Over the past couple of years I have noted a lot of people espousing hope that Canada will be able to avoid much of the global downturn and/or rebound faster than other western countries from the global recession. This weekend John Mauldin (a commentator who I respect and often agree with) reminded me of this theme when he wrote:
“…this is a global problem and primarily one in the “developed world”. I think we will find that much of Europe will be in a worse state of affairs than the U.S. If there are bright spots in the developed world, I tend to think they will be Canada and Australia/New Zealand.” See This Time It's Different.
Most often this type of optimism rests on a few key ideas such as Canada has a resource-based economy, Canada has a sound banking system, and Canada has been more fiscally conservative. While I generally agree with these ideas in the abstract, in reality I am concerned that decoupling hopes are still as wishful now as they were last Spring, when many were opining that the Canadian stock market would be able to hold up in the midst of a global bear market. As the past 12 months wore on, investors learned the hard way again that Canada lags; we don't decouple. Our stock market peaked (a year ago) in May 2008, 7 months after the US markets, but then fell a similar 50% to March 2009.
Our housing market has been declining for just the past year, now off nationally about 8%. Muted by American standards, no doubt, but then we are not through the decline yet either. Canadian household debt as a share of disposable income soared pretty much in lock step with American consumer debt over the past 9 years, and is now much higher than that of Britain or the Eurozone. See Globe chart this weekend in Why Carney's caution is warranted.
The Canadian government have been as utterly clueless as any other in anticipating the timing or extent of this global recession. Unforeseen budget deficits have recently ambushed their plans for fiscal conservatism, inspiring speculation this week of a non-confidence vote to oust the Harper government. The truth is that the other parties would not have planned for this downturn any better than the conservatives, decoupling optimism and economic naiveté transcends party lines.
Until very recently the Bank of Canada was assuring those who would believe of a strong rebound for Canada in 2010. This week Governor Carney scaled hope back allowing that Canada could be in for the equivalent of a “long and anxious time”.
The hope that Canada can rebound quickly by continuing to sell rocks and trees in the midst of a collapse in western world demand is simply delusional. Economist Paul Krugman reminded us of why in comments he made about Germany last week:
“Germany has huge inadequacy of domestic demand. Their economic recovery in the first seven years of this decade rested on the emergence of gigantic current account surplus.
How is it possible that Germany, which did not have a house price bubble, is having a steeper GDP fall than anyone else in the major economies?
The answer is that they depended upon exporting to the bubble regions of Europe, so they actually got side-swiped by the loss of those exports worse than the bubble regions themselves got hit.” See full interview: Paul Krugman's fear for a lost decade.
Canada is a great country to live in. It is also America’s biggest trading partner. Like Germany our domestic demand amounts to just less than 2/3 of our GDP. Those who hope we have been selling our goods and services to “other customers” than the ones currently in the global consumption downshift are likely to discover this bubble now burst.
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