Canadian Blahs

August 11, 2008

Canada announced more weaker-than-expected data today.  Housing starts in July were 14% below the 2Q08 mean level and some 22% under the first-quarter level.  The 12-month rate of advance in housing prices was only 3.5% in June, lowest since March 2002 and down from 4.1% in May.  Just before this past weekend came news of a 55.2K drop in jobs, most since February 1991.  In the year to July, overall employment still rose 1.3% compared to no change in U.S. jobs, but growth in full-time Canadian jobs amounted to just 0.9%.  Private employees were only 0.5% greater than a year ago.  Last week, too, the OECD leading index of economic indicators had the Canada dropping more between May and June than any other G7 component, a drop of 1.1 points and of 3.9 points from June 2007.  The jobs component of the Canadian PMI-IVEY index slumped to 46.3 from 58.2 in June, indicating that the weak national labor survey was no fluke.  A drop of 0.3% saar in Canadian real GDP in the first quarter had not been anticipated, and monthly GDP in April-May was only 0.1% greater than its 1Q level (not annualized).  The Bank of Canada has assumed positive 2Q growth of 0.8%, low and yet looking increasingly too optimistic.  Indeed, one cannot rule out the possibility of another negative quarter, which would constitute a technical rule-of-thumb recession.

In light of the recent soft data, Tuesday’s June trade figures loom importantly.  May data had produced a fifth consecutive rise in exports and a surprisingly sharp 5.4% increase that was spread widely across energy (8.1%), industrial goods and materials (9.0%), machinery and equipment (4.1%) and non-auto consumer goods (5.6%).  The strength of exports in May partly reflected prices but also embodied higher volumes, which is good.  The trade surplus that month widened sharply to C$ 5.54 billion, and the market consensus is looking for an even larger surplus in June.  I’m suspicious of that forecast and would not be surprised to see the surplus contract instead.  While several U.S. indicators have surprised on the upside, the rest of the global economy is worsening, and commodity export prices has slipped as well.

What sets Canada’s blahs apart from the negative trends in Japan and Europe is that the Bank of Canada, like the Fed, has cut interest rates rather substantially, with reductions of 25 bps each in December and January and then cuts of 50 bps each in March and April.  The result was cumulative 33% cut to 3.0% from 4.5%.  Officials stopped easing after April because of higher-than-anticipated inflation, with prints most recently of 5.4% in the PPI, 31.9% in raw material prices, and 3.1% on the CPI.  If it turns out that GDP fell for a second straight quarter in 2Q, the central bank will have to seriously consider taking out some additional insurance.



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