Fundamentals Backgrounder (rev 2010/12/23) ~ Some would argue Canada's $62 billion Economic Action Plan (EAP), proposed in January 2009, was overly generous.  In fact recognized studies have shown that Keynesian spending to extract an economy from Recession is more expensive on the long term when deficit borrowing costs are factored in.  Economic purists would further explain that State interference and subsidies also upset the natural "cleaning out" processes of wayward commerce and consumers.

Instead, political pragmatism dictates that the social cost of these periodic episodes must be mitigated.  In Canada's case, with the Unemployment Rate stubbornly at 8.1% (after a high of 8.7%), the excess fiscal stimulus is seen to be a welcome aid in getting the Rate back to the pre-Recession 2007 low of 5.3%.  In the absence of Inflation, Bank of Canada had obliged with a low interest rate regime to enable this quest for full employment.  Pleasantly surprising tax revenues and royalties resulted in last year's Federal Gov't Deficit being $47 billion ... $7 billion less than had been forecast.

The reality is that any Government that defied the G-20 call-to-arms for concerted stimulus action would have faced expulsion either by combined Opposition Parties or the electorate.  There is no doubt this would have been the demise of the Federal Conservatives here in Canada.  The EAP, jointly funded by Federal, Provincial, Territorial, Regional & Municipal jurisdictions comes to an end in March 2011.

Over the past year the Loonie has climbed 20%, mostly on the doubling of crude prices.  Both the Canadian & Australian currencies are unfortunately cursed with the infliction of still being considered commodity sensitive.  A rising Dollar impedes exports and thus the manufacturing sector.

Despite near-record low interest rates, Canada's superb macro economic fundamentals have encouraged foreign investment, as well as somewhat of a safe haven status; and even limited reserve currency status on the international scene.

These factors have not gone unnoticed at the Chicago Mercantile Exchange, where high Loonie-related speculation activity was reflected by record long futures volume (120,000 long non-commercial contracts) in mid-April.  This exuberance expired;  volume drifted to a mere 24k in mid July;  but rejuvenation of volume this month to 65k warrants vigilance.

Based on current commodity prices and other macro-economic fundamentals, the Canadian Dollar has a fair value of $0.87 today agin the USDollar.  That the Loonie in April already visited par with only $82/barrel contract crude implies the 2010 bump was built upon far too much anticipation.  If neophyte speculators carry the day and oil revisits the 2008 $131 high, Canada's Dollar could spike briefly to $1.18 in the present environment ... truly uncharted territory.  Our projected moderation of the Canadian economy in part reflects export challenges in a protracted par-plus CdnDollar environment.

Because GDP growth rates are correlated to the USA, it is prudent to understand the vulnerability south of the 49th.  For the past decade, I have warned of the consequences of growing structural deficits and the impending Federal Debt Wall in the USA.  Because both Congress & consecutive Presidents have failed to address this issue, the USDollar has been in secular decline since January 2002.  Failing an earlier intervention by bond vigilantes, America will probably face the beginnings of a Greek style Debt Crisis in 2022 ... marked by Treasury downgrades, major bumps in yield (3%) and ultimately ... withdrawal from the treasury auctions by tier-1 investors.

As most crude oil is denominated in USDollars, its price reacts inversely to movements in the Dollar.  As illustrated in our Barrel Meter chart, the USDollar debasement is a dominant component in price discovery and will continue to grow if the US Gov't continues its fiscal mismanagement.  Resultant rising crude costs could increase pump prices to the extent they approach the same Gasoline/GDP ratio that decimated USA New Car Sales in 1980, 1990 & 2007.

This Autumn's analysis has been an improvement over our previous reviews.  The recent change in sentiment reflected rumblings that the Bush tax cuts (due to expire at year-end) were unlikely to be extended in their present form by Congress.  This situation reflects fear that the momentum of the EURO has reached critical mass.   Austerity measures in the EuroZone have benefitted the EUR:USD exchange rate rising to 1.36 from only 1.18 during the Toronto G-20 Summit.

 Prime Minister Stephen Harper has been celebrated worldwide for his instrumental role in convincing G8-G20 nations to adopt aspirational targets of halving their deficits by 2014.  Thus it is distressing to see very recent Republican resolve to maintain the tax cuts should they be victorious in next week's congressional Elections.  Breach of this threshold would occur @ $89/barrel crude.  Another critical juncture would occur if oil passes thru the $106/barrel threshold:  another round of G-20 Recessions ... and inevitable negative effects on our worldwide exports.  As a caveat, our projected rise in GDP growth rate from this juncture assumes only the most minor of extensions  to the Bush tax cuts in December.

Canada's average home prices were double their American counterparts from October 2009 to May 2010.  The annualized 2010 Canadian avg price exceeds the long term Price / Family Income ratio trend by 29%.  Canada is today suffering a $76,000 Housing Bubble.  The average monthly Price plunged $22k (6%) after peaking in May 2010.  With the experience of our 1989 Bubble event, consumers are more likely to see a multi-year flat-line realty price correction than the deep-plunge episode witnessed by the USA in dealing with its own $61k (28%) bubble peak in 2005.

Still, in light of the potential (29%) correction, we continue our plea to CMHC (back on 2010/3/24) that it would be prudent for them to temporarily increase its down-payment requirement for high-ratio insured mortgages to 10% (from 5%) until the downside risk dissipates.  In the 90's, the average price fell a mere 6%, but took ten long years to set new highs.

Homeowners' growing realization of imminent falling prices and deteriorating wealth effect will not bode well for Confidence.  This factor will stymie robust GDP right through to the end of the current business cycle in 2017.

If long-term American business cycle trends hold to form, both economies should trough again in 2017Q3.  Whether this takes the form of a soft or hard landing will depend on Bank of Canada's monetary policy maneuvers in tandem with fiscal policy actions at the federal & provincial level.

Bank of Canada & the Federal Reserve must be very careful with their raising of interest rates during the balance of 2010 & 2011.  Low rate regimes will be necessary to weather the collateral damage associated with issues discussed and re-attain natural unemployment rates.  With November's GDP growth rate likely at a mere 0.6% amid fiscal stimulus, it is clear Mark Carney has been as overly ambitious in his raising of rates despite our cautions as he was overly optimistic in keeping rates high in 2008.

It is time to put a hold on future rate increases 'til inroads are made on nearing full employment.  Curbing inflation is required of course, but his battle against asset bubbles (real estate) should be delegated to the appropriate regulator (CMHC).

TRI Performance (rev 2010/2/16) ~ In Nov/2009, the TRI was the first mainstream analysis to indicate the Recovery was exceeding 5% GDP growth rates.  But within mere weeks the Indicator began to already project its serious deterioration.  By December 23rd 2009, the TRI signaled the first alert of a potential double-dip.  As North American news became worse, the date for a downturn was accelerated.  But then in late April 2010 - all signs of future negative GDP vanished.  Media pundits and bank economists have continually been behind the curve on all these developments.

The dismal activity in 2010H2 represents a significant plunge from the heady 6.2% GDP days back in January 2010.  Because it flies in the face of three months of fiscal stimulus spending still to be distributed, We are confident the downturn reflects our March 5th 2010 warnings that Bank of Canada would have to ratchet back if it raised interest rates too quickly in light of: a probable double-dip in the USA, an export killing near-par Loonie & an imminent bursting of Canada's Housing Bubble.  Afterwards Carney raised rates three times.  Only ten months ago, the Central Bank & the Minister of Finance had assured Canadians that there is no realty bubble up here.  Then we watched home valuations plunge $22k from June to August!

TrendLines Recession Indicator's 24-quarter Canadian GDP guidance (with a minimum of false positive/negative signals) weighs 6 leading indicators incl Animal Spirits & the Realty Bubble Monitor, Barrel Meter & Gas Pump projections

Recession Backgrounder  (rev 2010/10/29) ~ As illustrated in our long term chart, the 2009 Recession was the fourth severest Canadian economic event since WWII as measured by the TrendLines Recession Indicator (TRI).  Today's revised GDP data indicates the Canadian economy entered a Technical Recession in February 2008.  This sheds light on the discussions surrounding the 2008 Election campaign, when PM Harper and Treasurer Flaherty were adamant that there was no Recession in play and thus no chance of a 2008/2009 Deficit, whilst the Opposition used anecdotal evidence to "talk down the economy".

Leading Indicators and GDP exhibited much conflicting data through the year.  Then in December, Canada

With clarity absent, reporting inaccuracies sent mixed signals and resulted in the failure of the Conservative Gov't to address the downturn with sufficient fiscal policy stimulus in their infamous November 2008 Autumn Fiscal Update.

This mis-read was compounded by actions (or inaction) by the Bank of Canada, which made no effort to use its monetary policy privilege to  reduce

interest rates after March 2008.  The Bank Canada finally reduced rates by 0.5% on Oct 8th 2008, but even then it was only as part of a concerted effort by six Central Banks to address the international liquidity crisis.  At the time, it was not aimed at any perceived Canadian economic softness.  Viewing the Trendlines Recession Indicator archive (MemberVenue only), it is evident that StatCan has made many revisions to 2008 in the ensuing two years.

In a final look back at the recent downturn event, today's revised StatCan GDP data implies the full economic contraction was 19 months (~ 6 quarters) in length, with an avg GDP decline of -2.3%.

The Technical Recession started in February 2008, escalated to a Severe Recession in December and plunged to its eventual -7.6% trough in February before coming to an end in August 2009.   In comparison, the USA event lasted from Dec/2007 to June/2009 with a 7.7% (Feb) trough.  The USA slowdown in the sales of new home construction & autos devastated imports from Canada of softwood lumber, auto parts/vehicles, and the general manufacturing sector.

It is little known that more cars & trucks have been assembled in Ontario than Michigan since 2005.

As we predicted in Autumn 2008, a Spring recovery for both (new) homes & cars came as scheduled ... and before any of the stimulus cheques.  Already by July 2009, American New Home sales were up 27% from their Jan/2009 low.  Back on August 19th 2009 we declared that the Canadian Recession had ended in July.  StatCan GDP figures have confirmed the essence of that prediction.

 ~

July 21 2010 ~ Due to exorbitant gasoline and diesel prices at the pump, USA Car & Light Truck sales collapsed in 1980,  1990 & 2007.  On its present trajectory, the same fuel cost/GDP ratio that initiated these episodes of dramatic demand destruction will be revisited upon $3.42/gallon gas ($92/barrel crude) ... probably in 2011Q1. 

Ignoring the Cash-for-Clunkers anomaly, annualized sales have climbed back to as high as 11.8 million from 9.1 in Feb/2009.  See our Gas Pump & Barrel Meter charts for lots more discussion on the real factor thrusting the USA economy into double-dip.

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