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OTTAWA – Canada’s economy is becoming more solidly entrenched with the private sector beginning to play an increasingly pivotal role in leading the country out of recession, the Bank of Canada said today in its latest policy report.

In a mildly upbeat assessment of the recovery, the central bank’s quarterly outlook contains some upward revisions for growth in the United States, China, Europe and Japan that should help Canada’s battered exporters and manufacturing sector in the next two years.

And it says Canada’s economy will grow faster going forward than expected, in part because it got off to such a slow start last summer.

Overall, the bank appears more optimistic about the sustainability of the recovery that is happening around the world, although it also cautions that risks of a stall remain.

There is also some upside hope, the bank adds, that conditions may continue to improve better than projected.

“It is thus possible that the recovery in global demand could be more vigorous than projected, resulting in stronger external demand for Canadian exports,” the bank judges.

In Canada, it adds: “Economic growth is expected to become more solidly entrenched over the projection period as self-sustaining growth in private demand takes hold.”

The analysis is broadly similar to what the bank said last October, when it last issued a comprehensive forecast on the economy, but the tone is brighter at the margins and the danger signals less frequent.

For months, bank governor Mark Carney has been cautioning Canadians not to get overextended in purchasing homes, but there is no such warning this time. In fact, the bank says it expects the housing market to cool this year and next as a result of pent-up demand becoming satiated and relatively high home prices.

As well, the bank appears more confident that the private sector is ready to take the handoff from governments as the main driver of economic growth.

The bank says Canada’s reliance on government stimulus spending likely hit its peak at the end of 2009, representing about two per cent of all economic output for the country, and will decline this year.

By 2011, the private sector will be the sole driver of Canadian growth, the bank said.

But while Canada’s domestic demand continues to be the key driver of economic growth, the big change from October’s outlook is that prospects are also improving for the country’s battered export and manufacturing sectors.

“Export volumes are expected to continue to recover over the projection period in response to growing external demand and higher commodity prices. Export growth is projected to be somewhat stronger than was expected last October, owing to a more favourable outlook for the U.S. economy, particularly in the sectors that figure most importantly for Canadian exporters,” the bank says.

Those volumes would be even greater but for the strong Canadian loonie, it adds.

Canada’s auto and forest products sectors were particularly hard-hit during the recession, the bank notes, and will benefit most from renewed growth in the U.S. Canadian manufacturers shed about 200,000 jobs last year.

The central bank now says the U.S. gross domestic product will grow by 2.5 per cent this year, largely as a result of improvement in the financial sector. Three months ago, the bank estimated U.S. growth at a mere 1.8 per cent.

In Canada, the bank says the economy likely grew by 3.3 per cent in the last three months of 2009. For 2010, the economy will advance by 2.9 per cent, followed by a 3.5 per cent pickup in 2011.

In retrospect, the bank noted that Canada’s recession, while severe, was not nearly as damaging as it was in other industrialized countries, partly because of Canada’s solid banking system.

But neither has the recovery been particularly impressive in Canada, starting with a disappointing 0.4 per cent advance in the third quarter of 2009, which the bank attributes to a surprisingly strong influx in imports. The U.S., backed by a weak currency, rebounded more strongly with a 2.2-per-cent increase in the third quarter and a bouncy 4.7-per-cent advance in the fourth quarter of 2009.

The bank believes Canada will make up for the slow start this year, projecting it will advance stronger than the U.S., Japan and Europe.

The main engine of global growth remains China, however, which is expected to be back close to double-digit growth this year.

by Michelle Warren, Bankrate.com
Wednesday, January 6, 2010provided by

  Credit crunch, debt crisis — call it what you will, but the current economic climate is spurring people to get their own finances in order. For Jack and Sarah Stewart, of Toronto, this means tackling the $40,000 in debt they’ve allowed to balloon during the past eight years. With their mortgage coming up for renewal, they’re thinking of clearing the slate and rolling the burden into their mortgage.

“We want to consolidate our debt, but we’re not sure if increasing our mortgage is the best way to do it,” says Jack, who asked that his and his wife’s names be changed to protect their privacy.

He’s not alone. Laurie Campbell, executive director of Credit Canada, says it’s a question people grapple with all the time. “Homes in the past have been your sacred cow,” she says, referring to the drive to pay down one’s mortgage as quickly as possible.

These days, however, with people juggling debts and paying varying rates of interest, increasing one’s mortgage can be a smart move, even if it takes longer to pay off.

Lowering interest rates

Peter Majthenyi, a mortgage planner with Mortgage Architects, in Toronto, says it’s a common theme as homeowners strive to bring down the overall interest they pay, as well as reduce their monthly obligations. He prefers to think of it as repositioning one’s debt, and in his experience, “in almost all cases, it’s justified.”

“If you have debt that is sitting at 18 percent interest, then it certainly makes sense,” says Campbell, adding that it’s something to consider only if you have enough equity in your home and if your mortgage is coming up for renewal (read the fine print to find out if the penalties for breaking a mortgage outweigh the possible benefits).

Majthenyi notes that if you’re working with the same lender, there’s often no penalty involved with increasing your mortgage before the term expires.

The Stewarts seem like prime candidates. They have a $200,000 mortgage on a house worth about $425,000. They have plenty of equity, they’re up for renewal at the end of the year and they say they’re serious about getting their finances in order. Ideally, they’d roll the debt into their mortgage, continue an accelerated payment program whereby they pay every two weeks and they would not increase their amortization period, but instead increase their payments.

Dealing with debt

It’s a good plan, says Campbell, who thinks all mortgage holders should accelerate their payments. She also likes the idea that they plan to stick to a 17-year amortization instead of renegotiating another 25-year mortgage. However, she stresses that none of this amounts to much if the Stewarts are going to continue the same spending habits and find themselves in a similar position five years from now. “They have to understand what got them into this $40,000 debt in the first place. They have to make sure they don’t fall victim to that again.”

She recommends cutting up credit cards, especially store cards, which have higher rates of interest, and not using one’s line of credit like a bank account.

The Stewarts say the bulk of their debt was incurred for renovation costs, including a new kitchen and installing hardwood flooring, but admit their spending habits need a makeover. “We’re always dipping in to our line of credit because we’re strapped for cash,” says Sarah Stewart. “I think if we consolidate the debt, it’ll increase our cash flow and we’ll be able to live within our means.”

Jeanette Brox, a Certified Financial Planner with Investors Group in North York, Ont., always encourages her clients to look at the big picture when it comes to financial health: “My job is to make them think outside the box.” She says helping people manage debt, while securing their future, is essential. “People need to think beyond what our parents did, which was paying down the mortgage,” she says. “I used to think that way too, but I don’t anymore.”

In her view, the Stewarts and others like them need to take an aggressive approach if they ever want to get ahead. Not only do they need to improve cash flow, but they also need an emergency fund for unforeseen expenses, not to mention a retirement plan.

Planning for the future

Brox admits a lot of people would balk at the idea, but she thinks the Stewarts, both in their early 30s, should not only roll their debt into the mortgage, but increase their mortgage an additional $35,000 for a total of $275,000. To make payments more manageable, she’d also recommend increasing the amortization period to 25 years. She would invest $25,000 in mutual funds and further $10,000 in a money market account (earning about two percent interest).

“This is what I call a lifestyle fund,” says Brox, adding that part of the interest cost on the mortgage would be tax deductible. “It’s a win-win situation, but you’ve got to be really disciplined.”

That means using their increased tax return to pay down the principal on the mortgage, thereby helping compensate for the interest cost of carrying the additional $35,000. The other bonus is that within five years (or so), the $25,000 registered retirement savings plan, or RRSP, will have grown to about $40,000. She stresses this is a long-term plan and people have to realize that the market is going to rise and fall.

“It’s all based on comfort level,” says Brox, adding that the biggest mistake she sees with people who reposition debt is that they don’t have a long-term plan and, as Campbell, pointed out, go back to old spending habits. “People need to have their whole financial picture analyzed. It’s something to consider, but you need to work with a planner or bank manager.”

Lines of credit

There’s a whole school of thinkers that shudder at the thought of increasing one’s mortgage. At the core of this is that you’re trading unsecured debt for secured debt and paying interest on that debt for the entire life of your mortgage, which can dramatically increase the cost of borrowing. In addition, refinancing also involves added legal costs (in most cases a minimum of $500). An alternative is consolidating debt onto a line of credit or home equity loan, which have higher interest rates than a mortgage, but can be paid off more quickly.

This works in theory, say our experts, but rarely in real life. “A lot of people just make the minimum payment and never get it cleaned up,” says Brox.

“I’m wary of open lines of credit because they can easily stay at $50,000 forever,” says Campbell, adding that an increased mortgage payment forces people to be more disciplined in paying down debt.

As for paying the debt for the entire length of your mortgage, all the experts stress that the way to combat this is by channelling extra funds back into the mortgage and paying off the mortgage early. This could mean accelerated payments, using tax returns or bumping up the payments. “We’re putting all the money back into the principal of the mortgage,” says Majthenyi, who points out that an extra $10,000 on a mortgage costs about $50 a month, while a $10,000 loan requires minimum payments of $300.

In the Stewart’s case, it’s costing them about $1,000 a month to cover $40,000 debt. If it’s part of their mortgage, it translates into about $200. Ideally they’d direct the bulk of that money back into their mortgage through an annual lump payment or by increasing individual payments by a few hundred dollars.

Repositioning debt into one’s mortgage is a sound option for people who are committed to changing bad habits and/or taking a long-term approach to getting their finances in order.

When it comes to money, Brox says that people need a big-picture plan, not a band-aid solution: “A lot of times it’s not what you make but how you manage it.”

Michelle Warren is a freelance writer in Toronto.

Roma Luciw Globe and Mail

More Canadians are heeding the interest-rate warnings and focusing on curbing their debt loads in 2010.

A Manulife Financial poll released Tuesday found that paying down credit cards and lines of credit is growing as a financial priority among Canadians. In fact, more than a quarter, 28 per cent, pegged debt elimination as their main goal, up from 24 per cent in 2009 and a five-year high.

The results come at a time when households are tackling post-Christmas credit card bills and struggling with record debt, both mortgage and consumer. With interest rate hikes on the horizon, Bank of Canada Governor Mark Carney last month cautioned Canadians against taking on more debt than they can handle.

Despite this red flag, Canadians dug deeper this December, with spending in the holiday period rising 3.44 per cent in volume over the previous year, according to Moneris Solutions, which processes credit, debit and online payments.

The central bank estimates there was nearly $1.4-trillion in total household credit outstanding in October, the most recent data available, up from $1.3-trillion a year earlier. Much of the growth stems from mortgage debt, which stood at roughly $950-billion in October, compared with less than $890-billion a year earlier.

The Manulife national survey of 1,000 people, conducted last month by Research House, found that the second most-cited financial priority among Canadians was paying down the mortgage. It was chosen by 14 per cent of respondents, up from 11 per cent last year.

The third priority – saving for retirement – was listed by 11 per cent of those polled, down from 14 per cent a year ago.

“Paying down debts is understandably a priority, particularly at this time of year,” Paul Rooney, chief executive officer of Manulife Manulife Canada, said in a news release. “Given the economic challenges in 2009, we shouldn’t be surprised to see more Canadians focused on ensuring their financial house is in order.”

Only 5 per cent of respondents listed saving for a child’s education, through a tool like a registered education savings plan, and saving for purchasing a home, as financial priorities, on par with last year’s results.