MNI POLICY: Debt, Housing Strengthen Case For Longer BOC Pause

By Yali N'Diaye

     OTTAWA (MNI) - The outlook for the Bank of Canada tilted toward an even

longer pause after new home sales released Friday plunged to their lowest point

in over six years. 

     There was a rare upside surprise when manufacturing data were released

earlier in the morning, but that was quickly overshadowed by the home sales

data. It remains to be seen whether the manufacturing increase will be isolated

or whether growth in the first quarter could rebound more than expected by the

central bank.

     Even if the federal government were to announce stimulus measures in its

2019 budget on March 19 - the last budget before the October 21 federal election

- analysts don't expect any material boost to GDP growth.

--WEAKER HOUSING

     Canada's existing home sales plummeted 9.1% in February, more than erasing

the 3.6% gain in January, and reaching their lowest level since November 2012,

the Canadian Real Estate Association reported Friday. Sales have been down 4 of

the past 5 months. "The housing sector is on track to further reduce waning

Canadian economic growth," warned CREA Chief Economist Gregory Klump.

     The data released Friday came on the back of a 3.9% drop in housing

investment in the fourth quarter 2018, trimming the annualized GDP growth by 1.2

percentage points.

     Sales have been down 4 of the past 5 months. 

     On the price front, CREA's Aggregate Composite MLS Home Price Index edged

down 0.1% year-over-year, the first decline in nearly ten years, driven down by

single-family homes.

     Statistics Canada reported Thursday that Canada's new housing prices edged

down 0.1% in January, both month-to-month and year-over-year. The monthly

decrease was the first since February 2018, while the 12-month decline was the

first since December 2009.

     Even prior to these housing number, the BOC had stressed in its March 6

statement that, "consumer spending and the housing market were soft, despite

strong growth in employment and labor income."

--RISING DEBT CONCERNS

     Earlier this week, Senior Deputy Governor Carolyn Wilkins brought attention

to the rising debt, not just in Canada, but globally.

     In fact, "the global development that concerns me the most," she said in a

speech Thursday, "is rising debt."

     In Canada, elevated household debt remains the top vulnerability for the

financial system, she reminded.

     Earlier Thursday, Statistics Canada reported that household credit market

debt-to-disposable income reached a record high 178.5% in the fourth quarter

2018, during which households borrowed C$21.2 billion. Demand for consumer

credit and non-mortgage loans decreased, while demand for mortgage loans rose

C$2.3 billion.

     For the central bank following a risk-management approach, this new debt

number was a setback that further reinforces the need to be careful in

considering any interest rate hike.

     The already "increased uncertainty about the timing of future rate

increases" underlined in the March policy statement just got even more

uncertain.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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