Recession or not: Trudeau’s Canada
CANADA'S economy is the eleventh largest in the world. The problem is that with time its rate of growth is slowing down. The steady downward trend in oil prices might be good news for oil importers, but for Canada it is nothing less than an economic nightmare. As the price of oil plummets to below $30 a barrel, down from over $100 just a few months ago, it makes worrisome headlines for an oil exporting country like Canada. The fact is that Canada has a sophisticated oil-producing and processing industry. It is both an importer of oil and a major exporter of value-added refined oil products. In 2013, in addition to producing 1.2 billion barrels, Canada imported 440 million barrels, consumed 800 million barrels itself, and exported 840 million barrels to the U.S. Over 99 per cent of Canadian oil exports are to the United States. Canada is the USA's largest supplier of oil. There is no doubt that falling oil prices have changed the world's economy. In a situation where Saudi Arabia is refusing to pump less oil, and Iran remains in an increasingly comfortable position as an oil supplier, especially after the nuclear deal. In short the USA is all smiles while countries like Canada and Russia are worried about the future of oil export prices.
The issue also found its place in the historic final state of the union address of President Obama, who seemed to be in a mood to share and spread as much optimism as he could. The problem is that a lot of Canadians do not entirely share his optimism. While not all economist agree that Canada is going through a recession, but what they certainly do believe, and predict, that lean times lie ahead. Moody's Analytics defines a recession as a period with a sustained and widespread decline in economic activity. "The Canadian economy does not yet appear to be in recession, despite satisfying the commonly employed definition of having experienced two consecutive quarters of declining GDP," added Alexander Lowy, an economist at Moody's Analytics.
Although Canada's troubles are not limited to declining oil prices alone, the fact is that high unemployment is also weighing heavily on the economy as the Canadian dollar is believed to be a mirror image of the oil price in the world market. Oil prices used to have 80 per cent co-relation with the Canadian dollar, which has shot up to a 94 per cent relationship. So low oil prices are an increasingly critical factor. Taking a broader perspective, as Bank of Montreal's Douglas Porter put it, suggests the "end is not nigh." His opinion in the mid 2015s was that this was the "Best Recession Ever." The Trudeau government is "actively considering" speeding up promised investments in infrastructure in a bid to stimulate Canada's rapidly deteriorating economy. The point is that will that be enough or is it the right way forward to begin with? Prime Minister Justin Trudeau promised during last fall's election campaign to pump an additional $60 billion over ten years into infrastructure projects. However, it has been noted in the Press that because of commodity prices nose-diving and the state of the Canadian dollar, Trudeau's government as a response is looking to pump in money a lot quicker.
Earlier in January Bank of Canada governor Stephen Poloz also weighed in, calling infrastructure spending an "important ingredient" in economic growth. Another telling statement is the one released from The Bank of Canada, which states the investment in equipment and hiring intentions for the next 12 months have tumbled to their lowest levels since the 2009 recession. The declines in hiring intentions "point to negative net job creation this year, a sign perhaps that the economy is on the verge of a fullblown recession," Capital Economics' David Madani wrote. As a balancing act the Bank of Canada is hoping for an increase in exports, which to be fair has started to show signs of bouncing back. But will it be enough to negate the impact of a low-valued Canadian dollar? This conundrum still needs to be solved. Working in the banking environment, I deal with consumers with all sorts of issues, but if I had a penny for every time I hear clients cringe after finding out what the Canadian dollar is trading at, I would be a rich man, for the Canadian dollar in the recent past was at par with the mighty US dollar. A forecaster at the investment bank Macquarie says he expects the Canadian dollar to lose another 10 cents to reach an all-time low of 59 cents to a US dollar by the end of 2016. Doyle 'knows', they say. Last February, when the Canadian dollar was valued at just over 80 cents, he - correctly, as it turns out - predicted the it would hit 69 cents US at some point in the next 12 months. Final Thought: Canada might not be in a full blown recession but it is in an early to mid-level recession and has been since mid-2015 according to all logical reasons and statistics, the quicker they admit it and find a way out, the better.