"Economic Superstar" In Trouble
Suddenly the heady rush provided by rising commodity prices and the biggest credit expansion in the country's history is wearing off in Canada. We are reminded by China's slowdown in growth that prices for commodities are, as all prices, determined by marginal demand. Since contrary to the manufacturing industry, their producers are not "price setters" but must simply take what the market is giving them, the effects of aforesaid marginal demand become noticeable rather quickly. As long as China's demand for industrial raw materials seemed to be growing at very high rates with nary an interruption, commodity producing countries like Canada and Australia experienced an unprecedented boom.
The 2008 crisis then provided a brief warning shot, a reminder that commodities are not a one way bet. Now China's growth is slowing, although it is still fast by developed nation standards (if we can believe the official data, which appear a bit suspicious). However, this slowdown does affect demand at the margin. There is also a danger that the popular Chinese game of hoarding commodities like copper in order to use them as collateral in dodgy financing schemes for real estate speculation may eventually produce a sudden supply overhang that renders all the neat calculations of sell-side analysts about annual supply and demand of industrial commodities moot.
Major commodity producers these days tend to almost behave like warrants on China's growth.
Even the IMF suddenly seems worried that things are no longer going so swimmingly in Canada. This may well be a short term contrary indicator of sorts, but the fact remains that Canada's economy looks rather wobbly lately. The Bank of Canada has also just downgraded its economic outlook.
"Canada's economic growth will be the slowest among Group of 20 countries outside Europe as it grapples with a cooling housing market and as policy makers rein in deficits, according to the International Monetary Fund.
The Washington-based lender cut its 2013 Canadian growth forecast to 1.5%, from an October estimate of 2%, while boosting its projections for Japanese growth to 1.6%. The U.S. economy will grow at a 1.9% pace this year, while the euro area contracts by 0.3%, the fund said Tuesday in its World Economic Outlook.
Canada's economy is expanding at the slowest pace since 2009 as the housing boom that helped lift it from recession cools and high household-debt levels constrain demand. Canadian policy makers, who have sought to stem increases in household borrowing and cut government spending, should be prepared to take growth-supporting measures if the nation's economy continues to weaken, the IMF said.
That could mean allowing budget deficits to widen and keeping the Bank of Canada's policy interest rate at 1% for longer, it said. The IMF said risks to its forecasts for Canada are "tilted to the downside," citing concerns that the weakness in the U.S. and Europe could hurt the economy, as well as the impact of a decline in commodity prices.
"The main challenge for Canada's policy-makers is to support growth in the short term while reducing the vulnerabilities that may arise from external shocks and domestic imbalances," the body advises. "Although fiscal consolidation is needed to rebuild fiscal space against future shocks, there is room to allow automatic stabilizers to operate fully if growth were to weaken further."
Note the frequent mentions in this report of what "policymakers" should do. According to the bureaucrats at the IMF, economic growth is "directed from above," a result of central economic planning by "policymakers." What is this, have we transitioned toward communism without noticing it? Not a word about the fact that said policymakers are actually in large part responsible for the mess Canada now confronts. Naturally, the IMF advises the Bank of Canada to retain its highly inflationary policy:
"The IMF also has some advice for the Bank of Canada - don't think about tightening monetary policy until the economy improves.
"The current monetary policy stance is appropriately accommodative," it says, "and the beginning of the monetary tightening cycle should be delayed until growth strengthens again."
As if! The man deputized by Canada's government from Goldman Sachs, who will soon run the Bank of England and spread fresh money printing bliss in the UK, always struck as just another John Law in sheep's clothes. He simply got lucky by presiding over the BoC during the big commodities boom and leaving it before things have a chance to really get ugly. The man has been the recipient of an endless stream of breathless accolades by the globalist elites and their mouthpieces in the lamestream media ('central banker of the decade!), which by itself tells us that he is a dangerous Keynesian inflationist. Of course, his mutterings about introducing "NGDP" targeting in inflation-ridden Britain speak for themselves. He's going to try to print the UK back to prosperity. Good luck with that plan - citizens should brace themselves for a further decline in their living standards.
Mark Carney's Legacy
As our readers know, we have always had grave doubts about this exalted bureaucrat, who is widely held to be "irreplaceable," as though it were a great achievement to keep interest rates stuck at 1% and thereby stoke a massive credit boom. The reality is that Carney has presided over the biggest housing, mortgage and consumer credit bubble in Canada's history. As we have argued, there is not the slightest chance that this bubble will have a different outcome than others of its kind had elsewhere.
The debt-to-income ratio of Canadian households is at an all time high of over 165% as of March. Debt counseling has become the latest boom industry in Canada, as ever more overindebted citizens are seeking help:
"Scott Hannah says business just keeps getting busier. The head of Credit Counselling Services in Vancouver says the number of people coming for help was up seven per cent this year and there's no sign that pace is going to let up. And making matters worse, the jump followed a nearly 30 per cent increase in 2011.
"Not only did it grow, but we're seeing that the average indebtedness of consumers continues to creep up," Hannah said of his clients. Personal debt levels climbed to record levels in 2012.
Both Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty spent much of the year warning Canadians about the perils of too much debt.
Lured in part by low interest rates and trapped in part by a booming real estate market that has driven up home prices in the country's largest cities, Canadians have been borrowing like never before."
Can you believe the chutzpa of these people? First they implement policies that egg on a major real estate and credit bubble, then they "spend much of the year warning about the perils of too much debt." Incredible!
The debt-to-income ratio of Canadian households is off the charts. This is the legacy of Mark Carney, as he sails off to the shores of Albion to spread more money printing bliss there.
We don't know for certain if the bursting of Canada's credit and housing bubble has indeed begun. Much will probably depend on where commodity prices go from here. The fact is though that the economy and the bubble activities underlying it suddenly look quite shaky. Regardless of the precise timing, there can be no doubt as to how this ends. It is the same everywhere in the West where real estate bubbles haven't burst just yet: they inevitably will, and there will be spectacular contractions and banking crises in the countries concerned. We can thank the perverse modern monetary system and its purveyors for this. Mark Carney is feted by all and sundry, but he bears major responsibility for the economic misery that is eventually going to engulf Canada.
Charts by Finviz, BigCharts, Statscan