US GDP -6.2%

A little worse than expected - but really, who is surprised by bad numbers these days? I believe my assumed Q4 US growth was about -5%, so I'll update my forecast if I have time later today.

The SMC Bounce?

Canadian financial services stocks (XFN) have shot up about 15% since I mentioned a buying opportunity. Coincidence? I think not. (Okay, Ben Bernanke virtually guaranteeing that nationalization in the US was off the table may have had something to do with it as well)

Do editors still exist at the Globe and Mail?

Although I realize that I am encroaching on Stephen Gordon's turf, I still could not let this bit of terrible economic journalism from Canada's newspaper of record slip by unnoticed:

After the downturn of 2009, the B.C. economy will slog through several years of low-grade misery, the economic equivalent of a lingering chest cold. The jobs market is particularly lethargic. The unemployment rate is to peak at 6.2 per cent this year, and then drifts back to down to 5.5 per cent by 2013. By itself, that muted recovery is unimpressive. Four years of economic expansion will not be enough to trim unemployment back to the 4.6-per-cent rate of 2008.

- From "After the deluge, BC faces soggy economy", Feb 20, 2009

Above is a picture of the BC unemployment rate from 1990 to January 2009. I don't think anyone looking at this graph would describe 5-6% unemployment as "low-grade misery", rather it is likely pretty close to full-employment for BC. The 4.6% rate for 2008 was a product of an overheated construction sector that is now unwinding. A skilled (or even semi-skilled) editor should catch that.

This is not investment advice

...but if we have the soundest financial system in the world, doesn't it seem like now might be a good time to buy Canadian financials?

Why Canadians should be praying for the US stimulus package to work

I had some free time this weekend so I ran a pessimistic scenario for US recovery through my small-scale Canadian economic model. This scenario assumes that the US recession continues to 2009-Q4 and is followed by a very weak recovery in 2010. The implications for the Canadian economy are pictured below as deviations of Real GDP from its peak in 2008-Q3.



Lets hope it works!

Update: Canadian Energy Export Cliffdiving in Q4

As discussed previously here, Canada's trade surplus is taking a beating as energy prices and demand plummet. By my quick calculations, total energy product exports in Q4 came in at $25.6B vs $35.5B in Q3 - a drop of 28% quarter over quarter. I don't expect this will get much better in Q1 2009.

Canada in the Financial Crisis

Carmen Reinhart and Kenneth Rogoff recently published a short paper comparing the path of five US variables in the current financial crisis with the average performance of the same variables during five major crises in other countries - Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). The five variables chosen were asset prices (real home and equity prices), real economic growth, the current account and public debt. The authors set the crisis year to time "t" and track the variables for 4 years prior (t-4) and 3 years post-crisis (t+3).

I enjoyed this approach so much that I thought I would steal it and apply it to Canadian variables. The graphs that follow use 2007 as the base year for the financial crisis. Unfortunately, I don't have the Reinhart and Rogoff data set so the only comparison I'm able to show is with the US.

(Click to Enlarge)























The results are pretty interesting. Canadian asset prices seem to be following the same path as the United States ( my chart doesn't show it, but Canadian home prices softened in 2008 and should fall in 2009). Also, real growth is declining rapidly.

A key difference between Canada and the US, and perhaps a difference that will have meaningful implications for longer-term recovery, is that at the time the crisis hit, Canada had a much stronger budget and trade balance. Yes, public debt will grow as a result of the stimulus package and yes our trade balance is suffering as Canada's terms of trade weakens but the point is that Canada was in much better shape to withstand the crisis.

In crude terms, we could afford the crisis whereas the United States, partially because of reckless fiscal policy and partially due to a savings glut, could not and will now find it much harder to claw its way back. The lesson, and contrary to the immortal words of Dick Cheney, deficits matter.

More proof that things are really, really bad

Canadian job losses reached 129,000 in January, sending the National unemployment rate to 7.2% from 6.6% in December. Over 100,000 of the job losses were in manufacturing and 71,000 were lost in Ontario alone. My home Province of BC lost 35,000 jobs and the unemployment rate here now stands at 6.1% - up almost two full points from the end of 2007. Alberta continues to hang on to its jobs - I'm not sure how long that can last.

Payroll employment showed employment fell by close to 600,000 - unemployment now stands at 7.6%. Job losses since the start of the recession in December 2007 total 3.6 million. Wow.

Perhaps now that strange breed of creatures known as "Republicans" will feel a little more urgency to pass the stimulus package - that is, if , you know, they can get past the bizarro land logic that "spending" is mutually exclusive with "stimulus".