For the week of October 24, 2012

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Economic update: Dispelling global uncertainty

October 24, 2012

In many ways, Canadians have put the Great Recession behind them. Yet, the cloud of global uncertainty is casting a pall on Canadians’ expectations and businesses’ spending.

Statistics Canada’s Recent Developments in the Canadian Economy: Fall 2012 details the many ways Canada has bounced back. "Among the G7 countries, Canada’s post-recession recovery in output has been the strongest,” wrote the report’s authors, Cyndi Bloskie and Guy Gellatly.

At the same time, however, the Bank of Canada released its AutumnBusiness Outlook Survey and its Senior Loans Officer Survey. There was a lot less optimism than might otherwise be warranted.

"There is evidence that global uncertainty is affecting domestic activity,” Bank of Canada Governor Mark Carney told the Vancouver Island Economic Alliance earlier this month. "According to the Bank’s most recent quarterly Business Outlook Survey, Canadian firms have become more circumspect about new capital expenditures and less inclined to hire new workers.”

Yet, there are many reasons for optimism, judging by the StatsCan report.
• At the end of the second quarter of 2012, employment levels exceeded the pre-recession high by 2.3%. "Employment matched its pre-recession peak in January 2011. Since then, 338,000 jobs have been added to the national economy,” wrote Bloskie and Gellatly. "All of this gain has been in full-time positions, as part-time positions have declined by 39,000.”
• Non-residential investment spending has expanded in 11 of the last 12 quarters, recovering its pre-recession level by second quarter 2011. It has since gained a further 6%.
• Mining and oil and gas extraction industries, construction industries and the public sector (public administration, health and education) resumed growing in late 2009, surpassing pre-recession peaks in mid-2012.
• Despite some softening, housing starts have returned to pre-recession levels, led by multi-family urban homes. Nevertheless, noted the authors, "Single-family urban starts have been fairly steady since September 2010, averaging near 68,000 units per month (at annual rates) in the first half of the year.”
• Retail sales volumes have trended upward since the first quarter of 2009 and are now 9.7% above their recession trough.

There are negatives, of course, Canada’s merchandise trade deficit among them. After surpluses beginning in 1981, imports outpaced exports in 2010, 2011 and the first half of 2012. Imports reached pre-recession levels in October 2011 but exports have continued to lag. From the beginning of 2007 through to the first half of 2012, the volume of exports declined to 31% of GDP in mid-2012 from almost 35% in early 2007, while the volume of imports increased to 34% of GDP from almost 32% in the same time period.

Globally, the negative side of the ledger is piling up. The plight of the euro zone has dominated headlines in the past year; China’s "slowdown” — it grew by only 7.6% in the second quarter — is causing concern; the "modest” U.S. recovery is a source of disappointment.

The end result, according to the Business Outlook Survey: Canadian businesses reported less robust sales over the past year — and expect more of the same in the next 12 months. That means fewer firms expect to increase investment, with 37% expecting higher spending on investment, 34% the same and 29% lower, making for a balance of opinion of 8%, the lowest since the Great Recession.

Ditto, intentions to increase employment: although the balance of opinion is 26%, that is the lowest it has been since mid-2009.

What is Carney’s prescription to what ails us? It is not meeting recent events with inaction. "Should we lower our expectations? Or should we control our destiny by building on our strengths in the new global environment?” he asked his Nanaimo, B.C., audience. "We can improve Canada’s low productivity growth and sharpen our focus on emerging markets. And we can continue to invest in our greatest resource — our people.”

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