Wednesday, July 1, 2015

A Somber Canada Day?

Daniel Tencer of the Huffington Post reports, Recession Threat Looms As Canada's Economy Shrinks For 4th Month In A Row:
The odds that Canada will see a recession this year just rose considerably.

Canada's economy shrank 0.1 per cent in April, StatsCan said Tuesday morning, the fourth consecutive month of negative growth. Economists had been expecting the economy to expand by 0.1 per cent.

That suggests Canada's economic growth entered the second quarter considerably weaker than most economists had been expecting. Canada's economy shrank at annual pace of 0.6 per cent in the first quarter, and the number for April suggests that a negative reading for the second quarter is now much more likely.

Two consecutive quarters of economic decline would constitute a recession.

The mining, oil and gas sector shrank 2.6 per cent, the sixth month in a row it contracted. Retail trade shrank 0.2 per cent, the third month in a row it has seen negative growth. Manufacturing declined 0.2 per cent (the fourth consecutive month of declines) while construction fell 0.1 per cent. Finance and insurance fell a large 0.6 per cent.

Bright spots included wholesale trade (up 1.6 per cent) and accommodation and food services (up 1.2 per cent).

"The hit from oil to the Canadian economy doesn’t appear to be as 'front-loaded' as the Bank of Canada and Governor Poloz had expected," CIBC economist Andrew Grantham wrote.

"Thus far, we are yet to see the positives that should be offsetting weakness in the energy sector... Lower gasoline prices are doing little thus far to spur retail spending, while the weaker loonie is doing little to boost manufacturing."

The weaker-than-expected economy raises the odds that the Bank of Canada will lower interest rates again this year — something not all economists agree would help Canada's economy, particularly heavily indebted consumers.

April's weak GDP reading "probably provides the Bank of Canada with enough ammunition to cut again in July," CIBC economist Benjamin Tal wrote.

Tal wondered whether such a move would be necessary. "Highly indebted households don’t need even lower borrowing costs," he wrote.

Still, there are two months left in the quarter and most observers are not yet ready to declare a recession.

"While the decline in Canadian real GDP in April raises the risk of a technical recession, we still believe the economy will manage to eke out marginally positive growth in the second quarter," TD Bank's Diana Petramala wrote.
You can read more about Canada's economic woes in the National Post, the CBC and the Globe and Mail. None of this surprises me in the least as Canadians have been living in a bubble for a long time.

In December 2013, I warned all of you it's time to Short Canada, stating that oil prices will decline and along with them, the loonie will plunge from parity. A year later, in December 2014, I told you Canada's economic crisis is just beginning and that things will get much worse.

Amazingly, some economic commentators think the miserable truth to Canada’s economic recovery is that it's much stronger than we think, inflation is just around the corner and the Bank of Canada should hike rates aggressively (thank god we have Steve Poloz at the helm of our central bank).

Even Garth Turner with his popular blog on Canada's housing bubble, Greater Fool, has foolishly been proclaiming that the Fed will hike rates aggressively and the Bank of Canada will follow and that this will lead to a Canadian housing crash.

Poor Garth, he just doesn't get it. There will be a Canadian housing crash (the slowdown has already begun) but it's going to come when the next financial crisis hits, unemployment soars, and a protracted period of debt deflation sets in. And with Canadians indebted up to their eyeballs, the housing crash will be a lot more severe and protracted than anyone can possibly imagine.

The lower loonie will help boost tourism and manufacturing, but lower energy prices in the U.S. typically mean that manufacturing in Canada isn't as competitive as it once was. The shale energy revolution in the U.S. is very bad for Canadian manufacturing activity, which has slowly but surely been declining over the years.

Employment in the financial services industry and construction in particular will get hit hard. Already banks are in cost-cutting mode, shedding many employees, fearing the worst lies ahead. It will get worse for both these sectors.

"Leo, what's wrong with you? It's Canada Day today. Can't you be more patriotic?". I'm very patriotic and want the best for Canada and Greece, my ancestral home. But being patriotic means telling it like it is and not sugarcoating things.

Last week was St-Jean Baptiste Day in Quebec. I was too busy writing on Greece and completely forgot to write a comment on why I think Quebec is heading the way of Greece. Quebec's debt clock keeps rising but Quebecers seem to think we are immune to global crises and the craziness in Greece can never happen here. They will be shocked in the future.

Many Canadians will be shocked too by the severity and the duration of our economic crisis. I wish it wasn't so but I have been warning all of you to prepare for a crisis that will last many years, especially if global deflation sets in.

As I look outside my window, it's raining and grey in Montreal. I hate this weather. Wish I was in Greece but things aren't much better there. In fact, heartbreaking scenes of pensioners clamoring to get some cash out of the banks makes my stomach turn and blood boil (see below).

A defiant Alexis Tsipras is urging Greeks to vote no on Sunday. He's a delusional fool and he and SYRIZA will go down soon but it will be too late for Greece. The banks will not reopen next week and without banks, the economy will slide further into depression.

Those are my thoughts on this somber, rainy and grey Canada Day.

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