Monday, December 12, 2011

Canadian concerns

As one famous ultra-right wing economic commentator once said: "Canada makes things that if you drop them on your feet, hurt".  Canada makes steel (or at least Iron ore), we make copper we make gold and plenty of soft commodities.  Not only do we "make" these things we export the great majority -- which enables many Canadians to flee Canada's harsh winters.

Canada's banking system is made to measure to serve these industries, we know that demand is a boom/bust scenario -- unending change from feast to famine driven not by Canada's doing but others exuberance or at times soberness.  Canada's financial institutions are deemed some of the safest in the world because they know that today's feast can quickly change into famine. The past quarter of century (and the last decade specifically) have belonged to the emerging nations and as far as Canadian exports, China in particular.  The Chinese story has been one of massive investments -- accounting for nearly 60% of GDP -- the previous "master of the universe" with this level of capital investment was Japan -- which peaked at 40%.  For Canada this has been a boon of economic wealth -- whereas even a decade ago, Canada was dependent on the U.S. construction industry for sale of timber (and periodic trade "wars"),  Canadian exporters shifted their focus on China, just  as it  engaged in a massive construction boom.  

However, like all good things infinit investment is not a panacea for sustainable growth.  China's assumption is that its export engine was "the" solution (a similar ambition was espoused by Japan in the 60s and 70s), is being sorely tested by slowing OECD growth. The cold reality of aging OECD population -- with the corollary impact on GDP growth, the excess indebtedness in virtually every one of these countries (there are a few exceptions -- they don't include Canada but are "nordic countries") had to come to a head;  the events in Greece, Spain and Portugal are testaments to this realisation.  

Bottom line, China cannot rely on European consumers to stimulate GDP growth via exports, and what is said about Europe also applies to America. 

For Canada, finding the early signs of this turnaround are key to understand where our economy will be in 12 months time.  The first source of data is "King Copper", historically it has been the indicator of choice -- copper is used in everything, and production expansion is slow -- so easily quantifiable and as such (at the margin) provides a good indicator of potential growth.  However, copper has been surprisingly resilient, and has also played the fool to speculative fevers across the globe in particular in China where "Hog Farmers" infamously bought copper as a hedge (and also it turns out as a financing tool -- don't ask!).  Copper became a speculative tool by investors because of its role as economic predictor -- but its very success has marred its reputation as a predictor of growth.

The newest -- and it is still early days, predictor of growth is apparently steel -- in particular Chinese steel production -- which outstrips the capacity of the rest of the world several times.  Stories out of China are that there is now a massive amount of idle capacity (early maintenance shut down as they are euphemistically called).  Also demand for construction equipment is slumping.  Again, this is hearsay, and has been used mostly by those seeking to prove that China's economy is slowing.  Nevertheless, these are important indicators for central Canada -- where a good chunk of these heavy things are made!  

Next post: 2012 prediction -- later today


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