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Although the Canadian economy has been heavily reliant on housing for stability in recent years, experts are finding encouraging signs of economic growth in other sectors even as the Toronto real estate market corrects.
“For years the Bank of Canada has been seeking this Holy Grail of rebalancing in the economy away from housing and towards capital investment,” Gluskin Sheff Chief Economist and Strategist David Rosenberg told BNN earlier today.
“When you really think about it, housing is a consumption good, but it doesn’t really add to the productive capacity of the economy,” Rosenberg added in the interview.
The recent shift from reliance on housing is a “positive” development, Rosenberg says, and he doesn’t expect a cooler Toronto market will have a “deleterious” impact on the national economy.
So what has helped the Canadian economy’s rate of growth, which was 0.6 per cent on a month-over-month basis in May, amid a housing downturn in the country’s biggest market?
In a recent note on GDP data titled “Economy seemingly unfazed by housing slowdown,” macroeconomic research firm Capital Economics explains what other industries are posting gains.
The biggest contributor to economic growth in May was the mining sector, which grew by 4.6 per cent that month adding nearly 0.4 percentage points to GDP growth alone.
Oil and gas output, representing about three fourths of the mining industry, vaulted by 7.6 per cent in May compared to the month before, albeit on the heels of March and April declines and a weaker outlook ahead, according to Capital Economics.
Exports and business investment have also been heating up of late, the report adds, and the finance, insurance and real estate sector has yet to be hit by slumping home sales although construction was a headwind for GDP growth in April and May.
“The situation this year stands in contrast to the uneven growth displayed over the second half of last year, back when the Bank of Canada openly discussed lowering interest rates,” writes David Madani, senior Canada economist for Capital Economics, in the report.
In addition to a rebalanced Canadian economy benefitting from growth in multiple sectors, Gluskin Sheff’s Rosenberg notes another positive amid a Toronto housing market correction.
“[Toronto] real estate is not going to go into a downward spiral here; it’s going through a much needed correction. People can always look at it as, ‘What does it mean for me as a homeowner’ without taking into account all those renters out there and all the people that would love to buy a home in the GTA that couldn’t it because home prices were in such bubble territory,” he continued on BNN.
Rosenberg is not the only one upbeat on the Canadian economy. Its recent performance has led to wide anticipation that the Bank of Canada will follow July’s overnight rate hike with another before the year is out.
But Madani suggests the economy’s recent performance might be a flash in the pan.
“Unfortunately, with even tougher mortgage rules expected later this year, and another interest rate increase from the Bank of Canada also widely expected in the coming months, growth prospects for [finance, insurance and real estate] and other sectors of the economy dependent on housing are clearly souring,” he states.