Monday, March 2, 2009

Canadian Economy contracts 3.4% in Q4 2008

No surprise here, growth was a little worse than my initial forecast(guess) of -2.7%. The economy is now being hit from all sides - both domestic demand and trade were down and household spending was down 0.8%, the first decline since 1995.

Ugh. Next quarter will be much worse and Q2 won't be anything to cheer about either. Hope to see some sign of recovery in Q3. Wake me up when its over.


Toronto Real Estate said...

I hope you're right about the signs of recovery in Q3. Although even when optimistically looking at the current situation, it looks very unlikely to me. But lets hope!

Take care, Elli

Shock Minus Control said...

Thanks for reading Elli - I hope I'm right too!

There is certainly a lot of downside risk to that forecast - much of which depends on a smooth recovery south of the border.

Phillip Huggan said...

The AB oil economy benefits from a strong CAD. Ontario gets hammered as it loses manufacturing industries cross border and prefers a weaker CAD. No one likes revenue oscillations on the Provincial level given multi year investment time tables.

It would seem to make sense to use eachothers business and mortgage portfolios as a natural hedge. I think there should be some incentive or revenue neutral incentive/penalty for banks in AB and southern ON to swap eachothers portfolios as a partial revenue stream hedge.

Shock Minus Control said...

An interesting idea Phillip - though you might run into a few problems in application (like getting Albertans and Ontarians to speak to each other)

DW said...

I notice that in your forecast model you've got core inflation at 2% for all four quarters of the year.

I'm guessing this is an input based on the Bank of Canada's target. Do you mind commenting on how this results in what looks like a blast of total inflation in Q4? Any thoughts on interest rate responses?

Really enjoy the blog

Shock Minus Control said...

Thanks for reading DW - and also for pointing out a mistake I hadn't noticed - Looks like the picture I have of my forecast table is outdated (must have linked to the wrong one). My core inflation forecast (by quarter in 2009) is actually 1%; 1.5%; 1.9%; 1.9

I'll fix the table right now. Thanks again.

Interest rates are particularly difficult to model in a liquidity trap environment since the Central Bank reaction function doesn't make much sense at the zero bound.

I plan to update the forecast this week given final Q4 numbers.

DW said...

That makes sense. So I'll follow up:

Do we then just wait around in a liquidity trap until the money supply explodes? Any idea for how the bank might view the liquidity trap endgame?