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.

Emulating the Singapore model to boldly solve Toronto’s Housing crisis

Toronto is in the midst of full-blown housing crisis whose severity will soon stretch and tear at our City’s social fabric, inflame socio-political tensions, further erode our resident’s quality of life, and cripple long term economic potential.

Over two decades of insufficient private home building, historically unprecedented low interest rates, and an ongoing torrent of foreign capital investment have created a market Swiss investment banking giant UBS recently crowned “the world’s second biggest City housing bubble.” We have reached the stage where average housing unit costs have hit $880,840 pushing the price-to-income ratio to 8.2; meaning that average housing costs over eight-times gross household income, almost three times higher than ideal levels.

Buying a home is not the only challenge, with a rental market experiencing a surreal vacancy rate of 1.5% and one-bedroom apartment rent rapidly approaching $2,000. Our housing market is poorly structured and caters to investors, many of whom are foreign. Much of our private building capacity is dedicated to building miniscule, overpriced, shoddy but exceedingly profitable condominiums. Recently released data from Statistics Canada asserts that up to 37.9% of these units are vacant.

Superficial pledges from the political class and incremental, modest increases in investment (HousingTO, TCHC subsidy reform, foreign buyers’ tax) that we have seen in recent years do not address the fundamental underlying dysfunction in our market, and are window dressing measures that will do little to nothing to solve Toronto’s housing crisis. Like Singapore in 1960, Toronto is experiencing a severe shortage in housing, sustained population growth, and untapped economic potential. Singapore’s response to its past housing crisis has been internationally respected.

The country created a Housing and Development Board (HDB) that efficiently and rapidly built quality rental apartments to sell at below market rates to needy citizens. Within 5 years, the HDB built 51,000 apartment units and ended the supply shortfall. Today Singapore has a 90% home ownership rate and over 1 million publicly built, privately owned apartment units. Public housing in Singapore is of very high quality and occupied by all classes, rich and poor. Toronto’s public stock is crumbling despite record investment that will still fall short of needs. We have a waitlist of many tens of thousands who realistically will have to wait decades for affordable housing or will never get it at all. Transferring ownership of our public housing stock to current tenants will permanently transform the lives, shift repair liabilities off the city’s books, and free up resources to decisively and honestly resolve our housing supply crisis.

Canada’s population is exploding

Out country has had an interesting history of immigration stretching back hundreds of years. Throughout the late 19th century, immigration was modest compared to modern levels.

Annual immigration averaged roughly 25-50,000, topping 130,000 in the early 1880s but then falling to 80,000 in the 1890s and dropping precipitously in the late 1890s and early 1900s. A huge surge then occurred from 1902 to right before the start of the first World War. With the prairie provinces Alberta and Saskatchewan admitted to Confederation, elites recognized the urgent need and positive opportunity of settling the Western prairies and activating the agricultural potential of the region. Sizable grants of effectively free prairie land were advertised to European migrants, particularly those from Ukraine, Germany, and Poland, on the condition of long term settlement and productivity inducement. 400,000 people entered the country in 1912, an all time single year record.

In the 1920s and through the Second World War immigration began to fall until it recovered in the post-war boom. Over the last 20 years immigration levels have been high and steadily increasing, with both main political parties supportive of the trend. Average increases varied from 200-250,000, but the current Liberal Government has shown a zeal to increase this number further to 350,000+. Statscan has released data that shows recent increases in population have hit all time historic highs that have topped the traditional pre-WW1 figure of 400,000. From August 2018 to July 2019 the population of our country increased by 531,000. 60% of those immigrants settled in Ontario and British Columbia. These kinds of increases show that our immigration system is moving aggressively to address the most serious demographic issue we have; an aging population. Hopefully many of the new entrants are family sponsorship individuals who have likely been waiting for years to join with family members who are already here.

One can imagine the impact of this population increase on a housing market that is already squeezed from demand pressures. Even if immigration levels fall from this record high, they will still be significant in the years to come. The consensus on high immigration levels is shared by most of the political class, big business, and a significant chunk of the population. This won’t change anytime soon. Record high immigration are the new norm and this will continue to fuel rapid growth and housing prices. 

The BOC holds

Bank of Canada Governor Stephen Poloz surprised no one when he announced that the Bank of Canada’s interest rate would remain unchanged at 1.75%.

As Tembo outlined in our past post, analysts were divided over whether the Bank would emulate U.S. policies and cut rates or maintain them where they are. But the Governor’s carefully analyzed speech was also littered with a number of poignant warnings:

“Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist. In considering the appropriate path for monetary policy, the bank will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment.”

In other words, we’re in for ever more difficult times. This was an important warning. The Bank followed up the warning by stating that global economic growth would slow this year to its lowest levels since the 08-09 crisis. The Bank acknowledged that its counterparts around the world have all eased interest rates but it is proud to be standing firm on its decision. The Bank is giving itself wiggle room in case the economy slows into a recession and the slowdown extends past the manufacturing and investment elements of the economy.

It’s important to note that Central Banks around the world are not only lowering rates but are intensifying their market intervention by buying assets and extending additional forms of credit to their member banks. In the United States, the repo frenzy Tembo touched upon continues. This signals that there is some leak in the international financial system, some lack of liquidity that needs to be plugged by cheap and rapidly accessible liquid capital. As we’ve noted before, a repo is when the Fed sells a financial product (bond) to big banks only to repurchase them shortly thereafter at a higher price, thus injecting the difference directly into the financial system. This is particularly effective in reducing short term interest rates in the money market.

Canada is in a stronger position than its international counterparts, as our BOC is not stimulating the economy to similar extents, but it is staying cautious and preparing for the worst.