December 7, 2011
For Canada, the economic outlook depends on commodity prices; for the U.S., it’s housing demand
Chief Economist, CanaData
It goes without saying – except that’s what I get paid to do – that these are uncertain economic times.
The biggest problem area is Europe. Leaders among the 17-nation Euro zone continue to dither while the financial situation worsens.
The cost to borrow money keeps going up and even Germany is now paying a higher price.
Maybe it’s all part of a grand strategy. Let matters deteriorate to the point where electorates become more accepting of previously unthinkable positions.
In Germany’s case, that would be stronger intervention by the European Central Bank to become lender of last resort.
What happens in Europe will help shape the outlook for the rest of the world.
Even China has a stake in the matter. While Beijing has been deliberately slowing the economy to lower inflation, there is also the need for a healthier Europe to be a good customer.
If the Euro zone collapses, it will be the banking sector that will bear most of the burden.
Lending institutions will stop dealing with each other until the extent of the damage is better known.
There will be a need for re-capitalizations. In some instances, those will likely be so large (and onerous) as to require government assistance and equity positions.
Profits and balance sheets of banks in many jurisdictions will be adversely affected.
Even tighter austerity measures than are already in place will be imposed, slowing world growth further.
The fault line for Canada will be lower world commodity prices.
We have to hope affairs don’t deteriorate to that degree. Let’s look at the most recent data.
Most commodity prices plunged dramatically in the early stages of the recession, from mid-2008 through early 2009.
They gradually recovered some of their lost ground over the next two-plus year through April of this year.
Since then, there has been another pull-back.
The most recent period of decline hasn’t been nearly as severe as in second-half 2008.
The Bank of Canada’s overall commodity price index currently stands -16% versus its most recent peak in the spring of this year.
But that means it’s still almost +50% compared with its trough level in February 2009.
Energy (coal, oil and natural gas) has dropped the most among the sub-indices. There has been some recovery since early 2009, but natural gas in particular has been a drag on the sector.
The world price of oil has improved, which has been positive for mega project re-starts in Alberta’s Fort McMurray region. The price of coal moves coincident with Chinese steel demand.
The metals and minerals price index is -20% versus last spring. That leaves it still way above its level any time prior to 2006.
Also, it’s nearly 60% higher than its low point of December 2008.
This category is comprised of gold, silver, nickel, copper, aluminum, zinc and potash. There are major investment projects across the country dependent on prices holding their positions.
Agricultural prices have dropped the least.
They’re down only 8% versus their April 2011 peak.
Furthermore, April of this year was 9% higher than the previous pinnacle for farm products, which occurred in February 2008.
Agricultural prices (for cattle, hogs, wheat, barley, canola and corn) at present are on a par with their pre-recession peak.
The forestry commodities price index – for pulp, lumber and newsprint – is not far off its most recent peak.
In fact, it’s within the fluctuating range that was prevalent from 2004 through most of 2008 and which was restored in the second quarter of 2010.
There was a deep valley in 2009, but it was relatively short-lived. The current value of the index is 31% above its low point of May 2009.
As for the U.S. housing market, new single-family home sales in October were 307,000 units, according to the most recent joint press release from the U.S. Census Bureau and the Department of Housing and Urban Development.
October’s level of sales was 1.3% higher than in September, only a minor improvement, but it was a more substantial 8.9% step-up versus October of last year.
The “stockpile” of unsold homes remained the same in the latest month as in the period before, 162,000 units. That’s an exceptionally low number.
The upshot is that the number-of-months inventory of unsold homes (i.e., the stockpile dived by the current month’s sales rate) dropped another notch from 6.4 in September to 6.3 in October.
Normal is approximately 4.5 to 5.0. Therefore, 6.3 is one more figure on the U.S. housing market – along with new home starts and prices of new and existing homes – that has returned close to a stable baseline from which it will be easier to make long-awaited gains.
I’ve said it before. If only Europe’s financing problems were clearly on the mend, the outlook for the world economy would be quite acceptable.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
Chart: Reed Construction Data - CanaData.
