By Rose Simone, Record staff

KITCHENER – The Canadian economy will recover in 2010, but the challenge ahead is to get the private sector to take more of a lead in that growth, a Bank of Canada economic analyst said in Kitchener today.

Even though the global economy is responding to the stimulus efforts of governments and central banks, the private sector will need to take the reins eventually, said Jane Voll, a senior regional representative in the Canadian economic analysis department at the bank.

“The next thing we need to do is make the transition from policy-induced growth to private sector growth, and that will take tremendous consumer and business confidence,” she said at a Greater Kitchener Waterloo Chamber of Commerce breakfast meeting.

Voll, who is originally from Waterloo Region, said the government and central bank policies to stimulate the economy were necessary. “A year ago, we were looking at the most severe financial crisis since the Great Depression,” she added. The measures have worked, and Canada’s recovery appears to be well underway, Voll said.

Commodity prices have recovered, the housing market has improved and consumer confidence and spending is up compared to the end of last year, she said. Manufacturing shipments are starting to rise again and industries are saying they expect to increase spending on machinery and equipment in the coming year, she added.

The Bank of Canada is forecasting economic growth of three per cent in 2010 and 3.3 percent in 2011.

But there are “challenging headwinds,” such as the rise of the Canadian dollar, which could create “a downward pressure on the Canadian economy,” Voll said.

On the global front, a major concern is managing the current accounts imbalances between debtor nations and those that have trade surpluses.

“The saving countries will have to adjust their practices and the borrowing countries as well. This could happen in an orderly fashion and the economy could continue to grow, but if it happens in a disorderly fashion, it could create difficult circumstances for several economies, Canada’s included,” Voll said.

Voll said that for now it is important for the central bank to keep the overnight interest rate at its historic low because even though consumer spending is starting to come back, “there are still more deflationary pressures than inflationary pressures.”

She said analysts are looking carefully at the signals and trying to “get the timing right” for when the government can pull back and the private sector can take the reins. “There is a long road ahead but we are on the way and we are on the right track,” Voll said

Garry Marr, Financial Post 

The Canadian housing market’s surprising turnaround is spreading to new home construction as developers scramble to respond to a supply shortage that has sent pricing soaring for existing homes.

But any increase in construction on the new home side will likely not surface fast enough to feed the demand for housing that continues to be spurred on by record low interest rates.

Canada Mortgage and Housing Corp. said Monday there were 157,300 units constructed last month on a seasonally adjusted annualized basis, a 5.4% increase from a month earlier. Annualized starts at dropped as low as 118,500 in April.

“There is not a lot of inventory around,” said Gary Friend, president of the Canadian Home Builders’ Association, adding his industry has been careful not to speculate. “We have to watch our Ps and Qs, as we try to meet this demand.”

Any increase in supply would be welcomed as a shortage of new listings has lead to a spike in prices. The Canadian Real Estate Association said last month existing home prices across the country were up 13.6% in September from a year ago as a supply problem was evident in almost every city.

The shortage has yet to ease despite the suggestion higher prices would coax homeowners to sell. This month the Toronto Real Estate Board reported sale prices in October were up 20% from a year ago.

“The existing homes market is in short supply so we’ve gone from a buyer’s market to seller’s market. The way it gets linked is you get some spillover into the new homes market and that’s starting to happen,” said Bob Dugan, chief economist with CMHC.

The agency has already upped its forecast for new home construction for 2010 from 150,300 to 164,900. Even at that level though, construction is still well off the 211,000 new starts recorded in 2008.

Paul Ferley, assistant chief economist with the Royal Bank of Canada, said “at the margins” new home construction could help ease the housing crunch. “Builders are aware and will contribute where they can to advance construction activity but no they can’t turn on a dime.”

By Julian Beltrame        OTTAWA — Canada’s business leaders are turning bullish about the economy after a year of doom and gloom, a new survey suggests.

The Conference Board of Canada’s fall business confidence survey finds corporate leaders believe the recession is finally over and that the economy will rebound in the next six months.

The mood of confidence is particularly strong considering that recent indicators, particularly gross domestic product data for July and August, were disappointing.

Yet 63 per cent of business leaders surveyed said they expect the economy to improve over the next half-year, as opposed to only seven per cent who thought it will deteriorate.

Significantly, about a year ago the responses were almost exactly reversed.

The 16-point surge in the fall survey brought the confidence index to 97.8, the highest level since 2007.

The survey of about 2,000 representative firms from across the country was conducted between Sept. 14 and Oct. 22.

“After a year of despondency, Canadian business leaders are sensing an end to the deepest recession in a generation,” the Conference Board said about the results.

“Respondents appear very encouraged by signs of nascent recovery. More than half the respondents believe the present is a good time to expand their stock of machinery and equipment.”

Despite the apparent optimism, business still said they were concerned about under-utilization in their production levels, with 29 per cent describing their operations as substantially below capacity.

As well, leaders said they were concerned about the impact a strong dollar will have on their sales, the still weak demand, and about the ease of obtaining financing.

But it is in the forward indicators that business leaders were decidedly optimistic.

Almost 61 per cent said they expected their financial position to improve in the next six months, and more than half expect better profitability.

As well, more than half said it was a good time to expand, with 16 per cent saying they expected to increase their level of capital spending by more than 20 per cent in the next six months.

The Conference Board’s survey is roughly in line with results obtained by the Bank of Canada in September. The central bank’s survey of businesses showed 69 per cent of large firms optimistic their sales would increase in the coming year, and 42 per cent saying they expected to shift to hiring.

The Canadian Press

Fed creates ‘sweet spot’ for markets

Paul Vieira, Financial Post  – Equity markets, which have been on the ropes as of late, might have been given a second wind Wednesday as the U.S. Federal Reserve declared its easy-money strategy was here to stay for the foreseeable future.

“What the Fed has done is create a sweet spot for the equity market,” said Andrew Pyle, wealth advisor and markets commentator at ScotiaMcLeod. “What has happened to date can continue in an environment where rates are not going to be pushed up. It has given the equity market a lot more room to play with.”

Stock markets in Canada and the United States ended up with small gains following the release of the Fed statement, which acknowledged improvements in the U.S. economy such as an expansion in consumer spending and stable financial markets. But it reiterated that record low interest rates would remain in place for an extended period, as inflation expectations are expected to remain subdued “for some time.”

As a result, market players can continue to borrow short-term cash at very low rates to invest in higher-yielding assets. Low rates are also likely to be a boost to future corporate earnings, as borrowing costs remain cheap.

Keith Summers, chief investment officer and portfolio manager for Tricoastal Capital Management Ltd., said the Fed statement has removed the risk of a significant market correction.

“The result of what they are saying, which is easy money is here for the foreseeable future, is going to reassure people that the market is not going to be abandoned to its own devices,” Mr. Summers said. “Because of that there will be a bias toward buying as opposed to selling.”

Benchmark indexes in Toronto and New York have surged more than 50% from 52-week lows hit in March, as investors bet on an economic recovery. In recent weeks market indexes have shed some of the gains, as investors engaged in profit-taking on the belief that the market has fully priced in the recovery story.

The Fed statement offered some guidance as to when it might begin raising rates. In the only significant change from previous statements, the U.S. central bank said its record-low rate policy would continue due to “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.” Should those elements change, then all bets are off, analysts said.

“This appears to spell out the Fed’s criteria for beginning rate normalization,” Michael Woolfolk, senior currency strategist at Bank of New York Mellon, said. “While the language was subtle, the clear message is to keep inflationary concerns to a minimum and to curb talk of higher rates.”

But analysts such as Mr. Pyle said the guidelines provided are somewhat vague because they don’t indicate, for example, how much slack has to be removed from the economy before a rate hike is warranted. In contrast, the Bank of Canada said it is prepared to keep its key benchmark rate at the record-low level of 0.25% until June 2010, conditional on inflation remaining subdued.

“The longer you keep this low interest-rate environment going, the greater the shock will be for households, businesses and investors when someone is forced to change the environment. We are setting ourselves up for a huge risk,” he said.

One factor that could force the Fed to move is further deterioration in the U.S. dollar, Mr. Pyle added. The U.S. dollar lost ground following the Fed decision, on improved risk appetite. Mr. Woolfolk said the U.S. dollar could lose further ground against major currencies, such as the euro, unless job data due out on Friday is worse than expected.

Alia McMullen, Financial Post 
Gold soared to a record high Tuesday after India surprised the market with the biggest single purchase of the commodity by a central bank in the past 30 years — a signal governments around the world are becoming increasingly uncomfortable about the sliding value of the U.S. dollar.

“It’s certainly indicative that the monetary authorities in India are not overwhelmingly upbeat about the outlook for the U.S. dollar,” said Erik Nilsson, senior international economist at Scotia Capital. “Bear in mind too that we’re talking about a jurisdiction that has had a long standing love affair with gold.”

Mr. Nilsson said India had increased its gold reserves to hedge against its U.S.-dollar holdings, which total about US$268.4-billion.

He said the increasing demand for gold as a hedge against the greenback was helping to set the stage for an alternative reserve currency or asset to the U.S. dollar, a proposal that has been trumpeted by countries such as China, France, India and Russia. However, any such change would not come quickly, Mr. Nilsson said.

The cost of an ounce of gold rose US$30.90 Tuesday to hit a record US$1,084.90 after it was announced the Reserve Bank of India had purchased 200 tonnes of the precious metal from the International Monetary Fund.

The IMF said the purchases were made in installments between Oct. 19 and Oct. 30 for a total value of US$6.7-billion.

Timothy Green, author of The Ages of Gold, said it was “the biggest single central-bank purchase that we know about for at least 30 years.”

Indeed, the purchase amounts to almost half of the 403.3 tonnes that the IMF approved for sale in September to diversify its sources of funding. The IMF owns more than 3,000 tonnes of gold.

Bart Melek, global commodities analyst at BMO Capital Markets, said the Reserve Bank of India’s gold purchase pushed the country’s gold reserves up to 7.1% of its total reserve assets. He said other countries, including China and Russia, have also been buying more gold, a trend that would likely continue while the U.S. economy remained volatile. On average, countries hold about 12.6% of their reserves in gold, up from 9.9% a year ago. Some of this represents an increase in gold holdings, but another driver of the increased proportion is the rise in the value of gold.

The price of gold has surged 52% since bottoming on Nov. 12 last year.

“Historically, gold has been a hedge against instability, has been a hedge against inflation, has been known to behave counter cyclically to equity markets,” Mr. Melek said. “Gold has reasserted its historic role of being a hedge, basically insurance against bad stuff, against everything from geopolitical problems to inflation to dollar issues.”

He said in the bullish case, gold could continue to push higher to average US$1,300 on an annual basis by the end of 2010 or early 2011.

Brian Christie, analyst at Desjardins Securities, said central-bank demand would be an important driver of the gold price, with India’s purchase adding to the positive momentum for the commodity.

“China is rumoured to be interested in some or all of the remaining IMF bullion; however, it is likely very sensitive to price,” Mr. Christie said. “Since the transaction with India was done at fair market value, the Chinese could be waiting for a pullback in the gold spot before pursuing this purchase further.”

With holdings of US$2.3-trillion, China is the largest holder of U.S.-dollar reserves and has been actively looking to diversify its portfolio.

The Canadian Press

OTTAWA — The national housing agency is reporting that housing starts have started to recover and it expects the recovery to continue.

Canada Mortgage and Housing Corp. predicts starts will reach 141,900 this year and increase to 164,900 in 2010.

The CMHC’s fourth-quarter market outlook forecasts housing markets will continue to strengthen over the next year as economic conditions improve.

It says demand for existing homes has rebounded and both new and existing home markets are characterized by lower inventory levels.

However, the national housing agency says the strong pace of sales in the second and third quarters partly reflects delayed activity and is not likely to be sustained.

The CMHC says it expects the level of sales to move back closer in line with anticipated economic conditions.

It predicts existing home sales will reach 441,300 units in 2009 and increase to 445,150 units in 2010, while the average price is expected to be $312,950 in 2009 and $324,500 in 2010.