Canadian Countdown: Flood of Job Losses Coming?
August 19, 2008 | From theTrumpet.com
Amid the global economic slump, Canada’s economy looks set to cool. Is it only a matter of time?
Fifty-five thousand jobs disappeared last month. The shockingly large loss was the biggest monthly drop in 17 years. But the employment report shouldn’t be too surprising—warning signs abounded. Now, just like all the people who were partying it up around Noah’s ark when the rain first began to fall, some Canadians are finally beginning to wonder if a flood really is coming.
The employment figures, which economists called “extremely ugly
The reality that Canada could be on the verge of a significant slowdown seems to be finally sinking in—55,000 job losses in one month for an economy the size of Canada’s is very significant. “I think it’s fundamentally changed a lot of people’s views of the Canadian economy,” said Michael Gregory, a senior economist at bmo Capital Markets.
The job-loss report follows a news release by Statistics Canada that revealed that the economy contracted once again in May. Bloomberg
Conditions in Canada could be about to get a lot worse.
Look to the U.S.
There is little doubt that Canada’s biggest trade partner is now in the throes of recession. America has shed jobs for seven months in a row. And Barron’sfigures show that gross domestic product actually shrank
Spillover effects are heading northward. “There’s clear evidence that the U.S. economic slump is dragging down Canada’s economy,” said Sal Guatieri
Canada is hugely dependent upon the U.S. market. An astounding 78.9 percent of all Canadian exports are sent to the United States. Canada’s next-largest trade partner, the European Union, is a final destination for a paltry 5 percent of Canadian goods. If America’s economy stalls—and that is what is happening—Canada’s will stall too.
There is a reality in the land of the Great White North that sometimes gets forgotten: What happens in America eventually happens in Canada, it just takes a little time. More job losses are on the way.
For example, the Canadian housing market looks eerily similar to America’s in 2005 or 2006, just before it began its drastic reversion to the mean.
A recent report
“We’re most concerned about Saskatchewan, where the doubling of house prices in both Regina and Saskatoon over the past two years has led us to estimate that these markets are now close to 50 percent overvalued—a level that our research denotes as the beginning of the ‘extreme’ zone where bust risks rise materially,” said the report (emphasis mine). After Saskatoon and Regina, the most overvalued homes are in Victoria, Vancouver, Edmonton, Sudbury, Calgary and Montreal.
The report stirred a firestorm of protest, from realtor associations and housing industry representatives, who claimed the report was flawed and that local conditions suggest home prices have not overly appreciated. In July, Finance Minister Jim Flaherty also said: “There is no bubble in the Canadian housing sector, that has not been our concern.”
But to someone living in the U.S., the protests sound all too familiar.
During the lead-up to America’s historic housing bust, the airwaves were filled with the same sort of claims, from the same sort of people, as to why there was no bubble. Federal Reserve Chairmen Alan Greenspan and Ben Bernanke, the president of the National Association of Realtors, various lenders, builders and other government officials all claimed that soaring housing prices were sustainable—even as prices doubled, tripled and shot to multiples of household income.
Then came the worst bust since the 1930s.
And the recent legislation announcement by Mr. Flaherty, designed to help prevent a possible housing bubble, may have the unintended consequence of helping to pop it. The changes, due to take effect later this year, include ending government-backed 40-year mortgages, and requiring buyers to have a minimum down payment of 5 percent. Both are sound recommendations, but the side effect is that the new legislation will reduce the number of home buyers able to get a loan. Thus, current demand for houses will fall, home prices will come under pressure and fewer homes will be constructed.
Economists note that national sales of existing homes fell at an annualized rate of 14 percent in June—the largest decline in a decade. Canadians beware: As America found out, once sales start declining, it is only a matter of time before prices begin to fall too.
That’s not to say that home prices will not keep rising in certain areas for a while. America’s bubble lasted longer than many expected, and there are a few isolated areas where prices are still holding up. But when bubbles do pop, it doesn’t take long for the air to come rushing out. Just ask all the granite countertop salesmen, real-estate agents, and loan brokers in California. Or ask all those who lost their deposits at the failed IndyMac Bank, or shareholders at the soon-to-be-bailed-out Fannie Mae and Freddie Mac mortgage lenders.
A collapsing housing market will have grave implications for the Canadian economy. Although the housing and related industries may not have grown to quite as large a proportion of the economy as they did in the U.S., they were still responsible for much of the job creation over the past several years. As of 2006, the construction, real-estate, finance and insurance industries originated over a third
If Canada’s housing market follows that of America, increasing job losses will soon start to hit the headlines. Rona, Canada’s biggest home improvement retailer, is already reporting signs of stress. Profit has dropped for the third consecutive quarter and the chain spent $2.8 million to close stores and sell assets.
Canadian banks will be hit hard too. Many Canadian banks are already suffering losses due to exposures in the U.S. Falling home prices in Canada will lead to mortgage delinquencies, and repossessions in their home markets, resulting in a double whammy to company finances.
But for now, the housing market, at least in western Canada, powered by high natural resource prices, seems to be holding its own.
The West Covering for the Rest
Western Canada is reaping the benefits of a massive global commodities boom. As oil, natural gas, potash, coal and grains have gone through the roof in price, the resource-producing economies of Alberta, Saskatchewan and Manitoba have zoomed.
There is no doubt: If resource prices maintain their upward trajectory, it will help parts of the economy—but it won’t save it. Mining and agriculture originate less than 6 percent of Canada’s gdp. Most of Canada’s economy is consumer spending—and far more people are employed in industries like construction (which may be poised to rapidly contract) and manufacturing (which has been contracting for years) than in the resource sector.
But for now, the good times continue to roll for many. The West is booming, covering for the rest.
But the rest of Canada, especially Ontario and Quebec, is in a very different financial situation than the West. The two manufacturing provinces of Canada are starting to resemble the Michigan Rust Belt—abandoned factories, growing unemployment, and a falling standard of living. In July, Ontario lost 45,000 jobs, the highest monthly loss in 18 years. Bell Canada announced it is shedding 2,500 management positions, and Ford said it will be canceling another of its assembly lines, leaving 500 more workers unemployed. In New Brunswick it is estimated
Canada remains on edge. But deteriorating economic conditions in Canada and around the world are sweeping it to the precipice. The first drops of a job-loss deluge are being felt.
A global financial crisis is on the way, and Canada will not escape the coming flood.
To find your boat for the coming storm
Tuesday, August 19, 2008
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