OTTAWA — A leading international forecasting firm says Canadians should brace for tough economic times lasting another two years, lifting the jobless rate once again beyond eight per cent and setting back Ottawa’s plans to balance the budget.
In one of the gloomiest forecasts issued on the Canadian economy since the recession, Capital Economics predicts a sharp and protracted housing correction, in conjunction with muted business investment and government austerity, will keep Canada’s economy in stall mode throughout 2013 with a one per cent growth rate, only improving slightly to 1.3 per cent in 2014.
That’s half the current Bank of Canada estimate on both years, and well below the 1.6 per cent consensus used by Finance Minister Jim Flaherty in the March budget for the current year.
“Canada’s economy has lost considerable momentum and signs unfortunately point to continued slow growth ahead,” says the new outlook.
“With the housing downturn intensifying, business investment intentions softening and government plans to restrain spending, we expect GDP (gross domestic product) growth of only one per cent in 2013 and 1.3 per cent in 2014.”
In an interview, the firm’s chief Canadian economist David Madani agreed that his view is darker than most, but noted the consensus — the average of forecasts — has been steadily dropping for months and coming closer to his position.
And recent indicators all point to weak growth, he added.
Job creation for the first three months of the year has been non-existent.
In fact, there has been a net loss of about 26,000 jobs, while exports remain weak.
On Tuesday, the Canada Mortgage and Housing Corp. reported housing starts inched up to 184,028 annualized in March from the previous month, but were still 13.6 per cent below a year ago.
As well, Statistics Canada said February building permits for residential construction fell 7.2 per cent.
Madani said where he differs from many other economists is that he believes Canadians are in for a rough ride in the housing market, one of the pillars of economic growth until recently.
“I wouldn’t be surprised to see housing starts fall to 150,000 by the end of the year,” he said.
“Historically housing markets are either overbuilding or underbuilding and this boom we’ve been in the last decade has been enormous ... and that why I think the correction process will be fairly severe and protracted.”
Over the long term, Madani says Canadian home prices, which have held up remarkably so far in the face of falling sales and starts, will drop by 25 per cent.
The only bright spot in the outlook is exports, said Madani, which will benefit from the recovery in the United States, particularly in the auto sector and housing market that support shipments of Canadian lumber.
But given the size of the Canadian housing market, and weakness elsewhere, Capital Economics sees only minimal employment growth in the next two years, in the range of 11,000 jobs a month.
That won’t be enough to absorb population growth causing the unemployment rate to rise from the current 7.2 per cent to 8.1 per cent by the end of 2014.
With the economy underperforming, and low inflation, government revenue growth will also suffer, the firm says.
The Harper government has staked political capital on eliminating the deficit in 2015 so it can fulfil several campaign promises to bring in partial income splitting and doubling tax-free savings account limits in time for the next election.
“Unfortunately, eliminating deficits will take much longer than federal and provincial governments currently expect, even if the focus remains on controlling spending,” the report states.
• The average first-time homebuyer in Canada is 29 years old and expects to be able to put down a down payment of $48,000 on $300,000 home, according to a recent poll by the Bank of Montreal.
But the study, released Tuesday, also found that price expectations vary widely, depending on where the homebuyer lives.
Buyers in Atlantic Canada say they expect to spend the lowest in the country with an average of $202,000 on a first home, followed by Quebec with $224,000, Ontario with $326,000, British Columbia with $384,000 and Alberta with $406,000.
The sample size used in the Prairies was too low to be included in the survey.
Meanwhile, the data also found Vancouver to be the most expensive city, with first-time homebuyers there saying they plan to shell out an average of $443,000 for a home, followed by Toronto at $347,000.
BMO mortgage expert Laura Parsons says like with any major purchase, it’s important for people be realistic and prepared.
“What we tend to do is jump in the market when we’re ready, instead of starting a plan now,” she said from Calgary.
“Let’s start getting ready for it so we can start giving you good advice all along the way. Don’t be afraid to get things going.”
And while a large down payment is impressive, it does not necessarily mean that young people are diligently saving for their first home. Instead, many may be getting help from their Baby Boomer parents or friends, said Parsons.
Forty-six per cent of those surveyed also they’ll choose a fixed mortgage rate when they buy, versus 20 per cent who will choose a variable rate.
The study also found that the average first-time homebuyer plans on paying off the mortgage on their home within two decades, with 20 per cent anticipating they’ll be mortgage-free even earlier than that.
Twenty-three per cent of those surveyed say they will still have a mortgage within 25 years; 16 per cent say within 20 to 24 years and 20 per cent say within 10 to 19 years.
On the opposite end of the spectrum, seven per cent say it’ll take them more than 25 years to fully own their home, while three per cent say it’ll take them between 1 year to 9 years to pay it off.
The survey also found that 31 per cent admit they really don’t know when they’ll be able to stop making mortgage payments.
The Bank of Montreal (TSX:BMO) report surveyed a random online sample of 2,000 Canadians between Feb. 25 to March 5.
The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error because they do not randomly sample the population.