Tuesday, July 28, 2009

The Recession Is Over !!!

The recession is over, but not the pain. Canada's central bank predicted Thursday that the economy would expand this quarter, suggesting the economic contraction lasted for about nine months, considerably shorter than the previous two recessions in the early 1990s and the early 1980s. The Bank of Canada's reassessment of the state of the economy is perhaps the clearest signal yet that the worst of the recession is over.

Does that mean that unemployment rates will magically drop back to the 5-6% range overnight - of course not. Does that mean that your investment losses will be undone as quickly as they occurred? Also a very big no. Bank of Canada Governor Mark Carney stopped short of celebration, saying it will take more than a year to replace the wealth destroyed by the financial crisis. He also stressed that the rebound is fragile, sustained by low interest rates and massive government spending. Business investment is weak, and Canada's exporters are dependent on global demand rebounding as the Bank of Canada assumes it will.
“There are still risks to the recovery,” Mr. Carney said. “The point we really want to underscore is that this recovery is the product of policy and where policy is.”

Due to the nature of our economy (as a massive producer of raw materials), everyone kept saying how Canada would not be as affected by the downturn as other countries. Stephen Harper (not an endorsement) stated that we would slump but we would not stop. Here is an amazing stat - China's GDP (Gross Domestic Product - cost of all goods and services produced in a country during a year) is still growing albeit at a slower rate. That rate? It dropped from the 10-11% range down to 7-8%. I did a little research and Canada has not had a GDP over 7% since - well the research didn't go back that far. Let's just say that the last time the GDP of Canada was where China "dropped to", I still had a full head of hair.

Now before we start singing and dancing in the streets (promo for the Caribana festival), let's be mindful of something else I have pointed out several times over the past few months. While recessions always end, they don't end on a Friday and we go back to stupidity on Monday. There is a slow upward economic curve as companies slowly begin the process of hiring new (or old) employees back. Those employees then start paying down the damages. They don't run out and buy a new car - this behaviour is what caused much of the current damage. The next issue is how the various "banking leaders" adjust going forward. The phrase quantitative easing will be heard more in the next 12 months than "gas is too expensive". The Bank of Canada and it's global counterparts need to ensure that they don't suddenly increase interest rates to fight inflation, or we head back into the same predicament. As governments around the globe printed money to spend their way out of the problem, the resulting inflationary pressures could have equally devastating results.

Stay Well and Pay It Forward.

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