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Financial flows note to readers
Borrowing by domestic non-financial sectors fell between the first and second quarters of 2009, as federal government borrowing fell sharply following temporary measures to enhance liquidity in financial markets. Excluding this effect, domestic sectors increased their borrowing in the second quarter.
Provincial and corporate bond issuances accounted for more than 40% of total funds raised in the quarter, reflecting favourable bond rates for borrowers. Household borrowing was also up in the second quarter, albeit well below levels observed in recent periods before the current economic downturn.
Substantially decreased federal government borrowing associated with liquidity initiatives, including the Insured Mortgage Purchase Program, contributed to the decrease in overall funds raised by domestic non-financial sectors in the second quarter of 2009.
Chart E.1 Overall demand for funds recedes further
Description for Chart E.1
The Bank of Canada further reduced the target overnight rate, down 25 basis points to 0.25%, in April 2009. The five-year conventional mortgage rate increased by 30 basis points during the quarter to 5.85%, still considerably lower than the same time last year when the rate was 7.15%.
Canadian stock markets rebounded in the second quarter of 2009 with the Standard and Poor's / Toronto Stock Exchange composite index up nearly 20%, reflecting gains in energy and other commodity prices. This was the largest quarterly percentage increase since the fourth quarter of 1999 and a significant recovery from the record decline witnessed in the later part of 2008. The Canadian dollar appreciated during the second quarter of 2009 relative to its U.S. counterpart, closing the quarter at U.S. 88.8 cents.
Overall household borrowing increased to $98.3 billion during the second quarter of 2009, led by consumer credit and mortgages. However, lower interest rates helped keep the household debt service ratio in check, which edged down from 7.8% to 7.7%.
Consumer credit increased by 19% to $26.9 billion while net new mortgage borrowings were up in excess of 30% to $64.4 billion, though both were still well off the pace set prior to the economic downturn. The substantial increase in mortgage borrowing was related to increased activity in the resale housing markets, in the context of historically low borrowing costs. The consumer credit upswing reflected sizeable increases in motor vehicle purchases, as buyers were likely enticed by favourable dealer incentives.
Chart E.2 Total household borrowing up, but still well below historical levels
Description for Chart E.2
The government sector was again a net borrower from the rest of the economy, a pattern that emerged in the latter part of 2008. Federal and provincial government revenues fell further in the second quarter of 2009, down 4.7% and 1.7%, respectively. This contributed to further deficits (on a System of National Accounts basis), as revenues from taxes on corporations, government business enterprises and persons declined while overall expenditures increased.
Borrowing by the federal government dropped from $182.9 billion in the first quarter to $34.7 billion in the second quarter of 2009 (these are expressed at seasonally adjusted annual rates; on a quarterly basis the government raised $45.7 billion in the first quarter and $8.7 billion in the second quarter of 2009). The high level of borrowing activity in the previous two quarters was associated with liquidity initiatives, including the Insured Mortgage Purchase Program.
Other levels of government borrowed $83.7 billion in the second quarter of 2009, comprised primarily of substantial provincial bond and short-term paper issuances.
Corporate profits were down sharply again in the second quarter of 2009. Fixed capital investment of private non-financial corporations slowed for the third quarter in a row, which contributed to this sector remaining a net lender to the rest of the economy for the second consecutive quarter.
Funds raised by the private non-financial corporations sector grew from $14.6 billion in the previous quarter to $62.2 billion in the second quarter. The rise in demand for borrowed funds by this sector reflected significant new bond issuances. However, total assets were up significantly over the previous quarter, in particular financial assets.
Institutional investors' and lending institutions' investment in domestic fixed income securities and net new loan issuances slowed, while consumer credit and mortgages lending picked-up. Issuances of National Housing Act mortgage-backed securities were significantly lower in the second quarter of 2009, on the heels of the two largest quarterly issuances on record.
Non-resident investment in Canadian securities remained high for a second consecutive quarter. The increase in portfolio investment was buoyed by a boost in domestic debt security issues, in particular provincial and corporate bonds. The non-resident sector continued to be a net lender to the economy in the second quarter, a pattern that emerged in the fourth quarter of 2008.
Information on methods and data quality available in the Integrated Meta Data Base: 1804.