Canadian economy weathered oil rout, but housing boom a concern

GMT 01:22 2016 Tuesday ,14 June

Arab Today, arab today Canadian economy weathered oil rout, but housing boom a concern

After struggling for more than a year, due to the 2014
Montreal - AFP

The Canadian economy -- bolstered by low interest rates and the depreciation of its currency -- has emerged from the oil shock poised for a rebound this year, the IMF said Monday.

But Canada's overheated housing market continues to worry economists.

After struggling for more than a year, due to the 2014 oil rout that saw prices slashed in half, gross domestic product (GDP) is predicted to rise to 1.7 percent in 2016, the International Monetary Fund said in a report.

That is up from 1.2 percent growth in 2015.

Canada is the world's fifth-largest oil producer, and was hit hard by the price plunge. The economy lost more than half its value, and business investment slumped as energy firms scaled back oil exploration and extraction.

But the Bank of Canada's record low key lending rate -- at 0.5 percent -- and a drop in the value of the Canadian dollar, from parity with the US greenback to US$0.78, provided a boost. 

"The oil shock is the first major test of Canada's economic and financial resilience since the 2008 global financial crisis," said the IMF, "and its economy is adjusting well."

The IMF also welcomed Ottawa's plans to spend billions of dollars on infrastructure over the coming years.
The IMF's analysis, however, did not take into account the impact of a temporary lull in oil sands production caused by Alberta wildfires last month.

Production, which is slowly being restarted, was cut by an estimated 1.2 billion barrels of oil per day during the month of May.

The Bank of Canada forecast a 1.25 percentage point drop in total economic output as a result of the fires, which forced the evacuation of Fort McMurray and oil facilities to the north.

The IMF also warned of rising loan delinquencies, albeit from low levels, as a result of the oil shock.

More worrying, however, is a possible housing correction on the horizon.

Ten of the top 15 Canadian housing markets are showing "signs of overvaluation," according to a report by the Organization for Economic Co-operation and Development (OECD) also released Monday
OECD Secretary General Angel Gurria, who met with Finance Minister Bill Morneau at a summit in Montreal, warned of the risk of a crash destabilizing the Canadian economy.

"Vancouver is one of the places in the world where everyone wants to live," Gurria commented.

But the Pacific coast metropolis, as well as Canada's largest city Toronto have seen double-digit housing price increases year after year over most of the past decade. 

According to their respective real estate boards, Vancouver prices climbed 30 percent in the 12 months ending May 31, while Toronto prices rose 16 percent.

Bank of Canada Governor Stephen Poloz on Thursday warned that economic fundamentals do not support continued price increases, saying: "Prospective homebuyers and their lenders should not extrapolate recent real estate performance into the future when contemplating a transaction."

Previous administrations have on five occasions since 2008 tried to tighten mortgage lending rules in order to cool heady real estate activity. But those failed.

In its report, the OECD urged Ottawa to keep trying to curb overheating, notably in "hotspots of Vancouver and Toronto."

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