I was fortunate enough this week to be invited to listen to Paul Ferley from RBC. Paul is the assistant economist for the Royal Bank and focuses on long term trends in the economy. As a quick disclaimer, this article contains my interpretation of Pauls presentation and is not repeated in its entirety. I’ll try to keep this fairly brief so it won’t become a financial sleep zone. So first the good news, “there shouldn’t be a double dip recession!”, the Royal Bank is looking for growth in the economy to be slow but steady, around 2% in Gross Domestic┬áProduct.
However, the economies of North America are fragile and will likely remain in a frigile state for several years to come, maybe even out as far as 2014-2015. The concern would be any kind of external shock that is difficult to forecast. E.G. An earthquake, terrorist situation, government crisis etc. The underlying tone is one of caution with the general public very aware of constraints on their own incomes and the overall levels of debt. Bottom line, people are not overstretching themselves and trying to keep within their budgets. The key to North American growth over the past 10-20 years or so has been spending driven and unfortunately this has developed a culture of ‘I want it now…’ or ‘I have a right to…’ as opposed to one of fiscal restraint, like, ‘If I save up for it first then I’ll buy it’, type of idea. With this new thinking of ‘I’ll buy it when I can afford it and do we really need a $60k SUV when a $40k mid size will do? This thinking is going to be a drag on the retail commnity and also likely be a continuing hangover on the second home market (Cottages especially). For the Barrie real estate market we don’t suffer from the second home market and we have a fairly diversified local economy. This bodes well for our area remaining stable.

With a subdued retail environment and home owners looking to pay down debt, you can imagine that the forecast for inflation is also low. RBC are suggesting that the inflation forecast is likely to be between 2-3% for the forseeable future. If there is a risk to inflation it’s likely going to be as a result of raw commodity prices moving higher. At the end of the day you can’t get away from the fact that there are over 2.3 bil people now in India and China, affectionatly known as ‘Chindia’. These countries are experiencing growth rates closer to 10% and are of course sucking up world supplies of raw materials, such as Copper, Pot Ash, Oil and Aluminium. RBC is forecasting commodity prices to rise by around 3-3.5% over the 2011 period. The good news here is that Canada is a net exporter of many of these materials and that will likely help our own balance of payments move towards a positive stance, which will in turn help to reduce the large amounts of borrowing completed over the past few years to help restart the global economy. The RBC forecast for 2011 is for retail sales in Ontario / Canada to remain fairly flat around +1.5% year over year.

One of the negative consequences of exports is other countries have to buy Canadian $$ to purchase goods and that could lead to the Loonie soaring against other countries, particularly those like the USA that are net importers. Ontario being susceptible to the exchange rate advance due to the large numbers of manufacturing and auto companies could suffer as a result. Rather like the 2005-2008 era when it seemed everyone wanted to live in Calgary or Edmonton as it was close to Oil.

Unemployment will likely remain the key to growth and with companies not willing to extend hiring on speculation that demand will increase it seems that we are going to have to get used to an unemployment rate nearer 8% than a more traditional 5-6%. The Barrie real estate area however, is still likely to benefit over other towns as the developments to the south come on stream and RVH and the college extension opens. These facts alone should keep home prices in the Barrie area somewhat supported.

On the subject of interest rates, although it’s clear that rates are at at an extreme low point, the Royal Bank doesn’t see that changing in the immediate future but does see rates gradually returning to a more ‘normal’ area over the coming year or two.

You can find more detailed information from the Royal Bank on their outlook at www.RBC.com/Economics

If you are concerned about the value of your Barrie home please don’t hesitate to give me a call.

Ian

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