This weeks top stories include how there was no economic recovery witnessed for Canadian exports, how Canadian household debt has become the largest risk to the Canadian banking system and how the International Monetary Fund has downgraded Canada’s economic outlook due to rises in the unemployment rate.
Global trade reached an unbalanced road during the recession with some repaving as of lately. The problem till now was that no one is analyzing local data on how Canadian exporters were making out but that has changed. Philip Cross, Statistics Canada’s chief economic analyst, found that trade flows in most countries have made a drastic comeback, all with the exception of Canada.
All around the world, exports were down 37% from the highs of May 2009. Most of the world recovered including Asia, the EU and the United States but Canada only witnessed a recovery of 53.5% of its losses as of the second quarter. The hardest hit sectors have lead the recovery since the recession with four sectors that continue to shrink. These four sectors have fallen an additional 2.4% in addition to the original 12.4% hit during the recession.
The Canadian banking system is currently in bad shape due to a rising trend in household loans according to a new report from Moody’s Investors Services. The bank standing out amongst the rest is the CIBC, which currently has high consumer credit exposure than the other big five banks in Canada.
Moody’s commented by stating, “We are concerned that Canadian consumers are relying on low interest rates to support high debt loads. The creditworthiness of Canadian banks depends on the continued financial health of the Canadian consumer. While robust growth in consumer credit has driven strong system wide earnings year-to-date, this trend will be constrained as households reach borrowing limits at the same time the economy shows few signs of anything beyond tepid growth.”
Statistics Canada released a report last week outlining that household debt as a share of personal disposable income had reached 150.8% at the end of June. This ratio has passed that of the U.S. where it reached 148% during the first quarter of this year. This increase is partly due to strong house appreciation in Toronto and Vancouver.
Households across Canada are now reaching their maximum borrowing limits as the economy begins to show signs of minimal growth. This will result in revenue growth for banks diminishing as increased provisions to prevent credit losses take effect. This is inevitable as rising household debt with a possible housing price correction could wipe out the minimal amount of equity left in homes that were financed to 90% or 95% of their value. What do you think? Please comment below.
The International Monetary Fund (IMF) stated on Tuesday that is has cut the growth forecast for Canada as the jobless rate is expected to increase later this year and next year. The IMF stated that it expects Canada’s economy to grow a mere 2.1% this year and an unfathomable 1.9% next year.
The changes are based on a much weaker than expected forecast for growth in the month of April for this year of 2.8% and 2.6% for next year. Canada’s jobless rate of 7.3% is also expected to rise as a weak economy south of the border takes its toll on our economy. The jobless rate is expected to reach 7.6% later this year with an increase of 0.1% to 7.7% next year. The previous outlook was expected to reach an unemployment rate of 7.3% by next April.
The IMF commented by stating, “Although jobs have rebounded at a faster pace than in the United States, a slower pace of recovery over the near term is expected to keep unemployment at 7.5% to 7.75% per cent during 2011 & 2012.” They also stated that the U.S. economies worries for our economy will be offset by relatively healthy economic fundamentals and still-supportive commodity prices. What do you think? Please comment below.
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