Re­ces­sion or not: Trudeau’s Canada

The Pak Banker - - OPINION - Has­san Sheikh

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.

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