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The employment picture in Canada continues to improve, recovering nearly two-thirds of the jobs lost in March and April so far. Kim Parlee talks with Beata Caranci, Chief Economist, TD Bank, about the sustainability of the economic recovery, and the outlook for the red-hot housing market.
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[MUSIC PLAYING]
- Hello. I'm Kim Parlee, and welcome to the show. We all know about the metaphor about the turtle and the hare-- slow and steady wins the race. And apparently, that might be a good metaphor for the North American economy. Beata Caranci is Chief Economist at TD Bank. She joins me now. Beata, great to see you. Tell me about why we're talking about the turtle and the hare right now, and who that applies to.
- Yeah, well, when you think about that parable, basically the turtle is slower off the blocks, but ultimately wins the race. Certainly when we look at Canada and its economic performance, it had a greater depth to the decline than what we were seeing in the US. However, the recovery and how it's exiting that decline does look like it has more breadth and more sustainability to what we're seeing in the US. So quickly, Canada has caught up, and now the growth rates look to be stronger in the third quarter for Canada than the US. So they were first off the blocks, but look like they have lost some momentum as time went on.
You talk about, in a recent note, about the fact that we're about to enter the swoosh phase. So maybe tell me a bit about what the swoosh is first, just to refresh people, and then where we are on it.
- Yeah, so this is where we're getting-- you have a very hard drop as businesses were shut down, so that's that down leg on the swoosh, and then you've got this up. But it doesn't look like a V, and not quite a U. It has a little bit of the start of a V, and then a very elongated profile after that. And that's because we are literally in the easiest part of the growth phase, meaning when you go from stop to start, you get big numbers. An example would be that, in the third quarter, Canadian GDP could be as high as 50% growth annualized.
These are really big numbers coming off of really big declines. But as we go into the fourth quarter and there beyond, we're going to see slower momentum, towards 2%, 3%, as we proceed, because every incremental progress on that gets harder and harder because you have capacity restraints being placed on the economy with social distancing and the ability for restaurants and others to open. Tourism is a big one that is definitely looking at a very elongated growth pattern.
Hm. Now in terms of just going back the comparison between the Canadian and the US economy, my understanding is you believe the Canadian economy will outperform the US economy. But tell me a bit about that maybe in the longer term, because the Canadian economy depends very much on what happens with the US economy. So I'm sure it's going to come back to a mean, I think.
- Yeah, right now, these growth comparisons are being done in a very small world, right, because we don't have borders opened up between countries. So neither country is receiving the benefit inflows of tourism and dollar flows. We also have trade very muted as a result of what's happening. And so everything that is in terms of driving these economies forward are the domestic demand dynamics. So what's consumer spending doing, what's housing doing, and how is the job market reacting on all fronts.
On that, Canada is outperforming the US on all three metrics. So we've seen stronger rebounds coming through. The US has had rebounds, but ours have had a lot more momentum or push behind them than what we're seeing in the US. So this part of the recovery is showing Canada now starting to outperform after having underperformed in the first half. However, it's going to be a lot harder just to sustain that outperformance as we get into next year. We ultimately do need some normalization with tourism flows, which is more going to be a 2021 story, won't be this year, and trade flows as we get into next year, as well.
- You touched on housing. I want to come back to that. But before we go there, I mean, you mentioned tourism and all these inflows we can get, but, I mean, Canada is also obviously very tied to the energy sector. Less and less, it seems, every year, but that still is something. We still have some fairly high household debt, I know much of that tied to housing, as well. So I mean, why is Canada's-- despite those two things? Those would strike me as big negatives right now.
- Yeah, yeah. So a couple of things. One, as you mentioned, the energy sector was already suffering a down cycle. And so it was at already low levels. It wasn't a huge contributor when we went into this cycle to things like business investment and job growth. So it wasn't coming from a position of strength already. And then in terms of high household debt levels, the drop in interest and mortgage rates has improved affordability for individuals as they go forward.
And so this is what is putting fuel into the housing market. It is not just a Canadian phenomenon. I think in Canada, we're so accustomed to really hot housing markets. But we are seeing very similar strength playing out in the US, even in the UK and other countries. So it's telling you that people are responding to that mortgage impulse with very low rates.
The other factor it's telling you is that those who've been hit hardest in this recession cycle are not those who tend to buy homes. They're not your middle and upper income level or skilled level of jobs that have been preserved to a much greater extent than even what we saw during the 2008 financial crisis. So the characteristics of the cycle are very different. And likewise, it's putting more fuel and support into areas that are interest-rate-sensitive, like auto demand and housing.
And the housing piece is fascinating, to your point, in terms of-- I mean, I guess it illustrates a bifurcation in society that was already existed, and is getting even wider at this point. But when you look at housing, again, I've seen some numbers-- I think it was Toronto sales up 40%, Vancouver up 20%. I mean, these are big, big numbers. You see that strength continuing in Canada and around the world over the next little while, even when mortgage deferrals start to-- you know, the timing of those start to change?
- Well, the momentum should certainly slow. The big question-- and I think this is what analysts are struggling with-- is if it would actually contract again. And that's a harder area to predict. And the reason is, is when you look at the level of unemployment, it would suggest to you that housing should not be behaving the way it is, when you have 10% unemployment rates.
So any model that uses the unemployment rate as their main predictor, which most models would, would tell you that you would be on a much slower path for sales and prices. However, when you switch out the unemployment rate for the income metric, you get exactly what you're seeing in the CREA data in terms of home sales and prices.
And that's because income today is not behaving like it's in a recession. It's actually being supported at the same or higher levels than previous recessions. So there's a complete disconnect between the unemployment rate and income levels. And this is what's ultimately putting some of that fuel under the housing market.
The other factor is, you know, we talk about housing markets like in terms of one term, but it's obviously very bifurcated within the market. The condo market is not behaving like the detached market. There is significant supply in the condo market. It's the detached market where supply is exceptionally tight and where you're seeing demand push through.
And that's the opposite of what you would have seen in previous years, where there was much more lean towards the condo market because of the affordability of buying a condo. But with the drop in interest rates, now that detached market has improved in affordability off of that dynamic alone and suffers from a very tight market, so that affordability won't last. It will encroach on people's debt levels over time, but right now, that market still looks favorable to what's happening in the condo market.
Beata, thanks so much. Great insight, as always.
- My pleasure.
[MUSIC PLAYING]
- Hello. I'm Kim Parlee, and welcome to the show. We all know about the metaphor about the turtle and the hare-- slow and steady wins the race. And apparently, that might be a good metaphor for the North American economy. Beata Caranci is Chief Economist at TD Bank. She joins me now. Beata, great to see you. Tell me about why we're talking about the turtle and the hare right now, and who that applies to.
- Yeah, well, when you think about that parable, basically the turtle is slower off the blocks, but ultimately wins the race. Certainly when we look at Canada and its economic performance, it had a greater depth to the decline than what we were seeing in the US. However, the recovery and how it's exiting that decline does look like it has more breadth and more sustainability to what we're seeing in the US. So quickly, Canada has caught up, and now the growth rates look to be stronger in the third quarter for Canada than the US. So they were first off the blocks, but look like they have lost some momentum as time went on.
You talk about, in a recent note, about the fact that we're about to enter the swoosh phase. So maybe tell me a bit about what the swoosh is first, just to refresh people, and then where we are on it.
- Yeah, so this is where we're getting-- you have a very hard drop as businesses were shut down, so that's that down leg on the swoosh, and then you've got this up. But it doesn't look like a V, and not quite a U. It has a little bit of the start of a V, and then a very elongated profile after that. And that's because we are literally in the easiest part of the growth phase, meaning when you go from stop to start, you get big numbers. An example would be that, in the third quarter, Canadian GDP could be as high as 50% growth annualized.
These are really big numbers coming off of really big declines. But as we go into the fourth quarter and there beyond, we're going to see slower momentum, towards 2%, 3%, as we proceed, because every incremental progress on that gets harder and harder because you have capacity restraints being placed on the economy with social distancing and the ability for restaurants and others to open. Tourism is a big one that is definitely looking at a very elongated growth pattern.
Hm. Now in terms of just going back the comparison between the Canadian and the US economy, my understanding is you believe the Canadian economy will outperform the US economy. But tell me a bit about that maybe in the longer term, because the Canadian economy depends very much on what happens with the US economy. So I'm sure it's going to come back to a mean, I think.
- Yeah, right now, these growth comparisons are being done in a very small world, right, because we don't have borders opened up between countries. So neither country is receiving the benefit inflows of tourism and dollar flows. We also have trade very muted as a result of what's happening. And so everything that is in terms of driving these economies forward are the domestic demand dynamics. So what's consumer spending doing, what's housing doing, and how is the job market reacting on all fronts.
On that, Canada is outperforming the US on all three metrics. So we've seen stronger rebounds coming through. The US has had rebounds, but ours have had a lot more momentum or push behind them than what we're seeing in the US. So this part of the recovery is showing Canada now starting to outperform after having underperformed in the first half. However, it's going to be a lot harder just to sustain that outperformance as we get into next year. We ultimately do need some normalization with tourism flows, which is more going to be a 2021 story, won't be this year, and trade flows as we get into next year, as well.
- You touched on housing. I want to come back to that. But before we go there, I mean, you mentioned tourism and all these inflows we can get, but, I mean, Canada is also obviously very tied to the energy sector. Less and less, it seems, every year, but that still is something. We still have some fairly high household debt, I know much of that tied to housing, as well. So I mean, why is Canada's-- despite those two things? Those would strike me as big negatives right now.
- Yeah, yeah. So a couple of things. One, as you mentioned, the energy sector was already suffering a down cycle. And so it was at already low levels. It wasn't a huge contributor when we went into this cycle to things like business investment and job growth. So it wasn't coming from a position of strength already. And then in terms of high household debt levels, the drop in interest and mortgage rates has improved affordability for individuals as they go forward.
And so this is what is putting fuel into the housing market. It is not just a Canadian phenomenon. I think in Canada, we're so accustomed to really hot housing markets. But we are seeing very similar strength playing out in the US, even in the UK and other countries. So it's telling you that people are responding to that mortgage impulse with very low rates.
The other factor it's telling you is that those who've been hit hardest in this recession cycle are not those who tend to buy homes. They're not your middle and upper income level or skilled level of jobs that have been preserved to a much greater extent than even what we saw during the 2008 financial crisis. So the characteristics of the cycle are very different. And likewise, it's putting more fuel and support into areas that are interest-rate-sensitive, like auto demand and housing.
And the housing piece is fascinating, to your point, in terms of-- I mean, I guess it illustrates a bifurcation in society that was already existed, and is getting even wider at this point. But when you look at housing, again, I've seen some numbers-- I think it was Toronto sales up 40%, Vancouver up 20%. I mean, these are big, big numbers. You see that strength continuing in Canada and around the world over the next little while, even when mortgage deferrals start to-- you know, the timing of those start to change?
- Well, the momentum should certainly slow. The big question-- and I think this is what analysts are struggling with-- is if it would actually contract again. And that's a harder area to predict. And the reason is, is when you look at the level of unemployment, it would suggest to you that housing should not be behaving the way it is, when you have 10% unemployment rates.
So any model that uses the unemployment rate as their main predictor, which most models would, would tell you that you would be on a much slower path for sales and prices. However, when you switch out the unemployment rate for the income metric, you get exactly what you're seeing in the CREA data in terms of home sales and prices.
And that's because income today is not behaving like it's in a recession. It's actually being supported at the same or higher levels than previous recessions. So there's a complete disconnect between the unemployment rate and income levels. And this is what's ultimately putting some of that fuel under the housing market.
The other factor is, you know, we talk about housing markets like in terms of one term, but it's obviously very bifurcated within the market. The condo market is not behaving like the detached market. There is significant supply in the condo market. It's the detached market where supply is exceptionally tight and where you're seeing demand push through.
And that's the opposite of what you would have seen in previous years, where there was much more lean towards the condo market because of the affordability of buying a condo. But with the drop in interest rates, now that detached market has improved in affordability off of that dynamic alone and suffers from a very tight market, so that affordability won't last. It will encroach on people's debt levels over time, but right now, that market still looks favorable to what's happening in the condo market.
Beata, thanks so much. Great insight, as always.
- My pleasure.
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