There has been some recent economic news using the word recession in relation to Canada. Thank god Canada is not Ontario and Quebec! We here in BC and the West in general will continue to thrive from high natural resource prices and this should keep the Vancouver real estate market in good shape.
Have a look at this article about an OECD report on Canada. It says that Canada WILL NOT go into recession and that the Bank of Canada will be reducing rates which is great news for us involved in the Vancouver real estate market. Like I have said in previous posts, interest rate cuts caused by economic weakness in Central Canada is fuel to the fire for Western Canada's economy already roaring from high resource prices.
I'd love to hear your thoughts!
Continue to cut rates, OECD tells Carney
OTTAWA — Canada will avoid a recession, but the federal government may dip into deficit, and the central bank needs to continue cutting interest rates to fend off a protracted slowdown, the Organization for Economic Co-operation and Development says.
Faltering exports and trouble in the manufacturing sector have already pushed the pace of Canadian economic growth down significantly, and the economy won't recover until a year from now because the U.S. slowdown is expected to persist, the OECD said in its economic outlook Wednesday.
“But no recession is expected,” the organization stated.
Canada's economy shrank 0.3 per cent in the first quarter, at annualized rates, the first quarterly contraction in five years. Many economists have warned that the second quarter could be equally as weak.
Bank of Canaqda Governor Mark Carney
The popular definition of a recession is two consecutive quarters of economic decline, but economists hesitate to describe Canada's economy as recessionary, since the contraction has been slight so far, and job growth remains solid.
The OECD projected growth of 1.2 per cent for 2008, and 2 per cent for 2009. The projections are close to the average projection of private-sector economists.
Still, the economy is weak enough to warrant more rate cuts by the Bank of Canada, the OECD said.
“The monetary policy easing that started in late 2007 needs to continue in order to offset the likely protracted slowdown in the U.S. economy, the impact of the currency appreciation as well as the consequences of financial-sector stresses in the real economy,” the outlook stated.
It's not clear the Bank of Canada will follow that advice. Governor Mark Carney has hinted lately that the aggressive pace of rate cuts that marked the beginning of this year has come to an end, and he now has a wary eye on inflationary pressure.
Economists expect a small rate cut of a quarter of a percentage point next week, but aren't sure where Mr. Carney will head after that.
The OECD also warned Canada's current account will “dip deeper into deficit” mainly because of falling exports.
But economists in Canada are not worried about the current account. Canada initially recorded a small deficit in the fourth quarter of last year, but it was revised away last week. And now, with oil and gas prices soaring, Canada is in solid surplus territory again.
The OECD assumes an average oil price of $120 (U.S.) a barrel - in line with many other economic forecasts.
The OECD also warned Ottawa “may show a small deficit,” as tax cuts and taxes paid by struggling business eat into government revenue.
“Governments will need to hold the line on spending to keep their budgets close to balance,” the outlook states.
But again, economists in Canada don't see the fiscal situation unfolding that way. While output in Canada has stagnated, high oil and gas prices are bringing huge amounts of money into the country, pumping up corporate profits and income.
Nominal gross domestic product is strong, and that's the base Ottawa uses for taxation.
Plus, Ottawa's auction of wireless spectrum this week is bringing the federal government more than $2.5-billion, money that was not included in the last budget, and surpassing the government's internal projections.
At least one economist read the OECD recommendations as a hint of what the Bank of Canada will do next, since the OECD outlook is put together after extensive consultation with government officials.
Ted Carmichael, chief economist at J.P. Morgan Canada said the OECD comments “should be viewed as an indication that policy-makers continue to see further cuts in the policy rate as necessary to offset the strong headwinds provided by the expected protracted U.S. slowdown, previous Canadian dollar appreciation, and the continuing impact of credit market distress.”
The OECD report urges central bankers to put more weight on the slowing economy than on inflationary pressure, Mr. Carmichael said. And the OECD outlook “is usually a view that conforms with the official policy consensus in Ottawa.”
The OECD is essentially recommending that the Bank of Canada cut rates by as much as 75 basis points in the months ahead, added Stewart Hall, economic strategist at HSBC Canada. That's on top of the 150 basis points in cuts already undertaken since December.
(A basis point is one one-hundredth of a percentage point.)
Markets, however, are only pricing in a rate cut of 25 basis points next week, and not much action beyond that, Mr. Hall said.
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