On December 9th, the Bank of Canada made it official – the Canadian economy was entering a recession. According to the National Bureau of Economic Research, the U.S. economy peaked in December 2007 and has been in recession ever since. In addition to the recession arriving later in Canada, several other factors indicate that it is likely to be less severe.
Underlying Support for Canada’s economy
While Canada’s economy cannot avoid the serious recession in the U.S., both individuals and businesses in Canada are coming into the recession on sounder financial footing. Debt as a share of Canadian household assets is significantly lower than in the U.S. and Canadian homeowners aren’t facing the same kind of mortgage reset seen in the American market. Furthermore, Canadian companies are entering the recession with healthy levels of profitability. In the second and third quarters of 2008, as a share of GDP, profits were running at a record high at 15%.
Employment Holding Up
Although unemployment is expected to rise, employment in Canada held up remarkably well throughout 2008. As an indicator of housing sales, Canada’s relatively stable employment is in sharp contrast with the steady declines in the U.S.
Strong Banking System
Canadian banks are in better shape than their U.S. counterparts and we can expect them to be more supportive to home sales and residential construction. Although there has been hoarding or reserves by Canadian banks and a reluctance to lend, this is expected to subside as the financial panic in the U.S. begins to ease early in 2009.
Benefits Coming to Consumers
Two areas of stimulus will aid consumer spending – the lowering of mortgage rates and the reduction in energy costs – both of which have the potential to put cash in consumer’s pockets. In addition, large declines in commodity and basic materials prices and the coming downward pressure on construction wages, will make new construction more affordable. With wages and prices easing, the Bank of Canada will have room to continue cutting its policy rate.
A Need for Perspective
Despite the overwhelming wave of pessimism that has descended on consumers, homebuyers and businesses, there are a number of factors that suggest the outlook is not as bleak as some claim. Thanks to a vastly different economic policy response, we are unlikely to face a re-run of the 1930s. From August 1929 to March 1933, the downturn in the U.S. economy lasted 43 months. The current U.S. downturn has already lasted 12 months and is unlikely to stretch beyond the end of 2009.
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