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