WE’RE #1
Depending on how you count them, there are somewhere between 190 and 200 countries in the world. In that long list of nations, Canada has between the 10th and 15th largest economy as measured by Gross Domestic Product (GDP). In short, relative to the rest of the world, we are very wealthy indeed.
However, there is another important indicator in which we rank even higher: household debt. As of May, our household debt is the highest among G7 nations, and perhaps even more striking, it is greater than our entire GDP. At 107% of GDP, our household debt is bigger than our entire economy.
And yet, Canadians continue to spend enthusiastically, which is helping drive up prices (it is creating inflation, in other words), which in turn prompts our central bank to increase interest rates to dampen spending – and both of these factors create even more household debt.
This should be something of concern to us, because high levels of debt put households at risk, for example when:
-there is a recession, with possible job losses (there is the possibility of a moderate one, arriving late this year)
-homeowners have a variable rate mortgage, and rates and therefore payments keep going up
-homeowners have a fixed rate mortgage – and it comes up for renewal, with, in this environment, possibly a much higher interest rate and hence much higher monthly payments
Consider this: inflation of mortgage interest costs was at 29.9% in May, the highest on record, and we expect these costs will continue to rise.
Despite higher costs, the housing market in Canada has been remarkably resilient. Home resales and prices both continued to rise in May. Nationally, there was a 6.8% month-over-month increase in new listings, and we expect that listings and prices will climb even further in June. Since its steady campaign of interest rate hikes started last year, the Bank of Canada paused earlier this year, which seems to have rekindled demand. However, the BOC then raised rates in June, and we anticipate another hike in July, which could slow things down just a bit.
We mentioned the First Home Savings Account, or FHSA, in the April edition of this blog. It can certainly help make home ownership more affordable for the people in your lives seeking a first home, including your children and grandchildren. We also see an increasing number of our clients giving mortgage downpayments as gifts to their children and grandchildren, a decision that in some cases is a deliberate disbursement of their estate now, while they are still around to witness its effects. If you are considering any of these options, please do not hesitate to contact me, as I am here to help you work through the pros and cons, and make your wishes happen.
REVENGE TRAVEL
As I say, Canadians’ spending has been enthusiastic. And nowhere has this been more obvious than in the travel market, where spending has been exceptionally strong – rising almost 30% above pre-pandemic levels, according to RBC data. Between January and April of this year, more than 10 million Canadians returned from trips abroad, up 7% compared to the same period in 2019.
We are not just travelling on the cheap, but taking more expensive forms of transportation. For example, the number of Canadians returning by car from the US is down 21%, and the number coming back by plane is up 42%. And according to data from Google Trends, more Canadians are searching for “best” travel options vs “cheap” ones. As RBC notes, “the gap [between best and cheap searches] has also grown noticeably wider than it was before the pandemic.”
This data is just the tip of the iceberg in what I think is a fascinating story, as told in an article written by RBC Economics & Thought Leadership, which you can read here (can you guess the top three provinces Canadians are travelling to this year? Hint: they are all in one region).
TWO WORDS:
How can it be, with spending up on travel and homes, that inflation actually slowed in May, to 3.4%? Two words: energy prices. Sixty percent of the slowdown can be traced back to lower energy prices, which are down 12.4% year-over-year.
Food inflation, on the other hand, did not change much but remained high in May, at 8.3%. Hinting at what patio season will bring, prices were higher in particular for dining out.
The bottom line is that although inflation is slowing, it is still well above the BOC’s 2% target. Higher interest rates are cutting into household purchasing power, but spending remains robust. This week we will closely watch the Bank of Canada’s report on GDP, for any signs that our economy is losing momentum. That said, unless the data shows a surprising downturn, we continue to expect the bank will raise interest rates by another .25% in July.
SUNCOR
-CBC News story, June 21st: “Russia-aligned hackers are looking to disrupt Canada's energy sector, intelligence agency warns”
-Suncor press release, June 25th: “Suncor Energy responds to cyber security incident”
In the parlance of PR, Suncor’s press release was “terse.” It totalled just 71 words and gave no details as to the nature of the incident or what its impact on the business might be, although it is clearly some kind of cyberattack.
As you can see, the CBC story followed by just four days a warning from Canada’s cyber-intelligence agency, the Communications Security Establishment (CSE), that “Russia-aligned non-state threat actors will continue their attempts to compromise the country's oil and gas sector until the war in Ukraine ends.”
The CSE continued: "We assess that the intent of this activity is very likely to disrupt critical services for psychological impact, ultimately to weaken Canadian support for Ukraine. We assess that this activity will almost certainly continue for the duration of the war, and will likely increase as Russia's invasion efforts falter, or new support for Ukraine is announced.”
Other news reports and social media postings indicate that Suncor employees have been locked out of their computer systems. To the person on the street, there is the inconvenience of some of Suncor’s Petro-Canada stations not being able to accept debit or credit card payments. To our clients who own Suncor, it is possible that the stock price will be negatively affected in the short term – although we should note that as of market close June 28th, it was up slightly, 0.23%, over the past five days. Please also note that the majority of our clients have low exposure to Suncor.
But here is the most critical point of all: good, dividend-paying companies like Suncor – which have strong management teams, strong balance sheets and high potential – are going to weather almost any storm. Any downward movement in the stock price would likely be a temporary blip. In fact, because it seems impossible for companies to avoid cyberattacks completely, they must now be considered a cost of doing business.
SPECIAL ANNOUNCEMENT
In the May edition of the Journal, I hinted at an upcoming announcement about delivering even more value to you, our client. Today is the day I can tell you: following an intensive application and vetting process that took six months, I have received regulatory approval and been certified by RBC with the Private Investment Manager (PIM) designation.
Being a Private Investment Manager allows me to, with your prior written authorization, manage your portfolio on a discretionary basis. That authorization would come in a formal document – an Investment Policy Statement – that very clearly articulates your goals and the boundaries of the discretion I have to make changes in your portfolio without consulting you first. This discretion would allow me to adapt even more quickly to what is happening in the markets and economy, which is another way of saying that I will be able to act even more effectively in your interests that I can now.
I was eligible to apply for the PIM on the basis of my years of service and also that I hold the prerequisite certification, the CIM (Chartered Investment Manager).
I have to thank Colleen for her extensive support throughout the application process, which was exhaustive.
At my annual review with you, I will be talking about whether a PIM account is appropriate for you. I look forward to that conversation – and if you would like more information in the meantime, I will be happy to hear from you.
THE FAMILY FILES
We love going to Montana, as we just did for the first time since the pandemic. To Koocanusa. If you have been, you know that it feels like the real Wild West. Lake Koocanusa is a reservoir, and because the water level fluctuates so much, no one is permitted to build on it – meaning it is very quiet and peaceful. Which you can see in this incredible photo, which has no filters on it at all.
We stayed in cabins and enjoyed the beach, walks and campfires.
In other news, Cara and Jake are just wrapping up school for the year, with Jake’s graduation from grade 6 being this week.
Summertime is here indeed. Have a great one!
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The greatest compliment we can receive is a referral to someone you care about who would appreciate the same value we take pride in giving you. If you have someone in mind, feel free to contact me at any time. Thank you very sincerely.