This week, we will take a step back from COVID updates to focus on a few things that have been happening from an economic perspective.
Let’s start with the Canadian dollar, which recently hit its highest point - $0.82 - in 4-years:
You will recall that in our year look-ahead presentation in December, we pointed out that while our long-term forecast on the Canadian dollar remained negative, we felt that 2021 was likely to be a good year for CAD. This thesis was largely based on the fact that the Canadian dollar has become closely associated with “risk on” as it relates to the stock market and we felt that 2021 was likely to be a good year for stocks.
The question now is – where to from here? RBC Economics is sticking to its forecast that CAD is likely to hit around $0.78 by the end of 2021; although, it is likely to remain above $0.80 for the next few months. The main driver of the drop is likely to be a convergence in policy, which basically means that while the Bank of Canada has become incrementally less accommodative (they have gone from buying $4 billion/month of bonds to $3 billion), the U.S. Federal Reserve has yet to, but RBC Economics expects this to change as 2021 progresses.
Okay, now let’s look at the red hot housing market:
Home price gains continued to accelerate in April, with most major markets hitting record highs. Beneath the surface, there are some signs that the market is beginning to cool a bit, as sales in Toronto fell 20% in April; although, inventories remain low and there is obviously no sign on the pricing side of cooling.
RBC Economics expects single family home prices to remain robust, but for the pace of gains to slow markedly as affordability has deteriorated significantly. Conversely, RBC Economics expects condo prices, which have recently begun to firm, to rise over the next year as buyers are forced into the market because of soaring single family home prices.
Okay, now let’s move to the broader economy.
First off, the news on the jobs front was not good in April with Canada losing ~200k jobs largely because of the third wave of the virus and its impact on reopening. The unemployment rate rose to 8.1% from 7.5% with most of the job losses occurring in so called “high touch” industries, which have tended to be most impacted by the renewed shutdowns (retail, golf courses, etcetera). RBC Economics expects April GDP to decline in Canada after several months of robust gains. Despite this, their trajectory of growth in Canada remains above forecasts from earlier in the year:
Returning to our forecast from December, we expected 2021 to be a very strong year for growth, but we also felt that it was likely to be uneven with fits and starts. With the shutdowns in Canada likely to remain in place through May, we would not be surprised to see May also struggle on the jobs and activity front with potentially a stronger summer as a combination of warmer weather (negative for the virus), vaccinations (negative for the virus), and animal spirits (positivity spurred by vaccinations and reopening) boosts the economy.
Final Thoughts
A hearty Happy Mother’s Day to all of our mothers, grandmothers and great grandmothers. It has been a difficult 14-months, especially in the “hugs department”, but with vaccinations picking up steam, we are ever hopeful that next Mother’s Day will be filled with family and lots of hugs. For now, continue to stay safe, but don’t forget to facetime Mom on Sunday.