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The Global Economies – The Escalating Train Wreck Part 3b (#34)


CANADA: During the recession caused by the 2008 crisis, Canada was the least affected out of the G-7 countries. Its economy contracted the least, and recovered the most in the post crash years (see Chart below). But the lack of a real global recovery and the resultant lack of general demand for goods, services, and natural resources, particularly the sharp drop in China’s economy from last year, has finally caught up to Canada and has pushed its economy into a recessionary decline (see the next two Charts as they show the latest numbers this year).

The Bank of Canada (BOC) has been acutely aware of Canada’s vulnerability, particularly in energy, international trade, and in its red hot housing markets and heavily indebted households. In anticipation of a coming slowdown the BOC has been cutting its key lending rate ahead of the market’s anticipation, which now is at 0.50%, a quarter percent lower (cut on July 15, 2015) than the 0.75% shown in the Chart below.

Canada is an exporting country with almost 80% of goods and services going to its largest trading partner, the United States. Europe and China are the the next largest. As the U. S. slows, together with the economic problems of Europe and China, Canada’s economy becomes hostage to the growing weakness of its three largest trading partners.

While Canada’s economy is well diversified, yet energy and energy products make up a significant part of its exports. The significant drop in international oil and natural gas prices over the last twelve months has hurt Canada’s exports, as shown by the sharp correction below.

The Canadian dollar’s value has been dropping versus the U.S. dollar, coinciding with the drop in oil prices and the growing problems in the global economies from mid 2014. And with the Bank of Canada lowering interest rates to forestall the effects of the oncoming economic contraction this year, the Canadian dollar was pushed down sharply this year and is currently at $0.76 U.S.

Along with energy, other parts of the Canadian economy are starting to feel the effects of the general downturn, such as the accumulating inventories and the resultant slowdown in manufacturing (the next two Charts). And even though experts in Canada expect the Canadian economy to bounce back in the later part of this year, due to the weaker dollar and lower energy prices, we don’t. We think the growing weaknesses in the major economic regions of the global economy, particularly China, the United States and Europe, and the general global energy glut,will continue to slow Canada’s economic growth well into the remainder of the year.

Canada miraculously and inexplicably escaped the carnage of the U.S. housing market, post the 2008 ‘sub prime credit’ crash. In Canada, housing prices not only escaped the crash but, except for a brief dip, resumed their steady climb. Today Canada’s hot housing market is widely considered, by international institutions, and global experts, to be a vulnerable bubble.

The Bank Of Canada is also worried by the vulnerabilities of the Canadian housing market, and has said so a number of times due to the high level of household debt in Canada. BOC knows, a contraction in Canada’s economy could trigger a serious drop in value in the housing market. It is estimated by various institutions that Canada’s housing market is generally overvalued by at least 30%. Unfortunately BOC finds itself in a quandary, having to drop its key lending rates to try and prop up the softening economy, which in turn further boosts the housing market, making it more vulnerable eventually to a bigger collapse.

Canada is a well diversified, strong export economy, with approximately 45% of its GDP going to exports. And therein lies its weakness, in the type of the global economic environment that we have today, one of general falling demand. It is not only the demand for energy and natural resources that is falling but the global economies are plagued with over capacity in just about all sectors. For a Country such as Canada, the fall in exports triggers fall in internal capital investments in new projects and expansions. Especially in the capital intensive energy sector in the Province of Alberta, where tens of Billions in project investment has been cancelled or deferred, resulting in job losses that otherwise would have gone ahead.

With the U.S., China and the Euro Zone struggling with economic growth, Canada’s economy will continue to contract till there is a general and real economic recovery in those markets, which is possibly years away. Which means that Canada’s economic contraction or stall may be here to stay for quite some time.

AUSTRALIA: There are many things common between Canada and Australia. Their large geographical size and their relatively small populations being the two obvious ones. Plus they are both resource rich and raw material exporting giants dependent on their trade markets for their internal economic well being. Canada is highly dependent on the U.S. market which is the World's largest and richest, while Australia is dependent on Asian markets which includes the emerging giant China. In mid 2015, they are both facing similar difficulties as their respective major markets contract due to shrinking external and internal demand.

The other thing that both countries currently share is some of the most expensive real estate markets in the World. Out of the 10 most expensive real estate cities in the World (as per median household income), 5 are in these two countries (2 in Canada, and 3 in Australia). At various times both the countries have been warned by international financial institutions, such as the IMF, about their over exuberant real estate markets and the possibility of strong corrections. But, in the last two decades, the attractiveness of these two countries to immigrants and investors, seeking first World political and economic safe havens, especially out of China and Asia, and all the other trouble spots in the World, and the two decade boom in natural resources due to global demand, kept these markets buoyant and climbing. As the economic World shrinks, the possibility of a correction in the real estate of Canada and Australia becomes ever more certain.

Australia has been one of the very few countries in the World that has gone 24 years without a recession! Of all the developed countries, and alongside Canada, Australia has been in the best economic shape. GDP growth is currently at 2.8%, which is one of the best growth rates in the developed economies. But that is starting to change.

With China and Asia slowing down materially, especially China, the Australian economy is trending downward and the natural resource exports are falling.

With commodity prices at all time lows, capital investments in mining have fallen 34%, and with business sentiment turning bearish, non-mining investments have dropped 24% (next Chart).

With the general turn for the worse for the Australian economy, understandably wage growth has also been impacted negatively, which in turn is eroding consumer confidence (next Chart).

Australia is just starting to feel the real impact of China’s unraveling and Asian and global economic contraction. For the rest of the year we feel that Australia will continue to soften.

CONCLUSION: As our readers are aware, the past two or more years have been bordering on the surreal in the global economic world. Even though it became obvious a few years ago (or it should be by now) that Quantitative Easing (QE) was not a solution to engender a sustainable economic recovery of faltering national economies or regions (the Euro Zone), the Central Banks have single-mindedly pursued that method of recovery in concert with the lowest interest rate possible. They have tried to revive the impossible dream of the perennially growing global economy. From our first Economic Report in September of 2012, we have steadfastly maintained in all our subsequent Reports, that sustainable global economic recovery was not possible with more liquidity or easing, and that this path of ever increasing debt chasing ever shrinking economic activity, will lead to a global economic catastrophe. Those days seem to be upon us.

Regardless of the grim economic reality, the Central Banks, governments and experts, talk incessantly of growth everywhere. In their view, the constant cascade of bad news in the past few years has been good news, as it justifies the unleashing of more financial stimulus, which the stock markets certainly love. In America, Europe, China and Japan, and elsewhere, the stock markets roared upwards in anticipation of more economic stimulus in the face of continuing terrible economic news. The sheer insanity of such a warped reality is now looked upon globally as ‘the new normal’. All we can say is, at some point in the near future, this period of time will be looked upon in wonder, as the time when the leadership of the World had gone collectively insane. To these blinkered reality deniers, the larger tremors that are rolling through this year are not fore-warnings of a debt overloaded global economic structure coming apart, but in fact are mere rumblings of a global economic system hungry for even more stimulus!

All who are clinging on to the ‘recovery’ myth, in the face of the groaning reality, are simply unwilling to see the impending disaster, or state it. We have no hesitation in stating the obvious. We had stated China was already in a hard landing in our last Report (May, 2015), which today is being reluctantly acknowledged, in the face of the constant barrage of bad news coming almost daily from China. It is only a matter of time now before the collective economic reality of these past years comes crashing in and brings the global economic system once again to its knees.

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