Tuesday, April 15, 2008

Report: Canadian Economy Will Avoid Recession

This is from Canada.com. While this report may make things look rather rosy in Canada the details paint a different picture. Manufacture is likely to see a continuing decline because of the strong dollar and weaker demand from the U.S. Also some exports such as hogs and lumber may have troubles as well. Provinces such as Ontario may be in depression while Saskatchewan and Alberta continue to boom as the demand for oil and natural gas continues at even higher prices.

The Canadian economy will avoid recession: report

Eric Beauchesne
Canwest News Service

Monday, April 14, 2008

OTTAWA - The Canadian economy will avoid being dragged into a recession by the U.S. downturn thanks to healthy domestic activity and strong commodity prices, a major Canadian financial institution forecast Monday.

However, CIBC World Markets warned that Canada may slowly bleed factory jobs for years, and long after what it sees as a relatively short U.S. recession ends.

"The energy-and resource-rich Canadian economy will manage to sit out this U.S. recession ...," said Jeff Rubin, CIBC economist and one of the authors of the forecast. "Nevertheless manufacturing - and in particular, autos and parts - remains vulnerable, both to a U.S. recession and a parity exchange rate."

CIBC is forecasting that high commodity prices, which are cushioning Canada's resource sector, will push the loonie to $1.05 US by year end. The currency closed at 98.08 cents US Monday, up from 97.71 cents US Friday.

Oil, which CIBC sees reaching $150 US a barrel over the next several years, rose more than a dollar to a record high close of more than $111 US a barrel Monday. TD Bank, meanwhile, reported that its commodity price index, led by surging oil prices, "rallied strongly last week" to a "whopping" 29 per cent more than a year earlier.

CIBC forecast that continuing high commodity prices and the strong dollar will hurt central Canada's manufacturing-based economy.

"Weakness in the Ontario economy, which will likely come the closest to outright recession of any of the provinces, will likely spur further Bank of Canada rate cuts," Rubin said.

CIBC expects another three quarters of a percentage point reduction in interest rates here, somewhat less than in the U.S., which will also help lift the loonie.

Canadian economic growth will slow to 1.6 per cent this year from 2.7 last year, it forecast but would rebound to a healthy three per cent next year.

While the U.S. slipped into recession in the first quarter of this year and will remain in a recession this quarter, it will start to recover in the summer, leading to 0.9 per cent growth for the year, accelerating to 2.3 per cent in 2009.

While the U.S. rebound will help Canada's struggling manufacturers, the strong dollar and a relatively heavy reliance on labour will continue to weigh heavily on the sector, it warned.

"Relative to the U.S. Canadian manufacturing was loading up on workers during the cheap Canadian dollar era ...," Rubin noted, warning, "we could see years of slow bleeding in factory jobs and activity ... ."

The forecast was issued amidst further evidence of Canada's strong domestic economy - a continuing non-residential construction boom in the first quarter of this year led by activity in Alberta and then Ontario.

"Last year's pace for investment in non-residential building construction continued into the first three months of 2008, again the result of major construction activity of office buildings underway in Alberta and Ontario," Statistics Canada said in reporting that investment hit $10.3 billion, up 1.6 per cent from the fourth quarter, the 20th consecutive quarterly increase.

Even another Statistics Canada report of a 3.2 per cent drop in Canadian auto sales in February was not seen as a serious economic setback as it followed two months of strong sales and the level was still the fourth highest on record.

And business leaders, at least outside of the struggling manufacturing sector, remain relatively upbeat about the outlook for sales and employment, according to a Bank of Canada survey.

"While the weaker U.S. economic situation is weighing more heavily on the outlook, firms are not expecting a marked change in the pace of business activity," it said in releasing the results of its quarterly Business Outlook Survey.

Businesses continued to report higher sales from a year earlier, although the balance of opinion on future sales growth has turned slightly negative, reflecting slower sales in the struggling manufacturing sector, but still suggesting that overall they expect sales to continue to rise at nearly the same pace as over the past year, it said.

Fewer firms reported facing capacity pressures or labour shortages, but inflation expectations have increased with more looking to an acceleration of prices for what they buy and what they sell. However, inflation expectations are within the central bank's one-to-three-per-cent inflation control range, it noted.

Also, for the third straight quarter, firms reported increased difficulty getting credit.

Still, more firms expected to boost rather than cut back on investment, although the gap between those who plan to purchase new machinery and equipment and those that will cut back on such purchases narrowed closer to zero.

"Among firms planning to invest less, most of whom are based in Central and Eastern Canada, the most common reason cited was significant investment spending over the past year, followed by a desire to preserve cash given uncertainty about the economic outlook," the Bank of Canada said. "Firms located in Western Canada generally expect to increase investment spending over the next 12 months."

The latest quarterly survey of an economically representative sample of senior managers from 100 firms was conducted from Feb. 22 to March 20.

BMO Capital Markets economist Michael Gregory said the survey results justify a further half a percentage point cut in interest rates by the central bank after its rate review meeting next week.

And TD Securities economist Jacqui Douglas said comments to the media by Bank of Canada governor Mark Carney since the weekend meeting of G-7 finance ministers and central bank governors also suggest the central bank is ready to cut rates further.

"His comments were dovish and emphasized the need for a forward-looking approach to monetary policy, supporting our call for a (half-a-percentage point) rate cut," she said. "If there was one over-riding theme in Governor Carney's remarks, it was that despite the fact that domestic demand in Canada continues to hold up, he's still very concerned about the outlook for growth."

Meanwhile, the March U.S. retail sales report was "marginally" better than expected with a 0.2 per cent increase.

"On balance ... it does not change the trend in consumer spending by any measure," said TD Bank analyst Charmaine Buskas, adding that TD still expects a further half a percentage point cut in U.S. rates later this month.

"The consumer continues to be buffeted by a number of headwinds, including high energy prices, weak job growth, and difficult credit conditions," she said "All these factors have translated into slumping consumer confidence which in turn, will remain a drag on retailing activity."

© Canwest News Service 2008

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CanWest Interactive, a division of CanWest MediaWorks Publications, Inc.. All rights reserved.

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