REPORT: Canadian economy will struggle alongside the U.S. in 2008/09 - TD Economics

 

A report published recently by TD Economics states the Canadian economy is already showing signs of distress from the U.S. economic downturn, and will continue to feel its affect throughout 2008 and 2009.
Specifically, Canada has direct exposure to the U.S. housing fiasco via the spillover of tightened credit conditions, and faces collateral damage to the export sector from a stagnating U.S. economy. Fortunately, this is occurring in an otherwise healthy domestic demand environment.

Highlights:
 - Canadian real GDP to post 1.0% gain in 2008, underperforming U.S. growth of 1.4%.
 - Multitude of shocks hitting the U.S. economy leaves forecasters divided on the 2009 outlook.
 - TD Economics is more aligned with pessimistic camp on U.S. outlook, expecting meager 1.2% growth in 2009.
 - Canadian forecasters are in greater agreement with 2009 predictions. Most project reasonably solid domestic performances, so differences in forecasts are generally contained to that portion of the economy directly exposed to the United States - credit tightening and export demand.
 - Canadian economy should post modest 1.8% recovery in 2009, giving Canada the upper hand relative to the U.S. economic performance.


According to Chief Economist, Don Drummond, "Canadians would be best advised to buckle up for the ride." The path of the Canadian economy will be greatly influenced by how the shocks surrounding oil, the credit crunch and the plunging housing market evolve in the United States. TD Economics believes the U.S. economy will not experience the snap-back that typically follows an economic downturn. Rather, the number and severity of the shocks occurring simultaneously in the economy argue for an extended period of economic weakness.

Credit crunch to financial munch

The greatest forecasting uncertainty centres around the credit crunch, for which there is little historical precedence. TD Economics believes the impact from tight credit conditions will linger on the U.S. economy, and weigh down investment and consumer spending intentions through 2009.
"When financial firms pay more or profit less in their lending activity, the knock-on effects to non-financial firms and consumers can be quite long lasting. The combination of rising lending rates, tightening credit conditions and a dwindling share of internal funds available for investment spells trouble," said Drummond. Credit problems of today can act as a financial accelerator, whereby a shock is amplified or becomes long lasting by restricting firms through swings in their balance sheets and spending intentions.

U.S. consumers face a full frontal assault
Mounting job losses will put downward pressure on household income in the year to come. Meanwhile, record deterioration in home prices alongside record oil and gasoline prices makes for a less inviting environment for consumer spending, especially now that the Federal Reserve is showing reluctance to provide any additional monetary stimulus due to inflationary pressures.
    
"Our belief is that instead of getting the traditional pent-up demand pop in consumer spending that typically follows a downturn, we will see a muted pace of spending through the end of 2009. The non-traditional number and magnitude of economic shocks assaulting the consumer don't suggest a traditional recovery," said Drummond.
   
The U.S. government will be sending out $117 billion in rebate cheques, which will boost real consumer spending by $60-70 billion annualized in each of the second and third quarters. However, this is a one-time impact. Once the cheques are spent, consumer spending will drop back to the status quo level, which means a negative quarter. The short-lived tax rebate won't change the view that annual growth in real personal income less government transfers will still be treading water at -0.4% by the final quarter of this year and remaining in the red through the first quarter of 2009.

Canada to be pulled along with the ride

Canadian exporters will continue to feel the pain from the lingering U.S. economic weakness. Real GDP will expand at a 1.0% pace in 2008 and a 1.8% pace in 2009. Both of these estimates are at the low end of consensus estimates because of a more pessimistic U.S. outlook, and hence greater secondary effects to the Canadian market. Meanwhile, domestic demand growth will gear down in response to the tighter credit conditions and a softer job market.

Specifically, like the U.S., the cost of funding has risen dramatically.
The Libor-OIS spread was blown out for Canadian banks following the credit turmoil that began last August. The wound has been healing, but slowly. The spread remained high at 20-40 basis points in June compared to a low and steady 3-5 basis point range in prior years. A sharp increase in medium-to-longer term funding costs has caused a tightening in credit conditions on this side of the border, which will have knock-on effects to investment and spending.
 
However, Drummond noted one critical distinction between Canada and the United States: "Canadians households have one good leg to stand on. They will not have to face deterioration in real estate wealth or a sharp slowdown in income growth. The same cannot be said of their American counterparts."

In particular, Canadian employers continue to churn out new job opportunities, providing a solid foundation beneath income growth. With five months of employment data already on the books, the die has largely been cast on this front. Employers have been averaging 24,000 new workers per month, with hourly wage growth of permanent employees averaging 4.6% - the highest on record since 1997. With inflation holding below 2%, workers have had the benefit of a tidy real wage gain. Even with the expectation for softer job creation in Canada going forward (averaging about 5,000 positions per month), it will merely serve to restore wage growth to historical norms. As such, consumer spending should prove more resilient in Canada, averaging a quarterly annualized pace of 2.7% over the forecast horizon.

Drummond also said that "Although inflationary pressures are the 'flavour of the month' worrying financial market participants, we see the continued weakness in the U.S. and Canada containing inflation pressures. Nevertheless, the next move by both central banks will be to hike rates, but only after along pause." The Bank of Canada and Federal Reserve are both expected to begin a tightening cycle in the second half of 2009.

TD Economics' Quarterly Economic Forecast can be found at
www.td.com/economics

What it means:

Buckle up for the ride? No kidding, just ask GM's and Magna workers soon to be laid off. And one can bet that this is just the beginning. A new US trend is also rearing its ugly head: According to the June 19th J.D. Power and Associates Powergram's,  "Surprisingly, the crowded compact CUV category, which includes the popular Honda CR-V, Ford Escape and Toyota RAV4, also saw a dip in average price that was lower than the industry's average price dip of 1.9%. Smaller CUVs sold in May for an average of $21,644 compared with $22,272 a year ago."
At a first glance, it may not appear to be significant, but think of it - it's the same process that started the demise of the SUV.

Inflation: Despite TD's optimism, the inflation seems to be a serious problem - just as Mr. Carney, BoC's governor. Of course, the issue is what is the real world inflation? The official numbers or the anecdotal evidence that suggests otherwise?  Even Statiscan's official numbers are now at 2.2% - Consumer Price Index in May rose to its sharpest monthly increase since January 1991.

Source: Statistics Canada 

Of note: May's Consumer Price Index was actually held by lower vehicle costs: "...The price to purchase and lease vehicles decline 8.1 percent between May, 2007 and May, 2008. The strong Canadian dollar and an increase in manufacturers' rebates on certain larger models of motor vehicles contributed to this increase", said Statistics Canada.
 

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STRATEGIC/MACRO DAILY INFORMATION for Canadian automotive business

TJAAautoinfo FASTWEBLINK

Thursday - Sept. 02, 2010

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Wednesday - Sept. 01, 2010

FOCUS: Dan Akerson's first day at the top of GM - Fortune

FOCUS II: China's August Car Sales Increase 59%, Center Says - Bloomberg

FOCUS III: Feds investigate '11 Hyundai Sonata for steering issues - DetroitNews

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CANADA

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Ontario auto insurance reforms take effect Wednesday - TheStar

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Old GM, Motors Liquidation, files plan to revamp - MarketWatch

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Tuesday - August 31, 2010

FOCUS: US Car Sales Head Toward 1982 Lows - 24/7WallSt.

FOCUS II: US Chrysler dealers get details on adding Fiat sales - DetroitNews

ECONOMIC FUNDAMENTALS: World markets fall on economic fears - Guardian

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ECONOMIC FUNDAMENTALS III: 10 reasons Jeremy Grantham's betting $100 billion on historic game-changer - Seven lean years: No US recovery till 2016 - MarketWatch

CANADA

Magna, Stronach deal gets 2nd court OK - CBC

Canada auto sales near 3-yr high in summer - Reuters

Economists see Canada's growth slowing - FinancialPost

Canadian Dollar Declines as Data Underpin Weak-Recovery Case - Bloomberg

INTERNATIONAL

US proposes grading cars on emissions, efficiency - Reuters

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Future Leaf owners revolt over AeroVironment's outrageous charger installation quotes - Autobloggreen

Toyota Prius Augurs Collapse in Japan's Auto Sales - Bloomberg

Monday - August 30, 2010

FOCUS: US used vehicle demand up, supply down; prices soar - DetroitNews

FOCUS II: Friends of the Earth urges end to 'land grab' for biofuels - Guardian

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CANADA

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INTERNATIONAL

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US Gasoline Prices Plunge - 24/7WallSt.

US late payments on auto loans fall in 2nd quarter - DetroitNews

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China's Dongfeng Motor lifts 2010 sales target - Reuters

Weekend - August 28, 2010

FOCUS: August US auto sales sluggish; economy a concern - Reuters

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Friday - August 27, 2010

FOCUS: Dan Akerson Takes the Wheel at GM - BusinessWeek

FOCUS II: Russian car market steps up a gear (VIDEO) - Reuters

ECONOMIC FUNDAMENTALS: Fiscal ammunition runs low - MarketWatch

ECONOMIC FUNDAMENTALS II: Stock markets face a 'bloodbath', warns SocGen strategist Albert Edwards - Telegraph

ECONOMIC FUNDAMENTALS III: Yen rise to push more Japan output overseas - Reuters

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Judge erred in approving Magna share structure plan, panel told - FinancialPost

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Ford to expand presence in Asia - CNNMoney

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Autoworkers Adjust to Job Banks' End as GM, Ford Try to Rebound - BusinessWeek

Peel looking to reintroduce world's smallest car - Autobloggreen

Thursday - August 26, 2010

FOCUS: Study: China to gain top spot in electric vehicle sales by 2015; U.S. will remain hybrid haven - Autobloggreen

FOCUS II: Strong Used-Car Values Should Help New-Car Sales - WardsAuto

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INTERNATIONAL

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Roewe cashes in on MG Rover's British heritage - Telegraph

Jaguar's XJ Sentinel uncaged at Moscow motor show - Guardian

US auto sales likely to keep slipping - DetroitNews

Renault India to launch 5 new cars in the next 3 yrs - Reuters

Wednesday - August 25, 2010

FOCUS: 3 million Jeep Grand Cherokees in safety probe - CNNMoney

FOCUS II: Audi to Sell A1 Compact Car Outside Europe, Boost Production - Bloomberg

ECONOMIC FUNDAMENTALS: "We are right at the tipping point. The end game approaches, probably in next few weeks": Hard-nosed Fed sends global markets reeling - Telegraph

ECONOMIC FUNDAMENTALS II: Fed's Evans says US double-dip risk has risen - Reuters

CANADA

Recovery hopes take another knock - FinancialPost

June insolvencies increase 7% - CBC

INTERNATIONAL

Feds intensify probe of stalling Corollas - DetroitNews

Sounds like a Prius down the street - CNNMoney

Infiniti getting ready for more hybrid models - Autobloggreen

Russia Recovery Makes Car Market Europe Bright Spot - Bloomberg

Tuesday - August 24, 2010

FOCUS: The Big SUV's death rattle - Fortune

FOCUS II: U.S. agency steps up probe into Corolla stalling - Reuters

ECONOMIC FUNDAMENTALS: Latest US data suggest we are already in double-dip recession: Blowing in the wind - MarketWatch

ECONOMIC FUNDAMENTALS II: Deflation: the Neutron Bomb of Balance Sheets - Barron's

CANADA

GM Canada, 21 dealers settle suit - Reportonbusiness

Petro-Canada's Certigard tops auto service rankings - TheStar

Loonie Touches Weakest in Month After Revised Rate Expectations - Bloomberg

Ontario debt tops $200B - CBC

INTERNATIONAL

U.S. government seeks oil company tax to fund transportation - Reuters

Scania ups Europe hires to cope with truck demand - MarketWatch

Focus ST fails to meet Euro 5 standard, Ford gives it the axe - Autobloggreen

Toyota shifts more authority to U.S. units - DetroitNews

BRIEF-Fiat July car sales down 32.6 pct - Reuters

Monday - August 23, 2010

FOCUS: VW Interested in Buying Fiat's Alfa Romeo, Automobilwoche Says - Bloomberg

ECONOMIC FUNDMENTALS: If the economic road is so bumpy, why are all those trucks on the move? - Reportonbusiness

ECONOMIC FUNDAMENTALS II: America no longer needs Chinese money, for now - Telegraph

CANADA

Canada Credit: Carney Rate-Increase Odds Drop Below 50 Percent - Bloomberg

INTERNATIONAL

Facebook's ‘Car Town' Gains Honda Ads in Games Shift - BusinessWeek

Toyota 2011 hybrid output to rise 7 pct y/y - Reuters

Mahindra, Ssangyong to Work Together on New Vehicles - Bloomberg

UK: Motorists face £250-a-year tax to park at work - Telegraph

Hyundai's diesel-powered i40 to offer "class-leading CO2 emissions" - Autobloggreen

Weekend - August 21, 2010

FOCUS: The New GM to hit market with new hopes, old ghosts - MarketWatch

ECONOMIC FUNDAMENTALS: US: THE NEVER ENDING RECESSION - PragCap

ECONOMIC FUNDAMENTALS II: Preparing for the Next 'Black Swan' - WSJ

CANADA

Honda Canada discontinuing Insight and Civic hybrid - Autobloggreen

Odds of rate hike shrinking - FinancialPost

HST drives up Canada's inflation rate - CBC

INTERNATIONAL

Bill Ford sees sunnier days after weathering '07 storms - DetroitNews

Bond prices suggest GM stock may be overvalued in IPO - MarketWatch

GM considered, rejected HK listing - Reuters

BorgWarner May Make Acquisitions, Resume Dividends - Bloomberg

GM IPO may cost Ford some investors, chairman says - TheStar

Friday - August 20, 2010

FOCUS: Rising from the ashes in Detroit - TheEconomist

ECONOMIC FUNDAMENTALS: US unemployment Ready To Push Above 10% - 24/7WallSt.

ECONOMIC FUNDAMENTALS II: Flight to "safety" eases China diversification - Reuters

CANADA

BDC small-business loans hit record level - Reportonbusiness

Survey: Salary hikes eyed for 2011 - CBC

INTERNATIONAL

Honda's Dream of U.S. Production Protects Profit - Bloomberg

Look out below: Mitsubishi drops i-MiEV still-high price by £10,000 - Autobloggreen

Chrysler previews new Jeep Wrangler - DetroitNews

Another Hyundai exec jumps to GM - CNNMoney

Crude Oil Falls to Six-Week Low on Signs Recovery Is Slowing - Bloomberg

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