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Five Economic Trends to Watch

Wednesday, October 10th, 2012

Five Economic Trends to Watch

 By Dana Flavelle |   Sun Oct 7 2012

It’s been another challenging year for consumers. The basics of life — food, housing and fuel — have all been on the increase. But some of these could moderate in the months ahead.

Tighter mortgage insurance rules are starting to have an impact on demand for housing and should eventually affect prices.  A slowing global economy is pushing down the price of oil which should start showing up in the price of gas at the pumps.

And the worst drought in 25 years in the U.S. Midwest is threatening to boost overall food prices, though perhaps not by as much as you might think.

As 2012 heads into the home stretch we take a look at these and other trends and gauge where they’re going.

1. Food inflation: Higher than usual

A drought in the U.S. Midwest has sent the price of field corn soaring by 50 per cent, but the price of four cobs of fresh sweet corn in local supermarkets was still four for $1. Why was that and what does the drought mean for food prices? We asked Alfons Weersink, production economics professor, University of Guelph.

He says: When it comes to corn, there are two types. The drought primarily affected what is called field corn, which is used to feed animals and is also an ingredient in cooking oils, starch, breakfast cereals and other processed foods.

In comparison, sweet corn, the type consumers buy on the cob, in cans or in the freezer section of the supermarket, is grown in regions that have not been adversely affected by the weather.

Another key difference is the price of field corn is set on global markets. The U.S. is a major supplier, so when the U.S. crop fails it has a big impact on world prices. Thus, a drought in the U.S. Midwest pushes up the cost of corn paid by beef farmers to feed their cattle whether they’re in Texas or Alberta.

In comparison, sweet corn prices are set locally. In parts of Ontario, a combination of heat and rain this summer meant local growers had a bumper crop. Thus, prices for corn on the cob remained favourable.

Another reason the drought had a big impact on field corn prices is supplies are tight. About 40 per cent of the U.S. crop now goes to make ethanol to fuel cars, leaving less to feed animals. So a small disruption in supply can have a big impact on prices.

However, consumers haven’t seen much of an impact in the grocery store, Weersink said. That’s because the price of field corn is just part of the cost of the finished product, whether it’s steak or cooking oil or cereal.

The price of most processed foods is also affected by the cost of labour, transportation and marketing, he said.

“A 50 per cent increase in the price of corn doesn’t translate into a 50 per cent increase in the price of food in the stores,” Weersink said.

In fact, the increase in the price of field corn is expected to nudge overall food price inflation up by 3 and 5 per cent, he said. Food prices would otherwise rise at the same rate as the overall inflation, between 2 and 3 per cent, he said.

Related: 8 ways to make your fridge last longer

2. Gasoline: Cheaper fuel coming

Why is gasoline $1.30 a litre at the pump when the price of West Texas Intermediate crude oil is just $92.48 U.S. a barrel? We askedSpencer Knipping, oil adviser with the Ontario Ministry of Energy.

He says: Three things usually influence the price of gas at the pumps. The price of oil is one. The price of wholesale gasoline after it leaves the refinery is another. And local gas station price wars are a third.

But in the past two years another factor has emerged — lack of North America pipeline capacity. Producers can’t move their oil to refineries, so inventories are building up at a central hub in Cushing, Okla. And that’s depressing the North American price of crude oil, called the West Texas Intermediate price.

Consumers aren’t seeing the benefit because gasoline prices are based on international oil prices and the benchmark price is North Sea Brent crude, which is currently about $112 U.S. a barrel, nearly $20 U.S. a barrel more than the West Texas Intermediate price.

Apart from oil, pump prices are also affected by seasonal fluctuations and unpredictable disruptions, such as hurricanes, in the supply of wholesale gasoline.

Local price wars between gas stations also affect prices. When one station decides to lower its price to capture more business, others will follow suit. Prices can fall as much as 5 or 6 cents a litre before bouncing back up.

Knipping said many analysts see a decline in oil prices over the next 12 to 18 months because world economic growth is slowing. Consumers will eventually reap the benefits, he said.

“Lower oil prices do eventually flow through to the pump, but sometimes there are hiccups along the way,” Knipping said.

3. Home heating: Natural gas windfall

Natural gas prices have plummeted and so has the cost of heating your home, though not as far. Why is that and where are prices headed? We asked Ian MacLellan, one of the principals at Energyshop.com.

He says: It’s the old law of supply and demand. New technology called fracking has unleashed the gas stored in shale deposits in the U.S.

Combined with lower demand during the recession and a relatively mild winter last year, it’s created a surplus of natural gas.

The inventory buildup south of the border has driven down prices across North America thanks to a natural gas pipeline distribution system that connects Canada and the U.S.

Consumers who use natural gas to heat their homes are enjoying the savings, MacLellan says.

“About three years ago if you were buying your gas from Enbridge, you were paying 32 or 34 cents a cubic metre for it. Now it’s 8 cents a cubic metre,” MacLellan says.

Your overall bill won’t have declined by as much as the price of the gas itself, he said. That’s because the bill includes about 14 cents a cubic metre in other charges for things like distribution. And that figure hasn’t changed much.

Canada’s National Energy Board says it expects prices to remain the lowest they’ve been in a decade due to the record level of natural gas in storage.

Even though producers have cut back in both the U.S. and Canada in response to the low prices, it hasn’t substantially affected supply.

For the winter ahead, MacLellan said, he expects the price of natural gas will remain unchanged.

Related: Are furnace maintenance plans worth it?

4. Housing: Low rates, weaker demand.

Worried about a housing bubble, Ottawa clamped down on mortgage lending this spring, reducing the maximum amortization for insured mortgages to 25 years from 30. In the Toronto area, a wave of new condos is coming on stream, just as demand is falling. What lies ahead?

We asked Shaun Hildebrand, senior market analyst Toronto, for Canada Mortgage and Housing Corp.

He says: For the past 15 years, house prices have soared as a combination of falling interest rates and a stronger economy unleashed pent-up demand after the recession in the early 1990s.

In major centres like Toronto, housing prices over that period grew six times faster than average incomes, pushing home ownership out of more people’s reach.

There are fewer first-time buyers now in the market and, although existing homeowners are moving up, down or sideways, it’s no longer a seller’s market, he said.

As a result, prices are expected to stabilize.

Hildebrand believes affordability will improve in the short term. Incomes will have a chance to catch up with prices, the Canadian economy will strengthen and interest rates will remain relatively low.

Related: Why 10% down on a house worked for me CMHC sees prices for all GTA homes rising 7 per cent to just under $500,000 this year, before levelling off next year at $506,000.

For the moment, the City of Toronto seems to be defying the odds. Even though the number of units sold was down, prices were up again in mid-September. The average detached home reached $805,308, a 17 per cent increase over last year, according to the Toronto Real Estate Board.

In the suburbs, the price of a detached home was up 6 per cent at $563,739.

Condo prices were also split. In Toronto, the price of a highrise condo rose 5 per cent to $352,851 while in the suburbs they dropped 2 per cent to $287,467, according to TREB.

5. Interest rates: Not rising much

Worried about rising levels of household debt, the Bank of Canada has repeatedly warned that it will eventually raise its benchmark overnight rate from the current very low 1 per cent level. It’s been there for two years.

But few economists believe the central bank rate, which influences borrowing costs for everything from houses to cars, will rise any time soon. The unresolved debt crisis in Europe, a weak recovery in the U.S. and a slowdown in China all continue to weigh on Canada’s economic growth, they note.

Here are some forecasts:

CIBC World Markets said in a Sept. 27 report:

“We have a rate hike pencilled in for early 2014, expecting that by then, Canada’s fiscal drag will be lighter and global growth more supportive for commodities exporters.”

RBC Economics wrote in a Sept. 7 report:

“External risks mean that the Bank of Canada will likely opt to keep policy highly accommodative for longer. We pushed back our call for the first rate hike to the second quarter of 2013 from the first quarter of 2013.”

TD senior economist Jacques Marcil wrote in a Sept. 5 report:

“We expect global conditions to improve as we move into 2013, lifting Canada’s economy and prompting the Bank of Canada to become the first monetary authority to increase interest rates among advanced economies, probably next spring.”

The central bank’s next rate-setting meeting is Oct. 23.

Related: Why markets could end 2012 on a happy note

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