Trouble Deepens in Canada

December 4, 2008

Three disappointing Canadian indicators were reported today. The IVEY-PMI, which comprises activity in both manufacturing and non-manufacturing, dived  a dozen points to a record low of 40.2 in November and registered an average score of 46.2 in October and November after quarterly means of 59.8 in 3Q08 and 63.2 in 2Q08. This index is not adjusted for seasonal variations but averaged 56.5 in the previous four Novembers. The jobs sub-component slumped 6.3 points to 42.2, while the index for prices plunged 26.9 points to 51.6. A second release covering building permits sank 15.7% in October, twice as much as expected, and a third indicator showed 22.8% more personal bankruptcy filings in October than a year earlier.

As a commodity producer and a huge trading and financial partner with the United States, it figures that Canada would be impacted hard by the global downturn that started in its southern neighbor. Canada is in the fifth quarter of an economic slump. Real GDP posted successive growth rates (in annualized terms) of +0.8% in 4Q07, -0.6% in 1Q08, +0.6% in 2Q08 and 1.3% in 3Q08. Growth this past summer was squeezed into July. Monthly GDP fell by 0.5% in August and recovered just 0.1% in September, and industrial production posted successive drops of 1.6% and 0.3% in those months. The outlook has darkened since the Bank of Canada’s last policy meeting in October, and quarterly forecasts released then are outdated. The current quarter and 1Q09 will be particularly weak in Canada, as in other economies. Reflecting those problems, Canada’s stock market has fallen by 18.6% since November 4th, 40.2% since the end of August, and 45.4% since June 18th. The loss of share price wealth will in turn weigh heavily on personal consumption and business investment going forward.

Canada has political as well as economic uncertainty. Prime Minister Stephen Harper’s Conservative Party secured the most parliamentary seats in elections on October 14th but did not win a majority. Dismayed over Harper’s perceived insufficient response to the economic contraction, the various opposition parties are united in an effort to topple the government. A vote of no confidence on Monday was planned on an economic bill, but Harper is subjecting parliament to a 7-week lockout until January 26 to delay such action against his hold on power. All these maneuvers can’t help but raise voter anxiety about their government, the economic outlook and the scope for policy drift. If the Conservatives are ousted eventually, it seems doubtful that the unity required for that will carry forward with the same discipline as new leadership tries to govern. If Harper outfoxes the forces against him beyond late January, his disapproval ratings are bound to rise sharply.

The burden of helping the economy rests heavily on the Bank of Canada. The final scheduled monetary policy announcement of 2008 is set for next Tuesday at 09:00 EST. The Bank of Canada started cutting rates from a 4.5% peak in December, later than the Fed first acted. There have been three Canadian cuts of 25 basis points and three cuts of 50 basis points in all, including one of each magnitude in October. Seven long weeks will have gone by since the last reduction, a decrease of 25 basis points, when policymakers meet next week. Whereas the current Bank of Canada target level of 2.25% does not seem extraordinarily high, the magnitude of its rate cuts and their spaced-out frequency look timid by the standards of what central banks have been doing lately. A cut of 50 basis points is the minimum of what should be expected next Tuesday, and most likely officials will deliver a larger dose of relief.



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