- the source for market opinions


September 1, 2015 | It’s Here

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


A recession, eh? What does that mean? Does it matter?

In case you missed it, StatsCan revealed Tuesday the Canadian economy has, unlike Mike Duffy, contracted monthly. It’s called ‘negative growth,’ and if you’re the sitting prime minister, it’s the worst news. When an economy shrinks for two consecutive quarters, it becomes recessionary. Thanks largely to oil, that’s us.

And while the price of crude took a giant leap up (27%) in the last week or so, it’s volatile, unstable and unpredictable (look at Tuesday’s drop). More worrisome has been a relentless plop in business investment in Canada – down 11% during the winter and 8% over the last few months (witness today’s 1,000-job oil patch slaughter).

As you might expect, things are getting worse in the People’s Republik of Alberta where the Dipper government has announced not only a recession but a provincial deficit of almost $6 billion. Oil, drought, blazes and ideology are whipping the former cash cow province into submission. Oil rig activity has fallen by 50%, big money has gone into fighting wild fires and the government is goosing social spending, bloating the budget to over $50 billion for the first time. Concurrently an extra $500 million is being removed from often-struggling corporations in the form of higher taxes. Go figure.

Of course, news we’re into the R-thing is manna for the Muclairs and Trudeaus among us. After nine years of Conservative rule, they’ll point out, we have almost $200 billion more in federal debt, epic personal indebtedness, structural unemployment, eight years of deficits and now a recession. It’s hard to know if this will affect the outcome on October 19th, but hard to see how it won’t.

Anyway, what does a recession mean to us wage slaves and house-snorflers?

The last one of consequence hit at the end of the Eighties and extended through to the mid-Nineties. It was caused by high inflation and climbing rates, which makes our low-inflation, cheap-money recession all the more remarkable. But it’s interesting to note that residential real estate, which spent most of the 1980s in bubble territory (as now) suffered a US-style crash once recession gripped us.

The peak-to-trough decline in the average price of a Toronto house, for example, was 24.5%. Ouch. And during that entire period, mortgage rates got more affordable – with no measureable result. As I mentioned here yesterday, houses were cheaper in 2000 than they were in 1990. It took 14 years for the price of a house bought in 1989 to recover – not even factoring in inflation and buying/selling fees. Double ouch.

However, being a sunshine-and-ponies kinda guy, I have to point out that this recession is likely to be shorter and shallower than the one that hit the last time. The decline in business activity in the second quarter was less than in the first. That’s good. While business investment was way down, household spending was up – a lot. So you can thank all the idiots running up the LOCs and taking mountainous mortgages for mitigating the commodity price collapse. The US is motoring ahead (as the labour stats Friday morning will show), and that’s always good for Canada. Finally, the $3 billion largesse the desperate Conservative government bestowed on parents in July is also a factor, seeing it all got spent on Huggies and Heineken.

Now, despite recession being official, don’t look for cheaper interest rates. Ain’t gonna happen. Even economist David Madani, beating the drum for a third rate cut ever since the second one took place, has thrown in the towel. “Overall, this latest economic data is broadly consistent with the Bank of Canada’s economic projections presented at the time of the July policy meeting. Accordingly, we now expect the Bank to hold off lowering rates any further for the time being.”

In fact, given that the Fed will raise its key rate in September (odds are 44%) or October (odds overwhelming), fixed-rate, five-year mortgages in Canada will cost more by Thanksgiving – regardless of what happens with our central bank. That means 2015 likely marked the bottom of the interest rate cycle. This might even have been the cheapest money you’ll see in your lifetime.

So the real consequence of this could be political, not economic. Canada will get back on its feet when global growth moves higher and commodities respond. But in the process it might take a dramatic swerve left. As Alberta has started to prove even in the nascent days of NDP control, spending and deficits go up, and taxes follow. Is the answer embracing bigger, more costly government and less disposable income? I guess we’ll find out next month.

You might wish to prepare.

STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the Weekly Recap.

September 1st, 2015

Posted In: The Greater Fool

Post a Comment:

Your email address will not be published. Required fields are marked *

All Comments are moderated before appearing on the site


This site uses Akismet to reduce spam. Learn how your comment data is processed.