Lots of interesting happenings on the economics front from this past week. Here are a few that were on my radar:
Canada’s economic recovery not as strong as originally reported
“Revisions released Friday by Statistics Canada show that the country is still roughly 30,000 jobs shy of getting back all the jobs destroyed, based on updated population data from the 2006 census. The revisions underscore the reality that the Canadian economy is still facing a lot of turbulence, and that it’s no longer outperforming the rest of the world.”
I suspect the true state of the economy will become evident as credit demand dwindles and home prices normalize. Remember that David Rosenberg calculated that all of the GDP improvement coming out of the recession was directly attributable to inventory restocking and housing/wealth effect spending. Business spending has since picked up considerably, but I am highly suspect that it can bear the full weight of declining consumer spending in achieving the 2.5% concensus GDP forecast target by most economists. I expect GDP reading for the year to come in at roughly half of that with a good chance of negative quarterly GDP readings later this year.
Debt woes intensify in Europe as bond market remains unconvinced that bailouts will be successful
Portuguese and Spanish bond yields continue to soar compared to the index German bund. Rising borrowing costs for both countries will exert substantial pressure on the fiscal stability of these wobbling countries. Despite all the recent efforts to convince bond holders that they will not be forced to take a haircut on their holdings, the market remains highly skeptical that the current bailouts will have any positive long-term impact.
It’s a fantastic lesson for anyone who thinks that the bond market will allow fiscal imprudence by a government to go on in perpetuity. Perhaps even more importantly, it highlights how quickly a country’s finances can go from credible to crippled in the aftermath of a credit bubble gone awry.
I’ve written about the important lessons contained in the Ireland story….the once mighty ‘Celtic Tiger’ whose financial future remains highly questionable despite running budget surpluses only 5 years ago. These same lessons are written throughout the sad story of both Portugal and Spain.
US GDP data in line with expectations
US Q4 GDP data came in at 3.2% annualized, below the recent 3.5% consensus but above the 2.6% consensus at the start of the year. The gains were led by a rebound in consumer spending, non residential construction, and a modest rise in exports. The US has avoided what appeared to be an inevitable double dip earlier in the year on the back of extended tax cuts and unprecedented monetary intervention on the part of the Fed.
How long the bounce in consumer spending will last as the housing double dip intensifies is a major question. But with Bernanke et al seemingly determined to buoy all risk assets and wealth effect spending with QE2,3,4,5,n it may keep consumer wallets open for most of 2011. I wouldn’t be surprised to see US GDP record a near 3% gain.
How long one of the most dysfunctional economies can continue to grow with crushing debt burdens and its own central bank monetizing much of their own funding deficit is the $6 trillion question. The law of unintended consequences all but assures another financial crisis at some point in the next few years. We’re certainly not seeing the sort of organic sustainable growth driven by production and investment.
Baltic Dry Index within spitting distance of triple digits
The Baltic Dry Index, which essentially tracks the rental rate of dry bulk cargo ships, has plunged to a low point not seen since the credit crisis of early 2009 threatened to grind virtually all international trade to a halt as liquidity froze. It’s now fallen nearly 90% since its 2008 highs.
All of this may well be the result of two factors, one ominous, the other not a major concern. On the ominous front, it may be a signal of slowing international commodity demand. China in particular is seeking to mop up excess liquidity in an attempt to rein in inflation without causing a hard landing. If commodity demand dries up, expect the TSX to be in for a rough ride.
As an aside, the Vancouver Sun ran an interesting article earlier this week on this very topic:
“All of us in the mining industry are totally, totally dependent on the Chinese economy”….”Their demand for commodities has kept prices high. The ripple effect throughout B.C. and the rest of the country has been very, very important.”
The second factor is not particularly ominous. There is an expected 35 miles of capesize vessels set to leave the docks globally this year alone, a huge glut considering (at best) stagnant demand. Just how much of the precipitous decline in the BDIY has been caused by each factor is up for debate, but the index bears watching.
Property virgins are rapidly lining up to be
sacrificed on the altar approved for 35 year ams before the March 18 deadline. Despite the incredible irrationality of this decision, which we’ve discussed here and here, I wish I could say it’s surprising. Bob Farrell’s fifth rule of investing reminds us that the public buys most at the top and least at the bottom in any market.
From Canadian Mortgage Trends:
“The coming deadline will cause thousands of people to hasten their mortgage plans. Thus far, we’ve heard multiple lenders reporting above-normal mortgage volumes. These elevated volumes will likely continue for the next seven weeks, culminating in an especially busy stretch from March 14-17.”