April 18 (Bloomberg) -- The Bank of Canada said that economic growth will be stronger this year than its earlier forecast, as diminished risks from Europe and the U.S. boost consumer and business confidence.

"Global uncertainty will have less of a dampening effect on the spending of Canadian households and businesses in coming quarters," the Ottawa-based central bank said in its Monetary Policy Report. Governor Mark Carney holds a press conference at 11:15 a.m.

The bank kept his benchmark lending rate at 1 percent for a 13th meeting yesterday while saying that a policy-rate increase "may become appropriate" as the economy recovers. The shift in language triggered bets of a rise later this year.

The bank raised its growth forecast for this year to 2.4 percent from 2 percent. It lifted its outlook for the contribution from business investment to 0.9 percentage point from 0.6 point in its last report in January, and raised the consumption projection to 1.3 points from 1.1 points.

"Some modest withdrawal of the present considerable monetary policy stimulus may become appropriate," the bank said in its report today. It repeated phrase from the January Report that its forecast assumes "a gradual reduction in monetary stimulus" over the next two years.

Improving domestic and global demand also means trade will play a greater role in Canada's economy this year, the bank said. Exports will add 1.7 percentage points to output growth, up from a prior 1.1 percent outlook, while imports will subtract 1.5 points, greater than January's 0.8 point forecast.

Global Expansion

The global economic expansion will be 3.2 percent this year instead of 2.9 percent, the central bank said. The U.S. economy, which buys three-quarters of Canada's exports, will expand by 2.3 percent this year, up from an earlier reading of 2 percent. Europe's economy will contract 0.6 percent this year, the bank projected, smaller than an earlier prediction of 1 percent.

"The external headwinds facing Canada have abated somewhat," the report said. The U.S. is benefiting from employment and stock-market gains that are building confidence, while European policy makers have taken steps to manage the risks from the sovereign- and banking-debt crisis.

"While the European Central Bank's expanded liquidity operations have not by themselves directly improved the underlying health of bank balance sheets, they have created space for the restructuring of these balance sheets to proceed at an orderly pace," the report said.

IMF Forecast

The International Monetary Fund raised its global growth forecast for the first time in more than a year yesterday, with the U.S. leading the improved outlook. The world economy will expand 3.5 percent this year, compared with a January projection of 3.3 percent, the IMF said.

Canada's economy will grow at a 2.5 percent annualized pace this quarter, up from a January estimate of 1.8 percent, the Bank of Canada said today. Inflation will average 2 percent this quarter, up from a prior figure of 1.5 percent, it said.

Inflation, which was 2.6 percent in February, has exceeded the bank's 2 percent goal for 15 straight months, in part because of higher oil. Crude oil prices have increased by 18 percent over the last six months through yesterday, based on New York Mercantile Exchange contracts.

Canada's status as an oil exporter isn't translating into net economic benefits, the central bank said. That's because the rise in the benchmark West Texas Intermediate price paid to exporters has lagged the standard Brent import price. Most of Canada's oil is produced in western Canada and exported, while factories in eastern Canada consume imported oil.

"If sustained, these oil price developments could dampen the improvement in economic momentum," the central bank said.

Job Growth

Reports this month have shown 82,300 new jobs were created and an annualized pace of housing starts of 215,600 units in March, both the fastest since 2008.

The bank said Canada's economy was operating about half a percentage point below its full capacity in the first quarter. The January report said the gap was about 0.75 percent in the fourth quarter.

The bank also said its forecast assumes the Canadian dollar will trade for 101 U.S. cents through 2014 versus a January figure of 98 U.S. cents through 2013.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The profile for global economic growth has improved since the Bank released its January Monetary Policy Report (MPR). Europe is expected to emerge slowly from recession in the second half of 2012, although the risks around this outlook remain high.  The profile for U.S. growth is slightly stronger, reflecting the balance of somewhat improved labour markets, financial conditions and confidence on the one hand, and emerging fiscal consolidation and ongoing household deleveraging on the other.  Economic activity in emerging-market economies is expected to moderate to a still-robust pace over the projection horizon, supported by an easing of macroeconomic policies.  Improved global economic prospects, supply disruptions and geopolitical risks have kept commodity prices elevated.  In particular, the international price of oil has risen further and is now considerably higher than that received by Canadian producers.  If sustained, these oil price developments could dampen the improvement in economic momentum.

Overall, economic momentum in Canada is slightly firmer than the Bank had expected in January. The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated.  As a result, business and household confidence are improving faster than forecast in January. The Bank projects that private domestic demand will account for almost all of Canada’s economic growth over the projection horizon.  Household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk.  Business investment is projected to remain robust, reflecting solid balance sheets, very favourable credit conditions, continuing strong terms of trade and heightened competitive pressures.  The contribution of government spending to growth is expected to be quite modest over the projection horizon, in line with recent federal and provincial budgets. The recovery in net exports is likely to remain weak in light of modest external demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

The Bank projects that the economy will grow by 2.4 per cent in both 2012 and 2013 before moderating to 2.2 per cent in 2014. The degree of economic slack has been somewhat smaller than the Bank had anticipated in January, and the economy is now expected to return to full capacity in the first half of 2013.

As a result of this reduced slack and higher gasoline prices, the profile for inflation is expected to be somewhat firmer than anticipated in January.  After moderating this quarter, total CPI inflation is expected, along with core inflation, to be around 2 per cent over the balance of the projection horizon as the economy reaches its production potential, the growth of labour compensation remains moderate, and inflation expectations stay well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.

Information note:

A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 18 April 2012. The next scheduled date for announcing the overnight rate target is 5 June 2012.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The heightened uncertainty around the global economic outlook has decreased in the weeks since the Bank released its January Monetary Policy Report (MPR). With tentative signs of stabilisation in European bank funding and sovereign debt markets, conditions in global financial markets have improved and risk aversion has decreased. However, the global economy is still expected to grow below its trend rate as the deleveraging process in advanced economies proceeds.  The U.S. expansion is proceeding at a modest pace, reinforced by recent improvements in the labour market.  Growth in China is moderating to a still-high rate as expected, in response to past policy tightening and weaker external demand. Commodity prices are higher than anticipated, supported by improved global economic conditions and a geo-political risk premium on oil.  If sustained, the latter could ultimately dampen the improvement in global economic momentum.

Recent developments suggest that the outlook for the Canadian economy is marginally improved from the January MPR.  Although the economy will likely grow faster than forecast in the first quarter due to temporary factors, underlying economic momentum remains around trend, balancing domestic strength and external weakness.  Private demand is now expected to be slightly stronger than projected, owing to improved sentiment and highly-supportive financial conditions.  Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk.  Net exports have been supported by stronger-than-anticipated U.S. activity but are expected to contribute little to growth, reflecting still-moderate foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

The profile for core and total CPI inflation is somewhat firmer than previously anticipated as a result of reduced economic slack and higher oil prices.  After moderating in the second quarter, total inflation is expected, along with core inflation, to be around 2 per cent over the forecast horizon, reflecting the combination of modest growth of labour compensation, an economy operating around its potential over time, and well-anchored inflation expectations.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

Information note:

The next scheduled date for announcing the overnight rate target is 17 April 2012. A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 18 April 2012.

Two weeks into the New Year and general market activity is beginning to return to normal. Volumes have picked up to near normal levels as people return from Christmas holidays. Market tone continues to be somewhat positive, but cautious.

The Canadian economy remains strong, and earlier this week reported a national trade surplus for the most recent monthly reporting, November 2011. This added strength to our currency, and our outlook is that the “Loonie” remains strong throughout the year, averaging right around parity with the US Dollar. This valuation that hasn’t happened in over 25 years, and up until last year our dollar has traded at a discount to the US Dollar since 1975.

With Stats Canada reporting a trade surplus, primarily due to energy exports, we would expect to see continued strength in the currency, resulting in the Government of Canada Bond yield remaining low throughout 2012 and into 2013. Currently 10 year Government of Canada bonds yield 1.9%. This trade report is the last major economic data point prior to the next Bank of Canada meeting on January 17, where it is fully expected that Governor Carney will keep interest rates on hold.

While these record low yields may not be of benefit to Canadians wanting to invest in Government Bonds, it is of great benefit to our Provinces who are taking advantage of record low borrowing costs to raise funding.
The current uncertainty as it relates to the economic outlook not only includes Europe, but North America as well. CIBC government bond strategist, Warren Lovely, also writes that this may become a future concern should our provincial leaders not tackle the deficits and put spending on more sustainable footing. So while we will not make a political comment with respect to BC’s fiscal policy, suffice it to say, that we are one of the provinces who need to see deficit reduction sooner rather than later.

Staying with the Government Bond theme, we hop across the pond to the EU, where sovereign debt yield in both Italy and Spain declined on Thursday. This is very good news, as investor confidence in Europe’s financially stretched governments is key to contain its fiscal woes. ECB President Mario Draghi was quoted in today’s Globe and Mail, “we are seeing the tentative signs of a stabilization in economic activity, albeit from low levels.”

This is not to say that we are sounding an all clear on Europe, far from it, but what we are saying is that the first signs of stability are a good thing for our economy. Further positive data points from France and the UK this week, indicate that the threat of a strong recession in the Euro region may be easing. While a recession is still likely, a mild one would impact us far less, when it comes to the ripple effects we will experience.

As for investing in Europe, we are not stepping in just yet outside of a particular REIT that operates fully in Germany. If we were to make a comparison, we see the investor climate in the EU similar to how we saw the US in 2009. So we are staying out of Europe (again with the exception of the Dundee International REIT) and would expect to remain on the sidelines for a similar amount of time, ie: a couple of years. Just as we are only now suggesting to look at the US in particular sectors, we wouldn’t suggest investing in general Europe through next year.

Rather when it comes to investing in Europe our recommendation would be to finance it directly by taking a family vacation. The Euro should be expected to remain low, and with their economy weak, you should get a great deal.

Courtesy of The Dekker Hewett Group

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Uncertainty around the global economic outlook has increased in the weeks since the Bank released its October Monetary Policy Report (MPR). Conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened. Additional measures will be required to contain the European crisis. The recession in Europe is now expected to be more pronounced than the Bank had anticipated in October, as a result of increased deleveraging and tighter financial conditions, as well as necessary fiscal austerity and structural reforms.

Recent economic data suggest that growth in the United States has been slightly more robust than anticipated, largely as a result of continued vigour in consumer spending and business investment. Nonetheless, household deleveraging, fiscal consolidation and negative spillover effects from the European crisis are all expected to weigh on U.S. growth. Growth in China and other emerging-market economies continues to be strong, although there are signs that it is moderating to a more sustainable pace in response to weaker external demand and the lagged effects of past policy tightening.

On balance, recent economic indicators in Canada suggest that growth in the second half of this year is slightly stronger than the Bank projected in October. Household expenditures have more momentum than had been expected and business investment remains solid. Going forward, the weaker external outlook is expected to dampen GDP growth in Canada through financial, confidence and trade channels. The economy also continues to face competitiveness challenges, including the persistent strength of the Canadian dollar.

Although total CPI inflation has been slightly higher than projected, the Bank continues to expect the inflation rate to decline as a result of reduced pressures from food and energy prices and ongoing excess supply in the economy. Core inflation has also been slightly firmer than projected and is expected to ease as the output gap persists well into 2013.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

Information note:

The next scheduled date for announcing the overnight rate target is 17 January 2012. A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 18 January 2012.

Gift basket valued at $140

Here’s what you do: Send along a picture of you, your kids, or your family in Halloween costume. It can be in electronic form, a link to an online album, or a hardcopy. Just make sure we get it by Thursday, November 3^rd.

Here’s what you get: The winner will receive a gift basket valued at $140 along with a chocolate making tour courtesy of Cinnamon’s Chocolates in North Vancouver (because everyone needs a little extra Halloween candy).

So send in the pictures!
You can email them to info@tudormortgage.ca, or stop by the office at Suite 200 – 100 Park Royal in West Vancouver.

Good luck, have fun, and Happy Halloween!

The global economy has slowed markedly as several downside risks to the projection outlined in the Bank’s July Monetary Policy Report (MPR) have been realized. Financial market volatility has increased and there has been a generalized retrenchment from risk-taking across global markets. The combination of ongoing deleveraging by banks and households, increased fiscal austerity and declining business and consumer confidence is expected to restrain growth across the advanced economies.  The Bank now expects that the euro area—where these dynamics are most acute—will experience a brief recession. The Bank’s base-case scenario assumes that the euro-area crisis will be contained, although this assumption is clearly subject to downside risks. In the United States, diminished household confidence, tighter financial conditions and increased fiscal drag are expected to result in weak real GDP growth through the first half of 2012, before growth strengthens gradually thereafter. In Japan, reconstruction activity is projected to boost growth over 2012-13, although Japan’s economy will be constrained by reduced global activity and the sharp appreciation of the yen.  Growth in China and other emerging-market economies is projected to moderate to a more sustainable pace in response to weaker external demand and the lagged effects of past policy tightening. These developments, combined with recent declines in commodity prices, are expected to dampen global inflationary pressures.

The outlook for the Canadian economy has weakened since July, with the significantly less favourable external environment affecting Canada through financial, confidence and trade channels.  Although Canadian growth rebounded in the third quarter with the unwinding of temporary factors, underlying economic momentum has slowed and is expected to remain modest through the middle of next year.  Domestic demand is expected to remain the principal driver of growth over the projection horizon, though at a more subdued pace than previously anticipated.  Household expenditures are now projected to grow relatively modestly as lower commodity prices and heightened volatility in financial markets weigh on the incomes, wealth and confidence of Canadian households. Business fixed investment is still expected to grow solidly in response to very stimulative financial conditions and heightened competitive pressures, although it will be dampened by the weaker and more uncertain global economic environment.  Net exports are expected to remain a source of weakness, owing to sluggish foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

Overall, the Bank expects that growth in Canada will be slow through mid-2012 before picking up as the global economic environment improves, uncertainty dissipates and confidence increases.  The Bank projects that the economy will expand by 2.1 per cent in 2011, 1.9 per cent in 2012, and 2.9 per cent in 2013.

The weaker economic outlook implies greater and more persistent economic slack than previously anticipated, with the Canadian economy now expected to return to full capacity by the end of 2013.  As a result, core inflation is expected to be slightly softer than previously expected, declining through 2012 before returning to 2 percent by the end of 2013. The projection for total CPI inflation has also been revised down, reflecting the recent reversal of earlier sharp increases in world energy prices as well as modestly weaker core inflation.  Total CPI inflation is expected to trough around 1 per cent by the middle of 2012 before rising with core inflation to the two per cent target by the end of 2013, as excess supply in the economy is slowly absorbed.

Several significant upside and downside risks are present in the inflation outlook for Canada. Overall, the Bank judges that these risks are roughly balanced over the projection horizon.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

Flat economy makes interest rate

increases less likely

Accidents can happen to any economy. Temporary troubles in energy and autos hit exports hard during the second quarter, which was enough to push Canada’s Gross Domestic Product (the size of our economy with inflation factored in) into a decline—even though demand was healthy at home. This made the quarter look worse than it really was, and a rebound is therefore likely in the third quarter. Indeed, June’s monthly data showed a decent 0.2% gain as a signpost of an upward trend.

Aside from January’s strong growth, Canada’s GDP has been essentially flat for five months. Flat economies don’t inevitably signal a recession—both Canada and the US have gone through many extended flat stretches which were followed by growth. However, with the US economy so fragile, it won’t take much of a miss to find the US and then Canada in recession or something close to it. Plus, there are enough clouds on the global horizon to be concerned about the next several months.

In his most recent letter, he wrote: “Dear Madam: I am responding to your letter denying the child care deduction on my 2009 tax return. Thank you very much. For years, I have questioned whether this young person belonged to me. He is of questionable character, funny looking and expensive. Regarding Jason, who is 9 years old: He has beady eyes, and I suspect he may become a tax auditor one day – unless someone incarcerates him first. Henceforth, Jason is now under your care since he is not mine.”

Deductions of all types denied by CRA can drive anyone crazy. Fortunately, we can learn from the misfortune of others who have battled CRA in court over deductions. Today, I want to share with you a story about deducting interest costs, because this is one of the most commonly misunderstood tax deductions.

The story

Nina Sherle owned a home in Vancouver from 1985 to 1994. It was her principal residence and was free and clear of any mortgage or other debt. Let’s call this “Property V” (for “Vancouver”). She also owned a second property in Burnaby, which she and her husband had purchased in 1993, that was a rental property. Let’s call this “Property B.” There was a mortgage on Property B, and the interest was deductible since the borrowed money was used to earn income from Property B.

In mid-1994, Ms. Sherle decided to switch the properties around so that Property V became a rental property and Property B became her family’s principal residence. She did not want to switch her financing goal, which was to own the principal residence free of any debt. So, Ms. Sherle mortgaged the property they were leaving (Property V) and paid off the mortgage on their new residence (Property B). The result? Ms. Sherle made interest payments on a mortgage on Property V, which was the rental property after the switch. She then claimed a deduction for this interest cost under paragraph 20(1)(c) of the Income Tax Act because, in her view, the money was borrowed for the purpose of earning rental income.

Here’s the problem: Ms. Sherle was denied her interest deduction. She appealed this decision to the Tax Court of Canada. Her argument was that the purpose of the mortgage on Property V was to enable the switch of properties and to turn Property V into an income-producing property. Without this financing, she would not have made the switch.

Her argument makes some sense since the economic reality was that she still owned a residence and a rental property, and she had legitimately been able to deduct interest in the past due to her rental income. Why should that change when, in reality, she still owned the same properties? The problem, of course, is that our tax law and the courts have a different view.

The decision

In this case, CRA argued that the actual use of the money that was borrowed was to pay off a mortgage on Ms. Sherle’s new principal residence (Property B), and therefore the borrowed money was not used for the purpose of earning income. Technically, that is in fact what she used the new mortgage proceeds for; she paid off the mortgage on Property B – her new principal residence.

In the Sherle case, the court sided with the CRA. The judge made reference to other court rulings, a couple of which are considered to be landmark decisions on the issue of interest deductibility. In the Singleton and Lipson decisions, the Supreme Court of Canada established the principle that it is the direct and immediate use of the borrowed money that should determine the purpose of the loan. If the purpose is to gain or produce income, then the interest should be deductible – otherwise, you’re out of luck, as was Ms. Sherle.

The bottom line? Your intention or purpose for borrowing money is irrelevant when it comes to deducting interest. Further, the assets you pledge as security for the debt are also irrelevant. All that matters is direct use of the borrowed money. Next week, I’ll talk about what Ms. Sherle could have done differently – and what you might do to ensure interest deductibility.