What the Bank of Canada Thinks About the Economic Situation in Canada

Canadian investors have been first bombarded, and then exhausted completely by the doom and gloom emanating from the U.S. Our stock market benchmark, the S&P/TSX Composite, has lost all of the gains from last year. In addition, it has come very close to the 20% mark, which would effectively denote a recession. Yet, the Bank of Canada Governor, David Dodge, remained cautiously optimistic when he said on Thursday last week that, “Canada’s economy has bottomed out and won’t drop into a recession even though the United States’ easily could.”

In other words, Canada’s central bank estimated that, although our economy is at the moment more or less stagnant, the rebound is expected in the second half of 2008 and, by 2009, we should be well back on track — provided, of course, the central bank keeps interest rates low.

In addition, Dodge, who is soon to retire, elaborated more on his traditionally pessimistic views of Canada in the midst of the looming recession in the U.S. He further said that, while the recession is not likely in Canada, exports and capital markets are likely to experience serious blows inflicted by the U.S. subprime meltdown. Or, as Dodge put it, “While I think we will come through 2008 fine, it won’t necessarily feel so fine. There is a lot more adjustment still to come in financial markets.”

The latest estimates by the Bank of Canada are as follows: in the first quarter of 2008, the economy will grow a negligible 0.6% on an annual basis. In the second quarter, the GDP growth rate is expected to gain momentum at two percent and potentially 2.3% in the third quarter, while by 2009, the economy should be back to a more flexible 2.8%. For the entire 2008, the projected GDP growth is estimated at 1.8%, which is considerably below last October’s estimate of 2.3%.

As for our neighbors south of the border, Dodge sees an annualized growth of 0.5% for the first six months of 2008, with the rate picking up slowly in the last half of the year, provided, again, that the U.S. Federal Reserve keeps on cutting its interest rates, too, and by large amounts.

Unlike Canada, Dodge believes that, just as these positive numbers are possible, the direction of growth could easily go the other way too. “You know, statisticians can’t measure that accurately in the short run. It’ll be years before we know exactly what happened. Could U.S. growth be lower by half a percent? Could it be negative 0.5% or negative one percent in the first half? Sure, when we say 0.5%, this is a very weak U.S. economy.”

The question on everyone’s lips is concerning the global financial turmoil and when and how will it end. Dodge is not alone in the claims that, to fix what’s broken, the U.S. won’t be able to do it alone. A global effort is required and plenty of smart and hard work, too. Slashing interest rates will take the U.S. economy only so far. What is truly required is to stop burying our heads in the sand and to go for full disclosure. Meaning, governments and regulators on both sides of the border should sit together and sort out just how big the subprime mess is. Only when the full scope of the problem is known can the real solution be designed and effectively applied. Of course, to paraphrase Dodge, that’s easier said than done!