Double Blow for Canada

September 22, 2011

The Canadian economy is getting hit because of its close trade and financial ties with the United States and unfavorable commodity price trends.

Canadian real GDP contracted 0.4% at an annualized rate last quarter when net exports exerted a drag of 5.7 percentage points on the growth rate.  The rate of on-year GDP expansion was even lower at 2.0% in June than the 2.2% pace between the second quarters of 2010 and 2011.  In July, retail sales fell by 0.6% in nominal value terms and 0.9% on month on a volume basis.  The manufacturing purchasing managers index printed at a sub-50 level in August of 49.0, signaling the terminated factory sector recover that had begun in October 2009.  CPI inflation of 3.1% exceeds the 3.0% target ceiling, but core inflation is only 1.9%.

Canada’s financial vital signs reflect the turn for the worse.  The Canadian dollar’s low of 1.0363 per USD today was its weakest value since October 19, 2010.  The 2.02% 10-year sovereign bond yield now is 27 basis points lower than such was on September 15, 64 bps lower than on August 3, 110 bps lower than on July 4, and 216 bps less than on April 11.  Canada’s main equity index has dropped 9.5% since September 7, 14.7% since July 22 and 19.4% since April 5.

A little more than a year has passed since the last of three straight 25-basis point rate increase on September 8, 2010.  At that time, officials cautioned that the outlook was more uncertain than usual, but they were upbeat about prospects for consumer spending and business investment.  The overnight rate target then had reached 1.0%, and Canadian financial conditions were considered “exceptionally stimulative.”  Real GDP in Canada had risen 3.8% over the prior twelve months since 3Q09, and Bank of Canada official in July 2010 had projected that GDP would climb 4.2% between 3Q10 and 3Q11.  That’s a big over-estimate compared to the actual 2.2% rise that occurred.

It can be said that forecast uncertainties seem far greater now than in September 2010 when the Bank of Canada last tightened.  Officials at that institution are hardly alone in proclaiming that we live now in an age of immense uncertainty.  The U-word has been used often since August 2007 and, with the benefit of hindsight, inappropriately.  It’s not that the future is more uncertain than before.  Uncertainty has been ever-present since I got into this business soon after the first OPEC oil price shock.  The real problem now is that prospects are more consistently dire, but the word “uncertainty” is substituted euphemistically because politicians and bureaucrats do not like to deliver bad news.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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