Aurelia Butler

TORONTO (Reuters) – Signs of recovery in Canada’s housing market after a year-long slump, just as higher borrowing costs are expected to slow much of the rest of the economy, could raise inflation and delay a shift by the central bank to interest rate cuts, analysts said.The housing market’s upturn comes after the Bank of Canada paused its interest rate hiking campaign last month, leaving the benchmark rate at a 15-year high of 4.50% since January.In addition, analysts say higher borrowing costs have so far caused less financial stress for homebuyers than they had expected, so the market has not had to accommodate a flood of supply from forced sellers.The BoC is counting on slower economic growth to return inflation to its 2% target. A rebound in the housing market could boost activity and contribute directly to price pressures.”The Bank of Canada at the end of the day is probably not going to be too thrilled if the housing market really starts to ramp up,” said Robert Kavcic, a senior economist at BMO Capital Markets. “From a shelter cost perspective, you are going to start to see more upward push on inflation in the second half of this year.” The cost of shelter has the highest weighting in Canada’s consumer price index, accounting for 30%. And, home prices tend to be highly visible, so an increase could have a pronounced impact on inflation expectations, analysts say.The average price for a home in the Greater Toronto Area, Canada’s most populous metropolitan region, rose in April on a month-over-month basis for a third straight month, while sales also moved higher. Other major markets have also showed gains.Despite higher borrowing costs, mortgage delinquency rates have remained low for now in Canada after mortgage borrowers were put through a stress test showing they could manage if interest rates were 2 percentage points higher than the rate on their loan.In addition, variable-rate borrowers have been sheltered from higher interest rates after lenders temporarily extended the period over which their debt is amortized, keeping their payments the same.”One of the reasons the market has been able to stabilize so quickly is because there’s just no forced selling,” Kavcic said.Things could change – Royal Bank of Canada recently warned of the risk that mortgage delinquencies rise by more than a third over the coming year.The other worry is that stress in the U.S. regional banking sector could spill over to Canada. Clues on that front could come from the BoC’s Financial System Review – an annual checkup of financial system tensions – which is due for release on Thursday.But there are also tailwinds to support a recovery, including supply shortfalls, record immigration and labor market strength, analysts said.Wage growth could cool over the coming months, helping to lower inflation, but the Bank of Canada “is unlikely to be in a rush to cut interest rates if house prices are roaring higher again,” Stephen Brown, senior Canada economist at Capital Economics, said in a note. More

“The only function of economic forecasting is to make astrology look respectable,” the economist Ezra Solomon once said. It looks even less respectable today, as practitioners attempt to demystify the fallout from multiple shocks including the pandemic, the war in Ukraine, and the shifting geopolitical landscape. Andrew Bailey, governor of the Bank of England, knows this only too well. On Thursday as the central bank raised interest rates by 25 basis points, he faced a host of questions over the bank’s large upward change to its growth and inflation projections. Economic forecasting is indeed an inexact science; but hefty revisions do little to reassure the public that central bankers know what they are doing.It is not just the BoE that has been off the mark. The US Federal Reserve and the European Central Bank have both erred in their inflation forecasting too, particularly since the onset of the pandemic. The IMF has also chopped and changed its recent growth outlooks. Given the role that forecasts play in informing the decisions of investors, households, and policymakers, accuracy is important. For central bankers a record of decent forecasting is also vital to build credibility, particularly as higher trust can help anchor inflation expectations.Recent criticism of erroneous forecasts needs to be tempered. Economists have faced an unusually uncertain world since 2020. They have had to take positions on epidemiology, war scenarios, supply chain shifts, and rapidly evolving domestic and international policies. Another element is a limited public understanding of what forecasts actually represent. They are conditioned on judgments made at a particular point in time. As new data comes in, those judgments need to be recalibrated. They should be treated as indicative, not as gospel truth. Economists still have some questions to answer. Central bankers were arguably too slow to raise rates when inflation picked-up in 2021, clinging to the notion that price pressures were “transitory”. There were misjudgments over the effects of fiscal stimulus, how stable inflation expectations were, and the damage from the pandemic to supply, which contributed to monetary policymakers falling behind on inflation. The preceding decade of low inflation may have also lulled them into a false sense of security. Errors have been made during the rate-raising cycle too. Both the BoE and ECB failed to grasp just how sticky food inflation would be. Forecasting can be augmented in a few ways. Recent shocks underscore the importance of drawing on expertise beyond the economics profession. Economists should also continue to explore how advances in big data, machine learning and AI can offer opportunities to improve economic analysis and better model complexity. Improving how forecasts are communicated, particularly in times of uncertainty, is essential. Showing projections under different scenarios can help deepen understanding of the range of possible outcomes. Likewise, although central banks have attempted to highlight the probability distributions around their forecasts, they could be conveyed in a more accessible way. Above all economists need to be clearer in setting out how and why their key judgments have changed between forecasts — and how that affects the numbers. A greater effort to show how they reach their projections can go some way towards building trust and normalising an understanding of economic forecasts as reference points rather than foresight. After all, John Maynard Keynes, the famous economist, is often credited — perhaps wrongly — as asking: “when the facts change, I change my mind. What do you do?” More

Will retail sales advance after two months of declines? US retail sales data for April, to be released on Tuesday, will offer insight into the sentiment among consumers as inflation cools.Economists polled by Reuters forecast that the Census Bureau will report a 0.7 per cent increase in overall retail sales from the previous month, following two months of declines. That will also reverse the drop of 0.6 per cent in March. Analysts at Credit Suisse expect the increase to be driven by robust spending on cars and fuel. The underlying number, which strips out car-related spending, is expected to be weaker. The broker is forecasting a decline of 0.2 per cent in that metric month over month. The outlook for retail sales is mixed as continued strength in the labour market and wages is likely to support consumer spending. However, it comes amid expectations of a recession, tightening financial conditions and slowing inflation, all of which tend to crimp spending. The retail sales data comes after the Bureau of Labor Statistics last week reported that US inflation slowed its rise more than expected in April as the Federal Reserve’s interest rate increases continue to dent price rises. Smaller increases in prices typically slows the growth of retail spending. Kate DuguidHow fast has Japan’s economy grown in the first quarter?Japan’s economy is under pressure from an unsteady post-Covid rebound in consumption, faltering real wages and weak demand for its exports.Real household spending unexpectedly fell 1.9 per cent year-on-year in March, denting the momentum of a recovery under way as the country threw off most of its coronavirus curbs and travel restrictions. Real wages also notched up their 12th consecutive month of decline, with pay struggling to keep up with inflation, despite attention-grabbing increases from some of the country’s biggest brands. Goods exports, meanwhile, have suffered from weak global demand, particularly from China.UBS, the Swiss broker, has downgraded its forecast for growth from a seasonally-adjusted annual rate of 1 per cent, compared with the previous three month period, down from an earlier estimate of 2 per cent. But it thinks there are reasons to believe economic growth will continue throughout the year. It points to pent-up demand created by the delayed pandemic reopening, the strong potential for inbound tourism and the likelihood of a rebound in real wages as lower import prices ease inflation.“Ahead, we think the economic recovery will continue even with the headwinds from a slower global economy,” it wrote.Analysts at Goldman Sachs agree, revising their GDP growth forecast down to 1.1 per cent from 1.7 per cent, based on a “mixed picture” presented by March economic data, but still predicting a “reactive upturn” from the final quarter of the year. William LangleyCan the Mexican peso continue its run?The Mexican peso has emerged as the best performing leading emerging markets currency this year as high interest rates, an increase in remittances and its proximity to a strong US economy have made it a favourite among investors.The peso has risen by 10.8 per cent this year to trade at 17.6 to the dollar, its strongest level since 2017. But analysts warn that with a recession looming in the US, it could be close to its peak. Oliver Harvey, managing director at Deutsche Bank, said the peso looks “among the most expensive” emerging market currencies and he would not expect it to outperform other currencies in the second half of the year, in the way it has done in recent months.Caution comes as hedge funds have been ratcheting up their bets against Mexico, with $4.8bn government bonds on loan in May, up from a low of $2.7bn in February this year, according to data from S&P Global Market Intelligence. The peso is one of the most sensitive of the emerging market currencies to a slowing of the US economy. Brent David, senior portfolio manager at RBC BlueBay, said that a hard landing in the US, driven by debt ceiling concerns or tightening credit conditions, “would be extremely detrimental for the peso”. Mary McDougall More