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February 2008 - Avery Shenfeld, Senior Economist, CIBC World Markets
Vive la Différence
Is the US in recession? As they say, if it looks like a duck, and quacks like a duck, it’s a duck. The three-month loss of 47 thousand private sector jobs per month now in evidence simply has never been seen outside of “official” recessions. Look for a decline in GDP over the first half of 2008, with the first hopes for recovery resting on the lagged response to even deeper rate cuts and, in an election year, what could be even more fiscal action on its way.
Canada has avoided following the US into recession when the source of the initial shock was of greater severity south of the border. That was the case in the US technology recession of 2001, when Canada’s battered tech sector was simply too small a share of this economy to produce anything worse than a twoquarter period of flat growth. It was the same story in the 1973-75 oil-shock recession, when our lesser dependence on imported crude gave us an edge. As a result, Canada’s economy saw no worse than a threequarter run of very slow growth.
And that looks to be roughly what’s in store for Canada in what will be called the US housing recession of 2008. The initial shock was a collapse in America’s lax mortgage market and its ripple effects on housing and securities markets. Since Canada never had much of a subprime market, there was nothing to blow up in the first place.
Manufacturing can’t shed its links to the American economy. Indeed, Canadian factories have been in an onagain, off-again recession for the past two years, plagued first by the strong Canadian dollar, and now by slumping US demand for vehicles and other goods. Typically, it’s cyclical industries like manufacturing or housing that lead the way to an economic downturn, as blue collar workers seeing reduced incomes stop spending, and spread the malaise into services.
Thus far at least, accelerating jobs gains in other sectors are preventing the factory job losses from creating an initial aggregate hiring slowdown. Blue collar workers will be paring their spending, but new white collar workers are upping theirs at the same time. And while resource employment fell 4.2% in the past year, due in part to natural gas weakness, its hiring prospects look brighter for the coming year. GDP growth is too slow to sustain all of this hiring, and a rising jobless rate is still ahead. But there should be enough Canadians working, with enough spending power, to keep the economy from an outright recession.
If there’s no recession coming, it doesn’t mean that Governor Carney’s 50-bp rate cut this week was mistaken. The domestic economy remains healthy, in large part, because of the combination of monetary stimulus and a huge fiscal boost from government hiring, with nearly half the job growth in the past year found in the public sector. Rate cuts are needed to keep the banking system healthy enough to finance growth, and the C$ tame enough to prevent deepening damage in manufacturing. And because of the loonie’s buying power, inflation is tame enough to give the economy the benefit of the doubt. Further rate cuts could be in smaller doses, but they’ll be needed nevertheless.
February 19, 2008 - Nathan Vanderklippe, National Post
Bank of Canada governor stays the course
VANCOUVER - Standing before a crowd of pinstriped West Coast business leaders in a gilded Vancouver meeting hall, Mark Carney, governor of the Bank of Canada, took to the podium for his inaugural speech yesterday and restated his commitment to trimming interest rates in the near future.
But anyone expecting a dramatic coming-out party from the new governor likely left disappointed, as Mr. Carney delivered a speech on globalization that trod ground already well covered by the country's central bank.
His comments left little doubt that the 42-year-old former investment banker intends to steer the Canadian economy in much the same way as his predecessor. "This speech could have been given by David Dodge, there was nothing much new in terms of the interest-rate policy ahead," said Avery Shenfeld, senior economist with CIBC World Markets. Mr. Carney did repeat, virtually to the letter, comments he has previously made on the need for a cut to the bank's target overnight lending rate. "In line with our base-case projection and the associated risks, the bank, [has] said that further monetary stimulus is likely to be required in the near term," he said. "The timing and degree of that stimulus will be determined at future fixed announcement dates, after we have conducted a thorough analysis of, and applied our judgment to, all information at that time."
Economists read that statement as assurance the bank will trim at least 25 basis points, if not 50, from the bank's target rate when it makes its next announcement on March 4. A series of furious cuts by the U.S. Federal Reserve, which slashed its rate by 225 basis points between September and January, has left the U.S. rate at 3%, a full percentage point lower than Canada's.
Fears that the difference between the two is weighing down the Canadian dollar, not to mention worries that a likely U.S. recession will pull Canada with it, have led some commentators to push for significantly greater cuts from Mr. Carney, who acknowledged those issues in his speech.
Yet he also noted a possibly countervailing push from globalization-driven gains in Canada's terms of trade, which he said "could lead to stronger domestic demand growth than we had assumed." The high Canadian dollar's downward push on retail prices, especially among car and book sellers, could also provide a "greater and more persistent downward pressure on prices than we had assumed," he said, while affirming the bank's commitment to holding the country's inflation rate around 2%.
In his speech, entitled "The Implications of Globalization for the Economy and Public Policy," he compared today's enmeshing of world economies to the time of the Romans and cited a series of numbers showing how Canada has benefitted -- especially by gaining new, higher-skilled jobs, even if it has come with the pain of losing old elements of the economy.
For example, he said, though Canada lost 320,000 manufacturing jobs since 2002, it has actually gained 382,000 jobs in other goods-producing sectors. He did, however, note that the process of retraining workers for new jobs is likely to blame for "disappointing" declines in Canadian productivity growth. He also intimated that governments need to tear down barriers to movement of workers across the country through "policies [that] do not frustrate market-based adjustments, but rather are aimed at promoting flexibility in markets, particularly in labour markets."
As for his reticence to tip his hand on anything new regarding bank monetary policy, or, indeed, to even rephrase what he has already said, Mr. Carney told reporters being boring is just part of the job. "Look, as the central banker I don't mind repeating things," he said. "In fact, that's some of the art."
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