Title: Weathering the storm

Sub-title: Canadians need to guard against pessimism south of the border.

 

News on the economic front has been less than heartening lately. This week data emerged that showed consumer spending in the United States plunged by 1% in October, the largest drop since the 2001 terrorist attacks. In addition U.S. house prices recorded their largest year-over-year plunge ever. So it was somewhat unsurprising that the U.S. government announced new financing and bailout initiatives to help turn things around.

 

These trends are important for Canadians for several reasons. For one, the United States is our largest trading partner. If American consumers stop buying our goods, this will almost certainly eventually yield repercussions for Canadian factories, and eventually for Canadian jobs too. However many economists say that the psychological effects flowing north, stemming from the declining confidence among U.S. consumers, are almost as important as the real effects.

 

Much of this stems from media coverage. “Journalists are being sensationalist in their coverage of recent events,” said Yannick Desnoyers, a senior economist at National Bank Financial in a presentation to the Association of Quebec Economists earlier this week. “You can hardly listen to any business news report without hearing the words “financial crisis.””

 

Desnoyers has a point. In fact psychology is key. Because ironically, if Canadian consumers think that things will be bad, they will start saving more and hoarding cash. That will in turn slow economic activity here…and then things really will become bad.

 

Financial news under the gun

The current financial troubles present unique challenges for Canadian business and economics journalists. The reason is that a vastly disproportionate amount of the news Canadians consume stems from U.S. sources such as CNN, the big three networks, print versions of major dailies and of course the Internet. U.S.-based news sources will of course portray the financial situation there, which is indeed grim.

 

However Canadian journalists and economists have a very subtle challenge: they need to help Canadian consumers distinguish the bad news stemming from south of the border, from the far more nuanced situation that prevails up here – otherwise, things could spiral out of control here too.

 

“We made a conscious decision as an organization that we would not make statements that would worsen the current situation,” said Michael Burt, associate director at the Conference Board of Canada, in response to a question regarding whether the organization’s economic forecasts were overly optimistic. “Sentiment is bad enough as it is.”

 

Existing home sales and housing starts

One of the biggest distinctions between economic developments in Canada and the United States can be found in their respective housing markets. While on the surface, activity in both markets is slowing, a closer look shows that things are better here in Canada.

 

True, existing home sales are slipping, a trend which Gregory Klump, chief economist at the Canadian Real Estate Association attributes in part to “(concerns) with dire headlines about stock market volatility and a global economic downturn.” House prices are falling too. The average price of an existing home sold via CREA’s Multiple Listing Service slipped to $281,133 in October, down by 9.9 percent from where it was one year ago. However the declines are far less than they were in the United States, which was hit by a 17.4 percent drop in the average selling price of existing homes in 20 major markets during roughly the same period. 

 

On the construction front things have slowed in Canada as well. During the first ten months of the year, housing starts in rural and urban areas combined fell by 1.6 percent compared to the same period last year. And while that does not represent the greatest news, it is by no means a catastrophe, particularly when you take into account the fact that during 2007 construction activity had one of its best years in recent memory. Furthermore, new home construction in Canada is nowhere near the depths that it has reached in the United States, where housing starts last month plunged to their lowest level since 1959.

           

The only thing that Canada has to fear is fear itself

According to National Bank Financial’s Desnoyers, one of the biggest excesses in media coverage during the current cycle is talk of a possible depression. “The last consumer-led recession that we had was in the early 1990s, which was almost 20 years ago. So many journalists that are currently on the beat have never really seen one before, much less a depression,” said Desnoyers. “But we are nowhere near that. During the recessions of 1973 and 1990, gross domestic product fell slightly and then bounced back. But during the depressions of the 1930s, it fell close to 30 percent. And U.S. employment fell by 35 percent.”

 

However while Canadian consumers will need to pay closer attention to the pertinence of much of the financial news they get from U.S. media, there is one late American source they may want to consider. During the 1930s, as the U.S. economy stumbled, then president, Franklin Delano Roosevelt told Americans “The only thing we have to fear is fear itself.”

 

The challenge for Canadians is to not let fears stemming from south of the border, create very real difficulties here up north.

 

Recent Bank of Canada interest rate moves:

October 21, 2008 -1/4% to 2 1/4%

October 8, 2008 (inter-meeting) -1/2%, 2 1/2%

September 3, 2008, No change

July 15, 2008, No change

June 10, 2008, No change

April 22, 2008, -1/2%, 3.0%

March 4, 2008, -1/2%, 3.5%

January 22, 2008, -1/4%, 4.0%

 

Upcoming rate announcements:

Tuesday, 9 December 2008
Tuesday, 20 January 2009
Tuesday, 3 March 2009
Tuesday, 21 April 2009
Thursday, 4 June 2009
Tuesday, 21 July 2009
Thursday, 10 September 2009
Tuesday, 20 October 2009
Tuesday, 8 December 2009

 

Peter Diekmeyer (Peter@peterdiekmeyer.com) is a freelnace business and economics writer.

 

-30-

 
 

 

Home | Gazette articles | Eye on Ottawa | Book reviews

peter@peterdiekmeyer.com

  © 2007 Peter Diekmeyer Communications Inc.