Health of the Canadian Economy

OTTAWA – Expect more evidence of the health of the Canadian economy in the coming week with reports showing increased housing construction this summer, rising prices for new homes, a rebound in exports, a further increase in imports and higher factory shipments. And at mid-week, Bank of Canada governor David Dodge will offer his latest take on the economy’s recent performance and what has been a shifting in the balance of risks from rising inflation to an economic slowdown.

His speech in London to Canada-U.K. Chamber of Commerce, entitled “A Clear Case for Transparency,” will focus on the need for tighter regulation of financial market securities. This includes asset-backed commercial paper, which was anything but transparent and found to be infected with billions of dollars in sick subprime mortgages, causing much grief for investors and increasing the risk of recession for economies. While the fallout from the subprime mortgage market meltdown will continue to rattle financial markets, the Bank of Canada, and other central banks, will continue to closely scrutinize the flow of financial and economic data for signs that the turmoil may be spreading to the real economy.

Evidence that it has in the U.S. was the report Friday of the first monthly job loss there in four years. In Canada, however, the data suggests the economy has continued to perform well, and that’s expected to continue this coming week, starting with separate reports on housing construction starts and new-home prices on Tuesday. “Despite rising mortgage rates and high homes prices, which we expect rose again in July, we are expecting a rebound in starts in August to 218,000 as strong employment and wage growth continue to boost demand for new homes,” Scotiabank economist Karen Cordes said.

Ditto for exports.
“Total exports have been falling for the past three months as the strong Canadian dollar continues to erode competitiveness,” she said. “However, we will likely see a rebound in exports in July as strong auto production boosts export volumes, and higher oil prices lift xeport prices.” A report Friday on manufacturing will likely show that increased auto production helped boost overall factory shipments in July.

The rebound in exports isn’t expected to boost Canada’s merchandise trade surplus, offset by continuing increases in imports. But strength in imports is also a reflection of a healthy domestic
economy. “Strong consumer demand and demand for machinery and equipment will continue to put upward pressure on imports,” Cordes predicted. However, at the end of the week, a report on Canada’s lagging productivity performance will hang as a cloud over the longer-term prospects for the economy and, in turn, Canadian living standards.

Slightly weaker economic growth in the spring quarter of the year than in the first quarter, combined with an increase in the number of hours worked, will slow the growth in productivity, measured as output per hour worked, from a relatively strong performance in the first quarter, Cordes said. But it’s the economic reports out of the U.S. that the world will be watching, with a key report being August retail sales, which will be the first indication of how American consumers weathered the first month of the financial market storm. “Despite the turmoil in the latter half of the month, August retail sales are looking like they’ll be pretty healthy,” said TD Securities economist Jacqui Douglas. And that’s good news for those fearing the U.S. may slide into a consumer-led recession.
Source: The Windsor Star.

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Published in: on October 23, 2007 at 4:17 pm  Leave a Comment