The fall in oil and commodity prices that began in the summer of 2014 is something which I have broadly welcomed. This is because there are many more consumers than producers of such goods so that there will be an economic benefit to the world’s economy overall. However countries which depend on resource production will find the economic going much tougher and there was a broad hint about this in today’s purchasing managers report for manufacturing in China. Not only did it show a second contraction in a row but there was this in the detail.
Average input costs fall at sharpest pace since March 2009
Whilst this offers a direct guide to a likely strong impact on the South China Territories otherwise know as Australia there is an implicit link to the resource producer that is Canada too. More fuel for the argument has come from the latest data from the commodity price index from the Reserve Bank of Australia released earlier today.
Over the past year, the index has fallen by 20.4 per cent in SDR (IMF measure) terms, largely driven by falls in the prices of bulk commodities. The index has fallen by 19.1 per cent in Australian dollar terms over the past year.
Whilst this index is specifically weighted for Australia the broad pattern of an initial credit crunch dip followed by a strong rally has now been followed by sustained falls. This pattern also applies to Canada.
What about economic output?
The factors above seemed to finally catch up with the official data record for Gross Domestic Product or GDP in the numbers released on Friday.
Real gross domestic product declined 0.2% in November, largely the result of declines in manufacturing, mining, and oil and gas extraction.
Actually I would have expected the impact of the falling commodity and oil prices to be greater but we do know that there would be larger impacts in both December and January to come. Also November was a particularly weak month for manufacturing in Canada.
Manufacturing output fell 1.9% in November, after rising 0.7% in September and 0.6% in October. Durable-goods manufacturing decreased 1.8% in November, as most industrial subgroups declined.
Some care is needed here as Canada produces monthly GDP estimates so it would be harsh and unfair to call a recession if the next one records a decline but there are obvious building issues on their way.
What about the labour market?
As followers of the comments section of this blog will be aware there has been quite a change recently and it is not reality which has changed by the official measurement of it. In the middle of last week a broadly positive picture was painted by Canada Statistics.
Compared with 12 months earlier, weekly earnings increased by 2.2%……On a year-over-year basis, non-farm payroll employment increased by 120,400 or 0.8%, with an upward trend from April through October of 2014.
However there was a slowdown in wage growth in November and this happened to employment.
Total non-farm payroll employment declined by 33,000 in November, after edging up (+9,100) in October.
So a situation many countries would love has seen a deterioration but then boom! From the Globe and Mail.
It turns out the economy created just 121,000 jobs last year, not the more hopeful initially reported tally of 186,000.
So actually there has been quite a downgrade about which the newspaper was scathing.
Imagine an engineer who underestimates by a third how much structural steel is required to support a 60-storey tower.
A different perspective was provided by this.
As Bank of Montreal chief economist Douglas Porter pointed out, the revision alone is more than three times larger than the 17,000-plus Target Corp. workers poised to lose their jobs across Canada.
Regular readers will be aware that I discuss from time to time the error margin of such numbers which applies elsewhere too.For example the two official surveys in the United States regularly give different answers. Canada has a problem but so does everyone else except not currently as publicly and of course it adds to the mistake made in July 2014.
As Andrew Baldwin has already pointed out there are alos issues with the numbers for the growing numbers of self-employed which of course is an issue across the developed world right now. Also I note his point about the election in Ontario where the incumbent government used the employment growth which has now been revised away. As the current UK coalition is already using the UK’s jobs record that provides plenty of food for thought for May does it not?
However we move on with a both a labour market and a statistical institution with weaker records than previously thought.
What about Canada’s housing market?
Apologists for the situation here have been able to point to an economy that has been strong and in particular a booming resources sector. Now the latter is not booming and the economy has had as a minimum a hiccup the numbers below take a different perspective.
IMF staff analysis suggests a national real house price overvaluation between 7–20 percent although with important regional differences.
If we go back to November of last year then a Deputy Governor of the Bank of Canada warned on house prices too.
In the post-crisis period, household debt levels and house prices have risen, owing, in part, to accommodative monetary conditions necessary to support the economic recovery.
In December the Financial Systems Review put it thus.
The most important risk is the inability of stretched households to service their debt should they face a sharp decline in their incomes or a sharp rise in interest rates, which could trigger a correction in house prices. The probability of this happening is low, but if it did, the effect on the economy would be severe.
The debt issue has been identified by the Financial Post.
The record-low rates have contributed to record household debt in Canada which was 162.6% of disposable income in the third quarter, according to Statistics Canada.
What about Canada’s banks?
According to the IMF everything is fine.
Canadian banks remain highly profitable, with favorable loan quality, low nonperforming loans, and improving capitalization. Stress tests suggest that banks are resilient to credit, liquidity, and contagion risks due to their strong capital position, stable funding sources, and low exposures to the energy sector, as well as extensive government-guaranteed mortgage insurance.
It is true that Canada’s banks have pretty much sailed through the credit crunch era compared to the disasters seen elsewhere.. But there are many challenges ahead including the sort of ones which have collapsed banks and indeed banking sectors elsewhere.
Indeed the complacency highlighted above was brought into question on the 21 st of this month by the Bank of Canada.
The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent.
If you consider that to central banks the banking sector is the “precious” then you might wonder about the likely reasons behind a surprise rate cut! To my mind this is reinforced by the fact that the banking and indeed household/housing sectors are missing from the statement.
There are a multitude of factors impacting on Canada right now and not all of them are negative. The falling Canadian dollar may improve the trade balance and the impact of lower oil prices on the world economy will set a more helpful international environment. But if the oil price continues to be around us $50 per barrel then Canada faces perhaps its most serious challenge of the credit crunch era. We now know that via the labour market revisions things were not as good as previously though and we also know that the Canadian household sector is heavily indebted. So any slow down poses dangers across a range of indicators which include the housing sector which of course involves the banks. Intriguingly even Barclays Bank appears to agree with me. From CBC News.
From our standpoint, the surprise reduction in the overnight rate by the Bank of Canada is a net negative for the banks,” the report said.
Accordingly there are scenarios where 2015 leads to a range of economic issues for Canada. Perhaps South Park was correct to ask this question.
Do you ever stop to think how important Canada is to the world?