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Blog by Steve Burk

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Slow down v. recession

 Lately there is a lot of talk about the possibility of U.S recession and
   its effect on our economy and the housing market. In fact Bank of
   Canada, in its recent decision last Wednesday to keep the rates
   unchanged said that the cooling in U.S. housing market is the biggest
   downside risk to the Canadian economy. While we think that there is a
   25% chance that the recent slow down in U.S market could lead to
   recession, our base case scenario is that the recent slow down is just
   that; a slow down and not recession. For one, U.S short term rates will
   remain low, “U.S dollar will likely continue to weaken and  provide
   stimulus to exports and there is little likelihood that government
   spending on defense will moderate any time soon”. Most importantly you
   can’t have a recession when U.S corporations are doing so well; large
   profits with low debt. Also employment is high and people always spend
   when they are employed. So we think that U.S economy will grow but
   rather than growing at the recent levels, it would shrink to a growth of
   2% to 2.5%.
   In the environment of slow U.S growth, our economic growth would also
   slow down.
   Already, the recent figures on unemployment rate showed that the
   Canadian economy lost 16,000 jobs in the month of August, which was not
   only below expectation of 20,000 gains, but it was also the third
   straight month in a row jobs were lost. Un-employment rate rose from
   6.4% to 6.5%.” However, since the declines came on the heel of an
   outsized 97,000 gain in May, recent job growth is still running at a
   healthy monthly pace of 17,000 per month”. In B.C wage growth slowed
   down from 4% to 3.1%.
   These data should put Bank of Canada worries of accelerating inflation
   to rest.
   Consequently, we believe that while Bank of Canada may hold its rates
   steady over the net few months, it will start lowering rates by the
   beginning of 2007