The Economist - USA (2022-06-11)

TheEconomistJune11th 2022 Finance&economics 73

catingweakerdemand.Exportordersde­
clinedattheirfastestpaceintwoyears.
Economistsarethereforepencillingin
slowergrowthovertherestoftheyear.But
fewexpectanoutrightrecessionjustyet.
Thatisbecausesomepartsoftheeconomy
confronttheenergyshockfroma position
ofstrength,ratherthanweakness.Many
servicesfirmsarestillreapingtherewards
from the end of Omicron­related lock­
downs.Southerncountriesarebenefiting
themost,giventheirrelianceontourism;
inSpainarrivalsofsun­seekingnorthern­
ersalmostreachedpre­pandemiclevelsin
April.Overall,businesssentimentinser­
vicesremainsstrong,withmanyfirmsre­
portinga growingbacklogofwork.
Jobsarestillplentiful,too.Acrossthe
bloctherewerethreevacanciesforevery
100 jobsinthefirstquarterof2022,a high
levelbyhistoricalstandards.Firms’hiring
expectationsaresolid,albeitslightlyweak­
ersincethestartofthewarinUkraine.
MorethanoneinfourbusinessesinEu­
ropesaythata lackofstaffispreventing
themfromproducingmore.
A hoardofsavingsbuiltupduringlock­
downs should also provide consumers
with some cushion against the energy
shock.Accordingtoourcalculations,such
“excess”savingsinFranceandGermany
amountedtoa tenthof disposableincomes
inthefirstquarterof 2022 (seechart).
Thesebufferswillblunttheimpactof
theenergyshock.Buttheywillnotoffsetit

altogether.Excesssavings,fora start,are

notevenlydistributed. Poorerpeoplein

rich countries, andmost households in

poorercountries,havepreciouslittleleft.

InSlovakia,forexample,thesavingsrate

never rose much during the pandemic.

“Consumptionweaknesswillcomefrom

lower­incomehouseholds,”saysJensEi­

senschmidtofMorganStanley,a bank.Re­

tailsales,inrealterms,havemovedside­

waysformonths.

Manygovernmentshaveputtogether

spending programmes to shield house­

holdsfromhighenergyprices.According

toBruegel,a think­tankinBrussels,Ger­

many,Franceandothersarespendingbe­

tween1%and2%ofgdp. Notallofthatis

well­targeted,however.Muchofit isgoing

onreliefforbetter­offhouseholdsthatdo

notneedit;othermeasureshaveinvolved

meddlingwithprices, withsomeofthe

benefitgoingtoenergysuppliers.

Eveniftheeuroareaisspareda reces­

sion,then,theenergyshockwillbea drag

ongrowth.Theecbfacesanunenviabledi­

lemma.Witheveryincreaseininflationon

thebackoffoodandenergy prices,the

Europeaneconomyisgettingweaker.n

Pumped up

Sources:Eurostat;Destatis;INSEE;StatisticalOffice

oftheSlovakRepublic;TheEconomist

*Calculatedassavingsabovetheaverage2016-19savingsrate

8

6

4

2

0

-2

2019 20 21 22

Euro area, contributions to annual headline

inflation rate, percentage points

Other

Energy

12

9

6

3

0

2020 21 22

Q1Q4Q   Q2Q1 Q1Q4Q  Q2

Cumulative excess savings* as % of

annualised household disposable income

Slovakia

Germany

France

HousinginCanada

Northern frights

T

ired, oldstereotypes  portray  Canada

as the frigid north, awash in maple syr­

up, hockey and politeness. In the financial

world  it  has  earned  a  more  novel,  racier

reputation:  as  home  to  a  giant  housing

bubble.  Canada’s  property  market  has

soared for the past two decades, shrugging

off  the  global  financial  crisis  of  2007­09

and  outperforming  most  other  countries

throughout the covid­19 pandemic. Lately,

though,  cracks  have  started  to  appear.  In

Toronto  prices  have  fallen  for  three  con­

secutive months. Throughout the country,

home  sales  have  plunged.  Many  econo­

mists warn that worse lies ahead.

Canadians may scoff at such doomsay­

ers.  After  all,  bubble  talk  is  nothing  new,

with economists blaringwarnings since at

least 2010. Nevertheless, a comparison be­

tween  Canada  and  other  rich  countries

should  give  rise  to  some  concern.  Since

2000  the  average  house  price  has  more

than tripled in Canada; in America, by con­

trast, it is up by just about 60% (see chart

on next page). The median home in Canada

costs ten times the median household in­

come,the  highest  multiple  since  at  least

1980.  Within  the  oecd,  a  club  of  mainly
      rich countries, only New Zealand has seen
      house  prices  increase  at  a  faster  rate  rela­
      tive to incomes over the past two decades.
      The trigger for the recent fall in sales is
      the same thing hitting markets from Amer­
      ica to Australia: inflation. The Bank of Can­
      ada, like its peers elsewhere, is raising in­
      terest  rates  in  order  to  tame  consumer
      prices. That has increasedmortgage costs,
      making homes even less affordable. In To­
      ronto, monthly mortgage payments at the
      median home price gobble up an astonish­
      ing  three­quarters  of  median  household
      income, according to the National Bank of

Canada, a commerciallender. A  rule  of

thumb  is  that  mortgage  payments  should

be just about a third of income. Little won­

der that transactions are way down.

More uncertain is the impact on senti­

ment. Ron Butler, a mortgage­broker in To­

ronto, has quipped that a “fear of missing

out”  is  giving  way  to  a  “fear  of  getting

screwed”.  Storeys,  a  property  website,  re­

ports that some buyers have started back­

ing  out  of  deals.  Prices  could  have  some

distance  to  fall.  Robert  Kavcic,  an  econo­

mist with bmoCapital Markets, an invest­

ment bank, estimates that real home prices

are  38%  above  their  long­term  trend,  the

widest deviation in four decades.

Bullishness  about  Canadian  property

has long rested on two pillars: a shortage of

housing, especially in big cities, and an in­

flux  of  immigrants.  Like  any  good  story,

C ARLETON PLACE, ONTARIO

Air starts to seep out of the bubbly Canadian property market

Unapologetically overpriced