges to people until February 9th. This off-peak rate extends to 24 hours a day, and is one way the province is supporting people through COVID-19, especially given the impact of stay at home orders and the need to work from home. Another reason to check out the ontario.ca/covidsupport site is to see if one qualifies for the $1,000 PPE grant – to help businesses with the costs of buying the PPE and cleaning supplies they needed to comply with provincial orders.

There are other supports too. The Ontario Small Business Support Grant is just one of a number of these supports available to businesses during the pandemic, such as $600 million available in rebates to help offset fixed costs such as property taxes and energy bills, and grants to help cover the cost of personal protective equipment. Eligible business owners can apply for all of these supports through a single, hassle-free application.

What Will a Biden Administration Mean for the Canadian Economy?

COVID has put tremendous pressures on Canada’s economy and on our public and private balance sheets. Long term economic recovery and job creation will be a key policy objective for Canadian leaders. Given that over 70% of our national trade is done with the United States (over 80% of Ontario exports go to the United State), what happens in the U.S. will have dramatic impacts on Canada’s economic recovery and prosperity. With the election of Joe Biden over and done and his inauguration completed, Tembo will outline what some of the new Administration’s economic and trade policies could be.

Keystone XL

It now seems a done deal that Joe Biden will cancel the construction permit for the Keystone XL pipeline. The pipeline would have transported crude oil from Alberta to southern U.S. refineries. The project was supported by President Trump and is backed by a number of powerful Canadian political and business forces. News of the cancellation evoked strong responses from Premiers Kenney and Moe of Alberta and Saskatchewan. Keystone would have stimulated Alberta’s battered energy industry, and the pipeline would have contributed to some job creation. Premier Kenney views a cancellation as a move that would reduce North American energy independence and bilateral ties.

Trade

President Trump and his Administration did not shy away in using the powers of the U.S. Federal Government to unleash protectionist policies against sectors of the Canadian economy; including dairy, steel, aluminum, and lumber. The naive view is that these kinds of actions will cease altogether under a new and Democratic Administration. This is unlikely. Now U.S. Senate Majority Leader and New York Democrat Chuck Schumer wrote a letter demanding the Trump Administration impose sanctions against the Canadian dairy industry – likely to appease Democratic voters in key battleground agricultural states like Wisconsin, Michigan, and Iowa. Protectionism will not completely disappear under a Biden Administration.

Spending and the U.S. dollar

The Democrats have already unveiled a $1.9 trillion stimulus plan, with a $1,400 cheques to all Americans. This stimulus plan will place added pressure on the dollar, and will continue to force the Federal Reserve to continue its policies of ultra low interest and money printing. Higher rates on all of this debt would have serious repercussions to balance sheets. These forces of low rates and money printing will continue to weigh down on the Canadian dollar by forcing the Bank of Canada to keep its rates low. Although the Biden stimulus plan will likely have a difficult time of passing with ease, it represents just one portion of the multi trillions the U.S. has been spending to fight COVID and keep its economic system afloat.

The good news is that the new Administration is staffed by liberal internationalists, who are less likely to espouse nationalistic protectionism, and who are surely eager to position the U.S. as being warmer and friendlier to its Allies and partners. We will see how this new Administration wields the power it holds (as it controls the White House, the Senate, and the House of Representatives).

How is the government paying for all of its COVID spending?

A question many of you might have asked yourselves, and a question many Canadians are sure to be pondering. As many of us are aware, the federal government alone is set to spend almost $350 billion this year to manage the impact of COVID-19. The deficit could reach $400 billion in a worst case scenario of continued difficulties and unexpected negative surprises.  The answer is very simple, but worth considering. Obviously, the federal government doesn’t have $400 billion sitting around. The deficit will be accommodated through the bond market and by the Bank of Canada. The federal government will issue bonds that will be sold on the open market to domestic, international, and institutional investors. Whatever people, businesses, pension funds, companies, and foreigners don’t want will be bought up by the Bank of Canada. The Bank will print money to buy the bonds issued to facilitate the borrowing. In this sense, the Bank of Canada’s importance to our country and economy will only grow. Not only are their low interest rates supporting cheap debt, a strong property market, and easy access to credit for most, but now their bond purchasing will be critical to the country in getting out of the COVID mess. As many of us are aware, the federal government alone is set to spend almost $350 billion this year to manage the impact of COVID-19.

One must keep in mind though, that the provinces and municipalities are also loading up on debt to get through COVID. Like Ottawa, the hope is that whatever bonds aren’t bought by people and investors will be purchased by the Central Bank. Ontario touched upon this in their 2020 budget. With the province projecting an over $35 billion deficit, the bond market’s appetite for the Ontario bonds was strong enough for the government to project no major difficulties in getting the funds it needs to operate. Provincial bonds are a well respected financial product that is usually in high demand. British Columbia’s provincial bonds are the most highly rated in the country, as that province has low debt, a strong economy, huge natural resources, and a geographical position and outlook that’s favourable (access to Asia). Provinces like Alberta and Saskatchewan, which traditionally had triple AAA provincial bonds, have seen their scores fall given the collapse of commodity prices. Overall, there have been no red flags on the issue of demand for provincial or federal bonds. They’re being bought up, one way or another.

The big risk is that with all of this activity from the Central Bank, inflation will begin to rise. We’re already seeing it for the price of many commodities – steel, cement, lumber, machine parts. The supply chain issues brought on by COVID haven’t helped in this regard. If inflation does begin to pick up, the central bank will be trapped, as it can’t raise rates (we all depend on cheap debt), and higher rates would simply squeeze government capacity to borrow as debt servicing costs would spiral out of control. Inflation in food and basic commodities generally perpetuates when the money supply (money velocity) picks up. This hasn’t happened as most of the inflation we’ve seen has been soaked up by businesses, governments, or through asset prices, and not in the day to day goods we consume, so it hasn’t been a problem. While inflation is beginning to pick up, the good news is that government’s understand that this deficit spending is unprecedented and will have to be reduced in the coming years.

Six Straight Months of Job Growth

These are difficult times for all of us. Negative news jams the airwaves, and everyday a new challenge presents itself. The world is waiting anxiously for a vaccine for COVID even as case numbers rise and the death toll continues its upward climb. There’s light at the end of the tunnel but there’s more tunnel for us all to trudge through nonetheless. In an ocean of bad news, Tembo would like to outline some positive economic and financial news that’s accumulated in the last several days.

First, Statscan released its job numbers for the month of November. The results are positive nationally and provincially. Ontario gained over 36,000 jobs, while the national gain was over 60,000. This marks the sixth straight month of job gains for our province. COVID-19 cost Ontario 1,150,000 jobs, a huge hit to our economy. We’ve regained over 905,000 of the jobs we’ve lost. In addition, we’ve gained over 145,000 manufacturing jobs in Ontario in those six months, this takes total manufacturing employment to over 13,000 above our pre-COVID levels – a very impressive and positive feat. Keep in mind that there’s significant investment expected in the auto manufacturing sector in the next few years, over $5 billion. Ford, GM, and FCA (Fiat Chrysler). All of these firms have tentatively negotiated big plant investments with Unifor (the union that represents autoworkers). In one case, Ford is going to reconstruct the Oakville Assembly plant to build electric vehicles and GM is set to reopen its now closed Oshawa plant.

All of this manufacturing investment will have huge spin off implications, and will see smaller manufacturers increase hiring and invest more to service the production. And that’s just a snapshot of auto manufacturing, a small piece of the manufacturing puzzle. Despite all the ‘doom and gloom’, there’s lots of positive news out there. With these job gains, Ontario’s unemployment rate has fallen from 9.6% to 9.1%. There’s more. Further statistics showed that the household savings rate is up as people tighten their belts and put money aside. 3rd quarter GDP in Canada rose at its fastest rate in history, and national statisticians all noted the positive upswing and contribution the nation’s red hot real estate market has had on the overall economy. So, there’s a bit to smile about. Stay safe!

COVID-19 and the housing market

We are all impacted by lay offs, long line ups at supermarkets, empty toilet paper shelves, working from home, or worse. If our own lives haven’t been completely shifted by the COVID-19 crisis, we know someone else who has. In this blog, Tembo will take a look at how COVID is impacting Toronto real estate and the broader southern Ontario housing market.

So far, with March coming to a close, the industry is arguably in very good shape all things considered. First and foremost, real estate is considered an essential business by the provincial government. It’s importance to employment, output, and just ensuring people have somewhere to live is crucial – and the government has obviously responded to that and acknowledged it. Guidelines on home showings and social isolation have been updated and restricted but realtors have used technology to manage some of these disease-related challenges.

International commerce and buying continues, and in many respects, the crisis may accelerate foreign purchases and investors scramble to move their money or persons around the world looking for stability in an ocean of unease. Construction is an issue, with pressure on governments to effectively shut down sites growing despite the importance of construction. The short to medium term impacts on construction sites remains to be seen. Media have already reported that construction sites related to government funded public transit will see delays in their timetables.

Prices and demand have yet to be impacted negatively. March’s numbers will be released in the next few days and will be interesting. April and May figures will be interesting, especially if quarantines, shut downs, and further economic disruption continue. Even if prices and demand does fall, it will likely be temporary, as prospective buyers waiting on the sidelines and investors with cash bide their time for opportunities.

The big and very positive news is that the big banks have announced that people will be able to apply to defer mortgage payments, and lowered interest rates means people can refinance for lower mortgage payments. While this is not an ideal measure, it offers flexibility in a time of crisis. All in all, the immediate impact of the crisis has not phased our ironclad market, but the medium to long term impacts will depend on how long this all lasts.

A Coronavirus Related Rate Cut?

News keeps building on the spread of the coronavirus around the world. South Korea has reported a thousand cases of the disease and over 50 deaths, with these numbers rapidly rising. The South Korean Government has responded by emulating the Chinese in quarantining whole cities.

Keep in mind that a little over a week ago South Korea’s coronavirus numbers were negligible. Cases of the virus have been reported across South Korea’s demilitarized border in the notoriously isolated North Korea – despite that country shutting down its borders, and even reportedly executing the infected. But the coronavirus is spreading well beyond East Asia. Iran is reporting a rapidly growing number of cases and deaths despite a negligible presence of the virus not long ago. Iran’s Minister of Health was recently seen delivering a press conference on the virus sweating profusely, coughing, and appearing weak – a sign of the severity of the outbreak, according to international media.

In Italy, the virus is rapidly spreading and prompting reported shortages of goods in stores and growing unease. These are the most high profile country cases of the global outbreak, with fear growing around the world, especially in Hong Kong, Taiwan, Japan, and Singapore. Over the last several days, media attention on the outbreak has become increasingly fearful and the apprehension has already hit international stock markets. U.S. markets are falling precipitously and experts are warning that the virus’ impact on international supply will be severe and widely felt. As we all know, China is the workshop of the world and the planet’s biggest exporter of goods ($2.5 trillion annually). Chinese companies are involved in the production processes of everything from steel to pharmaceuticals to computers to drones,. If Chinese factory output remains negatively affected by worker anxieties over the virus, global supply chains will be damaged.

In response to this intensifying and ongoing issue, financial experts and economists have already begun to call for the Federal Reserve to cut rates. The Wall Street Journal is following and reporting on the outbreak closely and featured an article where the rate cut argument was made. The front page of the paper ran a headline stating that the virus was beginning to take its toll on the global economy. The supply chain pressures experts are warning about have yet to be truly felt. The Federal Reserve is obviously monitoring the situation carefully and has not yet provided detailed comment on the virus outbreak. This goes for the BOC (Bank of Canada) as well. It is likely that if the severity of the virus continues to accelerate and if global markets continue to be negatively affected there could be a comprehensive international response – central banks acting in unison to stimulate the world economy. 

Employment in Toronto

Toronto’s economy supports 1,569 million jobs. 1,178 million are full time and 390K are part time. The average wage of a full time worker in Toronto is just over $60,000. Job growth in Toronto has been healthy and consistent for over two decades.

Throughout the mid to late 1980s, Toronto saw impressive economic growth, real estate appreciation, and strong performances by financial firms and pension funds. Employment reached a peak of 1.4 million in 1989 and then fell to under 1.2 million by 1997 as the real estate bubble burst and the early 90s recession kicked in and ran its course. A recovery followed, buoyed by the dot-com bubble. Since 2010, however, the rate of employment growth has been rapid and consistent year-on-year.

The institutional sector is seeing significant job growth. Universities, Colleges, private education employers, and hospitals have collectively added 17,000 jobs in the City in the last two years. Growth is at three times the rate of inflation in the institutional sector. Office jobs went up by 23,000 in the last two years, while the rate of growth over the last five years was 16.7% in that space. This impressive job growth underpins the ambitious construction of commercial office projects throughout the City that Tembo has outlined in numerous blog posts. It is driving a very low commercial vacancy rate which has been falling for many years and which sends a clear signal to developers on opportunities in the market.

Manufacturing, retail, community and entertainment, and the service sector all saw gains but these were mode modest than the office and institutional sectors. There are over 77,000 businesses in Toronto, up from a decade ago but lower than its absolute peak of just under 85,000 in 1990 at the height of the late 80s boom. 48% of Toronto jobs are office jobs, with the institutional sector coming in at number 2. Health care and financial service jobs are seeing the biggest gains in the last five years. Obviously, most of the jobs are in the downtown core.

A snapshot of Toronto’s economy & construction sector as we wrap up 2019

In this blog post, Tembo will give its readers an overview of the state of Toronto’s economy and its major financial indicators. In this way, Tembo hopes to reveal the overall good shape, flexibility, and versatility of Toronto’s economic state. All in all, Toronto’s economic indicators are very positive.

The Macro-Economy

  • Unemployment is at 6.9%, slightly higher than the national figure but still a decent number, remember that population is rising by 70,000, placing pressure on job creation.
  • Mean hourly wages in Toronto meet provincial and national averages, at $29.
  • GDP is growing by roughly 2%, at the rate of inflation, it’s projected to stay at this amount for the next several years. The economy had a strong growth spurt from 2014-2017
  • Toronto’s economy boomed from 1998-2001, averaging rates of well over 5% in those years
  • There are 1,572.4 million jobs are in Toronto, contributing to an office vacancy rate of 4.1%, there have been only 10 business bankruptcies in our City this year
  • The industrial vacancy rate is 1.5%, down from 5.5% in late 2013
  • Consumer prices rose by 1.7% this year
  • Retail sales in Toronto will exceed $32 billion for 2019, most of which was cars and car parts

Buildings under construction

  • There are 246 mid and high-rise buildings under construction in Toronto as of October 2019, up from 202 in October of 2018
  • The pace of building continues to rise, Toronto is competing with New York City for the title of most mid to high rise construction in North America
  • 2022 will be a giant year for construction in our City as there are a huge number of supertall buildings that will be completed in that year
  • These will include the 83 floor The One building at Yonge-Bloor, YSL Residences at 85 floors just down the street, and Sugar Wharf Tower D on Queens Quay which will reach 70 floors
  • This article from the Financial Post has lots of information and an interactive video of some of the supertall structures that are being built right now: https://business.financialpost.com/real-estate/property-post/vertical-city-80-new-skyscrapers-planned-in-toronto-as-demand-climbs

Housing

  • Disappointingly, housing starts in Q3 2019 were 9% lower than in Q3 2018 but are up 11.5% from Q2 2019
  • There were roughly 5,000 housing starts in Q3 2019, most of which were apartments and condos
  • The average house price in our City is $925K

Most analysts and experts consider Toronto’s economy to continue

to remain healthy and reasonably stable in the coming years. Analysts believe the biggest threats are high debt levels, a rapid rise in interest rates, or a severe recession from abroad.