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September 1, 2010

Canadian economy weak, recovery in doubt

CANADA - Canada's economy has been growing more slowly than expected and appears to be stagnating. Concerns over Canada's economic recovery are casting doubt whether the Bank of Canada will raise interest rates or keep them low.

Canada's GDP grew at an annualized rate of 2.0% during the second quarter. Earlier estimates had been hopeful for a number near 5.8%, which is what the first quarter of 2010 did. (Source: Statistics Canada)

Even conservative analysts had been hoping for 2.5% growth for the 2nd quarter, but even that has proven false with the 2.0% results. Meanwhile the US recovery is even weaker, a mere 1.6% for the same time period.

Compared to pre-Great Recession / 2007 levels consumer and government investment are higher now, but business investment and exports are lower. While the bolstering effect of investments does add some stability to the economy, the lower exports and trade deficits are not helping either the North American economy.

Furthermore Canada's GDP growth is mostly limited to the mining, oil and gas sector. If we ignore that Canada would still be in a recession.

Consumer spending in Canada is also slowing. In the first quarter of 2010 it was an annualized rate of 4.3%. During the 2nd quarter it went down to 2.6%.

With the housing market in Canada heading towards a real estate bubble burst this could be very dangerous times for the Canadian economy. A housing bubble burst, combined with a double dip recession would be disastrous.

It is our opinion that the Bank of Canada botched the economy by raising interest rates in July. They should have waited until Canada's economic recovery was complete. The early rise in interest rates hurt the mortgage and housing industry and will now make things much worse when the double dip recession hits.

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