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Avery Shenfeld, chief economist at CIBC, says self-congratulatory accolades about Canada’s comparative economic performance need to be put in context.

“Of late, our self-congratulations have extended to economic performance, with Canadians cheering our lower unemployment, sounder banking system, solid mortgage market and climbing house prices. Clearly, the recession hit less hard on this side of the border.

But before we wear out our arms patting ourselves on the back, it’s worth noting that, on some dimensions, we’re doing no better than our American friends,” Shenfeld wrote in an economic update.

Shenfeld says given the budget deficits coming to light provincially and federally, Canada’s government debt levels will only slightly trail the U.S.

“Canada’s debt burden stands well below that stateside, but that owes to superior fiscal results that are now in the rearview mirror. With several provinces having conceded to much larger shortfalls this year — Ontario being only the latest in a string of such confessions — the aggregate federal and provincial budget deficit burden for residents of some provinces is not that far out of line with what Americans face,” Shenfeld says. “Both countries will see the economic squeeze of fiscal tightening in the next few years, even if Canada can afford to take a bit longer in getting it’s house in order.”

Shenfeld point out that Canada’s economic output seems poised to lag the U.S.

As of Q2, nominal GDP was down 7.4% from the peak on this side of the 49th parallel, vs. 2.7% stateside. Government revenues, particularly in provinces where resource royalties or corporate income taxes are major income sources, have seen the impact of that deeper plunge in nominal output,” Shenfeld says. “The U.S. saw only one-fifth of a drop in the second quarter real GDP as opposed to Canada, and the coming week’s first estimates for Q3 should show America advancing at more than twice Canada’s likely pace. They’re not hiring down there, but they are squeezing a lot more output from their staff, a productivity edge that will help corporate bottom lines and export competitiveness.”

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International fund industry touts future

Delegates from 30 associations from around the world gathered for the 23rd Annual Conference and General Meeting of the International Investment Funds Association held in Seoul this month.

Kun Ho Hwang, chairman of the Korean Financial Investment Association and host of the conference, said members came together to discuss future directions for the investment funds industry and the changes and impacts that have occurred over the past year as a result of difficult financial markets.

Hwang said strong financial markets depend on public trust and confidence. Transparency and effective oversight serve to “promote strong markets and are hallmarks of regulated investment funds.”

The consensus from the conference is the investment funds industry is well-positioned as a savings and investment vehicle and as such should continue to grow and develop in order to help investors meet financial goals while contributing to global economic growth.

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DBRS downgrades Ontario

DBRS has downgraded the long-term rating of the Province of Ontario to AA (low) from AA as a result of the considerable erosion reported by the province in its already depressed debt and fiscal outlooks.

DBRS has also downgraded the short-term rating to R-1 (middle) due to the extent of the deficits now foreseen for the next three years and the pressure this is expected to place on the borrowing program, which will require a much greater use of short-term debt.

Of course, the downgrades will also impact the long-term ratings of crown corporations. The Ontario School Boards Financing Corporation, Ontario Power Authority, University Health Network, MaRS Development Trust and the Ontario Electricity Financial Corporation are also being downgraded by one notch given their strong ties to the Province.

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Fixed or Variable, which is better?

A new report released by BMO’s economics department provides insights to help choose between a fixed or variable mortgage.

“The question of whether to lock in to a longer-term fixed mortgage rate or stay in a variable rate has become an increasingly complex and important issue,” says Doug Porter, deputy chief economist, BMO Capital Markets. “Short-term rates are at extreme lows and pressure is likely to build for higher rates in the year ahead.” According to the report, over the past 30 years it has been more cost-effective for borrowers to have a variable rate mortgage 82% of the time. However, under the current environment, Porter points out there are a number of factors to consider before assuming the variable rate is the hands-down winner:

Canada has been in a long-term declining rate environment since the early ’80s. The Bank of Canada’s overnight rate is now as low as it can go, so there is no further downside for variable rates. “The surprises can only be to the high side from here.”

The advantage to a variable rate mortgage is that it has been consistently less costly over time. As well, the current outlook for inflation remains benign, which will likely keep price pressures at bay well into 2011. The soaring Canadian dollar is putting additional downward pressure on prices, reducing the near-term need for the Bank of Canada to raise rates.

The report points out there is also some risk to locking in as rates could fall if the economy performs worse than anticipated. Even as rates start to rise, Canadians can always lock into a fixed rate at a later date.

(10/23/09)