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Stagnation at best – Probability of recession is rising fast



I didn’t want this to be a rambling post, but it is because there are many interconnected issues here.  I also insist on being amusing!

The problem with additional data that sometime it confirms you worse fears.  More data points this morning confirm that Canada is now operating at stall speed.  Today’s data is unemployment benefits and wholesale trade.  Last May both had been going in the right direction (fewer people were receiving unemployment benefits and wholesale trade was rising 2% -- annualized rate), both these metrics are just about flat in June which augurs poorly for June’s GDP numbers; overall Q2/2011 could be slightly negative!

Little change in the number of Employment Insurance beneficiaries in June

Wholesale sales increase in June
(Source: StatsCan)

So far I’ve counted 7 data points that all say the same thing.  Canada is decelerating fast.  While Q1 was on fire, that’s no longer the case.  Inflation has been tamed (more or less), interest rates are still ridiculously low and will probably drop further.  Since this new recession is not “made in Canada” there is little that the policy makers can do.  In fact, interest rates really have nowhere to go!  The only stimulus available is if the federal government decided to slow down the pace of its budget cuts (hence not create more job losses), but we are not sure that this is such a good idea, first because since the recession is not Canadian in origin there’s really nothing to fix here!

Canada’s prime minister is definitively on the right track.  His recent trade mission in South America was well timed and these markets are somewhat uncorrelated with the U.S. and Europe (Canada’s principal export markets).  The same goes for Asia and the Middle East, for while we are expecting slow down in these regions too, its nothing compared to what looks to be on the cards in the U.S. and Europe (especially in Europe). 

The Bank of Canada has few policy tools at hand (fewer than the Feds or the ECB in fact).  First because growth in Canada is largely the result of trade (1/3 of Canada’s GDP is trade related). Canada’s banks are well capitalized and the “newish” mortgage lending rules make that sector more or less bullet proof.  Canadian companies have recently completed a large number of refinancing that means that they too are more or less immune to market insanity.  Canada’s banks also depend less than their counterparts around the world for interbanking funding, and at any rate the Bank of Canada can easily inject liquidity in the system as it did successfully in 2008 (within 9 months it had been withdrawn)  

Canada strength and its weakness are the same, Canada is a small open economy that is largely inconsequential, and has the good luck of being rich in natural resources, it has a well educated population and a strong legal system.  Although its tax burden is higher than some, at some level the single payer health care system dramatically reduces enterprise risks.  Wage inflation is low although a higher percentage (than the U.S.) of the labor force is unionized. 

Since a slow down (or even a recession) cannot be avoided the best solution is to embrace it, and make sure all the elements are in place for a quick recovery.  Stable government policies and stable tax policy is helpful.  Despite the riots in Vancouver a few months ago, there is little social tension here.   
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