An article in the National Post suggests General Motors may look to divert some of its bailout money to Europe in the wake of a chill in German government support for subsidies. Talk of using taxpayer money to benefit workers in other countries is sure to raise ire, especially in the United States where the unemployment rate has hit double-digit levels.

When General Motors was forced into receivership this past Spring, it received tens of billions in bailout money from the U.S. and Canadian governments in order to protect jobs in the auto sector.

For his part, Stephen Harper, Canada’s Prime Minister said the aid was regrettable but necessary.

The Vancouver Sun reported at the time:

Canada had no choice but to support the restructuring of auto giant General Motors Corp. with about $10 billion in taxpayer aid or face devastating economic consequences, Canadian government and union leaders said Monday.

Hundreds of thousands of jobs would have been lost and communities across southern Ontario would otherwise have been devastated, Prime Minister Stephen Harper and Ontario Premier Dalton McGuinty said at a news conference Monday, hours after the 100-year-old company sought protection from bankruptcy in the U.S.

"We could either participate in reshaping these companies for the future or stand idly by as they restructured out of Canada," Harper said in Toronto.

"The decision announced today is regrettable but necessary."

The federal and Ontario governments’ contribution to the restructuring is set at $9.5 billion US, according to a joint statement Monday from the prime minister and U.S. President Barack Obama.

For that, Canadian taxpayers will hold a 12-per-cent equity stake and will also appoint one independent director to the company’s board.

The U.S. government sunk even more into General Motors – $50 billion. All of this money and the ‘cash for clunkers’ program have allowed General Motors to return to life. However, many issues remain, the most consequential of which is GM Europe. 

Since late May, it has appeared that a consortium headed by Magna International was set to take over GM Europe on the condition of 4.5 billion in state aid from Germany. As early as August, stories surfaced in which GM was considering raising capital in order to keep Opel. GM never wanted to sell Opel and Vauxhall, but it was forced to do so by circumstance.

However, when GM abruptly backed out of the Magna deal early in November it enraged the German government, who are now not likely to offer any aid. At the time I said:

Will Obama now come up with the funds?  If this minister gets his way, there don’t seem to be a whole lot of solutions here.

Well, here is one solution via the National Post (note the part I have highlighted in bold):

General Motors Co. may use some of the money it won from Canadian and U.S. taxpayers in the spring to fix its Opel unit in Europe in the months ahead as it works out a new financing plan for the money-losing business.

Detroit-based GM plans to fund Opel’s turnaround using a mix of sources after deciding to keep the business itself instead of selling a majority stake to Magna International Inc. and Russia’s Sberbank. That could include tapping funds pledged by the federal and Ontario governments, said Chris Preuss, GM’s vice-president of global communications.

"We’re going to be needing to participate directly in the financing" of Opel, Mr. Preuss said in an interview yesterday. "The taxpayers of both Canada and the U.S. have a stake in this. But what was agreed upon was that we have to be able to run a global business."

Translation: GM has every right to use its bailout money as it sees fit.

GM continues to misjudge the political situation. They handled the decision to back out of the deal with Magna very poorly. We are now likely to see increasing signs of economic nationalism at play.

But, just as the backing out created huge waves in Germany, this latest salvo from GM is likely to enrage Canadians and Americans as they see their tax dollars at work to protect the jobs of Europeans. GM may think using Canadian and American bailout funds for GM Europe is a good ‘technical’ solution. But, it is a very poor choice politically and they will pay the price.

Related posts:

• Germany gives GM a stiff arm on state aid
• Germans reject Chinese offer for Opel
• GM considers keeping Opel, raising capital
• German Press: Fiat to sign a deal with Opel, not Chrysler
• GM board decides to keep European Opel unit

The Canadian daily National Post has a good piece out today that highlights how the ‘Buy American’ provision is being seen in Canada.  Many see it as an affront that America could and would favor domestic firms over those of its largest trading partner and next-door neighbor despite the North American Free Trade Agreement.

For the second time in six months, pipe fittings in California are being ripped from the ground because they were stamped "Made in Canada," a move manufacturing companies say hurts both sides of the border.

Cambridge Brass Inc., a Canadian brass fittings manufacturer, discovered Thursday that it stands to lose more than $1.5- million in this most recent fallout from the Buy American protectionist measure.

Greg Bell, vice-president of sales and marketing for the Cambridge, Ont., company, received a call Thursday from the City of Sacramento, where the parts were being fitted into the public water system. He was told his product was no longer acceptable because it was not made in the United States.

"It’s disheartening. (The city) wants American-made products and there’s nothing I can do about it," Mr. Bell said. "Business is tough enough these days without having to deal with these roadblocks."

Anything already in the ground will have to be ripped back up at Cambridge Brass’s expense, Mr. Bell said. Between the costs of losing the project, pulling up the pipes and legal fees, he estimates his company stands to lose money in the seven-figure range.

Cambridge Brass has been based in southern Ontario for more than a century and has survived two world wars and the Great Depression, but Buy American may be what finally causes the company to bid farewell to the province.

Mr. Bell said losing a major project like this would mean more layoffs for the already suffering company.

It has already lost a supply distributor in Maine, and it has had to lay off half of its own employees in Cambridge – from a workforce of 140 it is now down to 77 – since the introduction of Buy American policies this year.

And if these protectionist measures continue, he said, the company will likely be forced to move its manufacturing to the United States in order to stay in business.

America seems clueless at how protectionist policies build rage that politicians abroad must quell or heed through retaliation. It’s as if only American politicians want to protect jobs.

It bears repeating because some people don’t get it: it’s not the act of protectionism itself which is so damaging, it is the retaliation and escalation that results.

"The government has got to stand up and propose some serious retaliation," said John Hayward, president of Hayward Gordon Ltd., noting the Halton Hills, Ont.-based industrial-pump manufacturing company has been barred from bidding on U.S. products. He said he has had to switch manufacturing from three Canadian plants to U.S. sites in order to stay in business, a survival decision that has resulted in local layoffs.

Read the full account below.

Source

‘Buy American horror stories’ building – National Post

Related posts:

• ‘Buy American’ will translate into a 21st century Smoot-Hawley
• Canada is furious about U.S. protectonism
• China launches retaliatory investigation into U.S auto subsidies
• The absurdities of ‘Buy American’
• China: we “will take steps to protect the interests of our domestic industries”

When the stimulus bill was being crafted, I wrote three posts lamenting the protectionist Buy American provision attached to the bill.

• ‘Buy American’ will translate into a 21st century Smoot-Hawley
• The U.S. is exporting unemployment with ‘Buy America’
• Canada is furious about U.S. protectonism

The last of these three demonstrated that the provision was needlessly creating lots of ill will north of the border.  As I am in Canada right now, I found the following story from the Sydney Morning Herald particularly laughable:

US President Barack Obama’s stimulus spending has run into a problem: A shortage of General Electric water filters.

GE makes them in Canada. Under the program’s `Buy American’ rules, that means the filters can’t be used for work paid for by the $US787 billion ($935 billion) fund.

Contractors are searching the US in vain for filters as well as bolts and manhole covers needed to build wastewater plants, sewers and water pipes financed by the economic stimulus. As officials wait for federal waivers to buy those goods outside the US, water projects from Maine to Kansas have been delayed.

“It’s added a whole new level of difficulty,” said Kathy Emery, a senior engineer for the West Virginia Department of Environment. “We’re continually having changes and further guidance” from federal rule-makers, she said.

At stake are the president’s efforts to fuel an economic recovery in the US by funneling stimulus funds to communities, including $US6 billion for municipal water projects. Lawmakers mandated that the money be spent on US products, with exceptions to meet international trade obligations.

GE says it assembles high-tech filtration systems for North American markets at its plants in Toronto and Oakville, Ontario, with parts from Hungary and elsewhere.

These are the absurdities that result from protectionism. In a globalized economy, it is often difficult to say where a product was actually made.  For example, there is a huge transfer of parts to GM Detroit from GM Canada in Windsor, Ontario, which is actually geographically south of Detroit and right over the border.  Were GM building cars under the Buy American provision, this type of transfer would be illegal.

The article points out that, just as the plants in GM Canada are fully integrated with GM Detroit, the GE facilities in Oakville and Toronto are fully integrated with GE’s US operations as well.

The purchasing rules are hurting the stimulus program, said US Representative Kevin Brady, a Texas Republican. He has called for a congressional review of the Buy American plan.

Losing jobs

“There are some real downsides to Buy American,” Brady said in an interview. “It delays projects. We have to look at what jobs we are losing.”

Lawmakers in America who pander to voters who do not live in these communities might think these provisions are justified.  However, this one example is one of scores of similar logistical minefields created through protectionism. Here is another from the same article.

At Aquarius Technologies, which sells equipment to US wastewater plants, domestic business has slowed to a trickle, said Tom Pokorsky, president of the closely held company in Port Washington, Wisconsin.

`Buy American has stopped US wastewater work this year,” he said. “I’m surviving by selling to Canada.” Even that market won’t be safe if Buy American sparks a “Buy Canada” retaliatory initiative, he said.

After watching trucks send manhole covers flying, officials in Auburn, Maine, switched to hinged covers years ago. The ductile-iron ones they used were made across the border in Canada.

While they waited for weeks for a waiver to buy more covers for a new sewer project, Norm Lamie ordered steel plates placed over the exposed holes. “EPA did eventually give us the waiver,” and the manhole covers are in place, said Lamie, general manager of Auburn’s water and sewer district.

To my mind, the biggest takeaway here is that this is what should be expected when the government inserts itself into a relatively free market legislatively.

Source

‘Buy American’ backfires – Sydney Morning Herald

Related posts:

• ‘Buy American horror stories’ in Canada
• ‘Buy American’ will translate into a 21st century Smoot-Hawley
• Congress ready with second stimulus package
• Canada is furious about U.S. protectonism
• The U.S. is exporting unemployment with ‘Buy America’

This is from the Globe & Mail:

Bank of Canada Governor Mark Carney is signalling frustration with the Obama administration’s handling of the financial crisis, saying delays in shoring up the banking system in the United States have exacerbated the recession in Canada.

With remarkable frankness, Mr. Carney singled out the U.S. government for criticism in his quarterly economic report Thursday, placing much of the blame for Canada’s economic woes on U.S. Treasury Secretary Timothy Geithner’s abortive attempts to cleanse financial institutions of their toxic assets.

“Timely and credible action is required to address the impaired assets on bank balance sheets and to restore the normal flow of credit – a precondition for sustained economic recovery,” the central bank said. “Progress on these measures has been slower than expected in the United States and other major financial centres.”

Mr. Carney’s criticism sets the stage for a tense meeting of finance ministers and central bank governors from the Group of Seven rich industrial countries Friday in Washington, where banking issues will be the main topic of discussion.

Looks like bloggers aren’t the only one concerned about Geithner’s plan.  But that doesn’t matter because Americans think the U.S. is on the right track.  Obama’s policies are putting Americans in the best frame of mind since Saddam Hussein was captured in 2004. See the video below for details.

Source
Carney blames U.S. for slow recovery – Globe & Mail

Related posts:

• Three views of the global economy
• Canada: Boom in progress
• Royal Bank of Canada: time for takeover talks
• Canada’s largest province on road to recession
• Transat: credit crunch now hitting non-financials

Since Lehman Brothers declared bankruptcy in September, the capital markets have been all but shut to large banks globally. Investors were spooked by the evisceration at Lehman, Washington Mutual and Wachovia to name but a few cases of near total losses. As a result, many banks have been forced to go cap in hand to the government for a bailout in order to bolster their balance sheets. Apparently, a thawing could be in the offing as more and more banks are selling shares to investors. The latest two are HSBC and CIBC.

In HSBC’s case, it has been hotly debated whether HSBC actually has a strong balance sheet ever since Morgan Stanley called this into question.

Is HSBC’s $17.7 billion rights issue a sign of weakness or of strength?

THERE are two radically different tales doing the rounds about HSBC, Europe’s biggest lender by market value. The first says that HSBC, deep down, is still an emerging-markets operation run by rugged types who disdain the sorcery of modern finance. Under the temporary grip of an evil spell in 2003 they bought Household, an American consumer-credit firm that then haemorrhaged losses. On March 2nd they snapped out of it. HSBC’s chairman acknowledged that it was “an acquisition we wish we had not undertaken”, wrote off its cost and promised to run down its book of dodgy loans. Having opened its heart, HSBC felt able to lower its dividend and raise its core tier-one capital ratio to 8.5%, above those of JPMorgan Chase (6.4%) and Santander (7.2%), two more of the Western world’s biggest banks also vying for the title of the safest one.

Against this there is a horror story. It says that HSBC’s definition of capital excludes mark-to-market losses on asset-backed securities (ABS). Furthermore, particularly demanding critics say that it also excludes mark-to-market losses on its loan book. Like almost all banks, HSBC carries these at book value and impairs as customers default. However, include both these items and the core tier-one ratio would drop to just 2%. Treating loan books on the same basis, JPMorgan would be at 5% and many other banks would be insolvent.

This would suggest that HSBC is in fact poorly capitalised, and needs to raise even more equity. The alternative, advocated by, among others, Knight Vinke, an activist investor, would be to cut loose Household, which HSBC does not legally guarantee and which accounts for just over half of the additional mark-to-market losses. Household’s credit spreads are much higher than HSBC’s, suggesting that investors think this is possible, despite HSBC’s verbal assurances to the contrary.

Which story is right? Given the risk of litigation, the reputational hit and the fact that HSBC has itself loaned Household some $13.5 billion, its mark-to-market loss would have to get a lot worse before HSBC was prepared to let it default. And like many banks, HSBC argues that there is at least some chance mark-to-market losses overstate the ultimate impairments it will face. The ABS loss has been very volatile, doubling in six months and stands at ten times HSBC’s “stress test” estimate of the probable hit. The mark-to-market loss on Household’s loan book is double what optimistic analysts think the likely ultimate impairment will be.

Pleading that fair-value accounting is cruel is hardly unique, but what makes HSBC’s position more credible than most is that it has the capacity to wait and see. Its funding position is excellent with deposits exceeding loans, reducing its dependence on wholesale markets. And the core business continues to generate lots of pre-provision earnings. If spread out over several years, the bank could absorb the hit from Household implied by the mark to-market valuation without damaging its capital.

Indeed the real moral of the tale is different. Compared with other banks HSBC is protected by its big deposit base and its profitability. It looks therefore as if investors will back the rights issue. Others do not have even that comfort.

Edward here. The HSBC story demonstrates the murkiness infecting the global banking system, because even the best of institutions must be doubted until zombie banks are liquidated or restructured.

I remember I had a very negative reaction to the Household International deal when it was announced. Here was a top tier bank buying into sub-prime; it seemed like a total mismatch.  And this deal has blown up in HSBC’s face.  After all, HSBC started the whole daisy chain of writedowns because of Household way back in February of 2007.  How do we know more isn’t lurking underneath?  That is the problem with not clearing away the bad assets — everyone comes under suspicion.  If the like of JPMorgan Chase and HSBC are called into question, no large financial institution can be considered safe. This is bad for the proper functioning of credit markets.

CIBC presents another case altogether. The Canadian banking system is considered the best in the world as Marshall Auerback likes to remind me. Nevertheless, a bubble in housing and a downdraft from the U.S., Canada’s largest trading partner are bound to have a deleterious effect on Canadian banks’ balance sheets. CIBC, one of the smallest of the big five Canadian banks, has decided to act.

Canadian Imperial Bank of Commerce (CM.TO) said it will issue C$1.6 billion of Tier 1 notes through its CIBC Capital Trust unit in a move to bolster its capital ratios and balance sheet strength.

The bank said the offering includes an issue of C$1.3 billion of Tier 1 notes with a 9.976 percent yield until June 30, 2019, and C$300 million of Tier 1 notes with a 10.25 percent yield until June 30, 2039. Both notes are due June 30, 2108.

CIBC, which was hardest hit by the credit crisis among Canadian banks, said the proceeds will be used for general corporate purposes and are expected to qualify as Tier 1 capital. A bank’s Tier 1 ratio is considered a key measure of its financial strength.

Canada’s banks, which have been ranked as the world’s soundest as the global financial crisis ravages their international peers, have nevertheless been shoring up their balance sheets by issuing preferred and common shares.

With this and other recent financing, the bank’s pro-forma Tier 1 capital ratio at Jan. 31, 2009 would be about 11.5 percent, CIBC said.

The regulator of Canada’s financial institutions requires domestic banks to have a Tier 1 capital ratio of at least 7 percent, but the average is around 9.5 percent.

We could be seeing a potential return to the capital markets for global financial institutions if these deals go well. Certainly, the likes of Citigroup are probably not getting capital from anyone but the U.S. government. However, we should hope stronger institutions do find alternative funding sources available.

Sources
HSBC’s rights issue, Household chores – The Economist
CIBC to issue C$1.6 bln of Tier 1 notes – Reuters
HSBC may need $30 billion: Morgan Stanley – Reuters

Related article
Santander’s capital raising puts pressure on the stubborn few – Telegraph

Related posts:

• British banks are underestimating losses
• Barclays taps Sovereign Wealth Funds
• Barclays raises £4.5 billion from Asia and Mideast
• UBS to write down but has massive Tier 1 capital
• European banks have hands out for more capital

The “Buy American” clause stuck onto the stimulus bill wending its way through Congress is a pernicious piece of legislation because it has engendered a ferocious response from trading partners, not the least of which is Canada.

Below is a Wall Street Journal video clip discussing this piece of legislation and the Canadian reaction to it. In addition, the video rightly claims that the bailouts now being conducted for financial services industries around the world are subsidies that are equally protectionist. None of this bodes well for the global economy.

Related posts:

• ‘Buy American horror stories’ in Canada
• Canada: Boom in progress
• The protectionism bogeyman
• Canada joins the list of housing busts
• Sheila Bair talking to Bloomberg’s Al Hunt

Everyone should be concerned about the increasing tone of trade friction in the global economy.  While Chinese Premier Wen and U.K. Prime Minister Gordon Brown are setting a positive tone in London today regarding bilateral trade agreements, the U.S. is doing its best to put off trading partners.  In fact, in Canada, there seems to be a lot of rancor regarding the ‘Buy America’ provision now being attached to the U.S. stimulus package.

Comment: ‘Buy America’ policy a veiled attempt to export unemployment

Free trade afforded by goodwill in times of economic expansion is ending rapidly with the lurch of the world economies into recession.

Plans by U.S. Congress and President Barack Obama to put a fence around its US$825-billion stimulus package by implementing a “Buy America” policy is a veiled attempt to export unemployment to the rest of the world. The result could be slower growth and a higher cost of credit for the U.S. economy, two good reasons for investors to “Sell America” now.

Attaching a “Buy America” policy to the US Stimulus Package is a futile and dangerous attempt to protect American jobs. America’s best export right now is unemployment. U.S imports are falling and the trade deficit is improving due to the fall in U.S demand. U.S imports fell 12% in November taking the trade deficit to its lowest level since 2003.

China’s export sector is reeling from the sharp fall in U.S demand. Exports in China fell the most in a decade in December and are likely to continue falling over the next six months as demand from the U.S, Europe and Japan dries up. Manufacturing in China has contracted for the past six months and has made roughly 10-million migrant workers jobless.

President Obama should tread very softly when it comes to trade policy. Firstly, it is widely acknowledged that free trade contributed to global economic prosperity. Free trade with China brought an era of low inflation to the United States and to the rest of the developed world. Trade in general leads to higher productivity and potentially higher levels of global growth.

On the flipside, rising trade barriers that protect industries lead to the misallocation of resources, lower productivity, higher prices and lower levels of economic growth. They are especially dangerous in times of recession. They are tantamount to suicide for the U.S administration given the high level of savings that China has shipped abroad.

The U.S Treasury Department is justified in pointing the finger at China for practicing mercantilist-style trade policies: China’s massive trade surplus and multi-trillion dollar store of foreign exchange reserves provides strong evidence that trade policy in China is designed to keep its currency weak. But the timing is all wrong.

Agitating for a revaluation of the Yuan and a “Buy America” policy could backfire in a big way. The U.S is like a junky with a US$2-billion a day borrowing habit, so getting on the bad side of its best dealer could be a big mistake.

China has been a major source of cheap credit to the U.S over the past few years. The People’s Bank of China has parked roughly US$680-billion in U.S Treasury securities making it the single biggest source of credit to the U.S Treasury from abroad. This “savings glut” as it has been referred to allows the U.S Treasury to borrow money at very low rates of interest, and China could end that by easily converting those reserves to Euros or Yen. U.S Treasury Secretary Tim Geithner might get the revaluation of the Yuan he is looking for in the form of a dollar rout.

Access to cheap credit has never been more critical to the U.S economy at this juncture. The U.S Federal Reserve Bank has been buying mortgage securities to reduce the cost of credit to U.S homeowners, to slow the rate of foreclosures, and to support the price of mortgage securities held by U.S banks.

Moreover, the U.S Treasury will need to borrow heavily to support its multi-trillion dollar fix to the U.S economy. President Obama’s attempt to keep every dollar of his stimulus package from leaving the U.S by issuing a “Buy America” policy could cause the unintended consequence of foreign capital flight.

This is an editorial comment in today’s Financial Post, a leading newspaper in Canada. One should note how strong the language is in this editorial.  While the quote concentrates on trade between China and the U.S., Canada itself is quite worried about the increase in protectionism in the United States.  The Financial Post is angry that the United States is looking to foist its own unemployment problem off on its trade partners.

The long and short here is this:  China, the EU, and Canada have now all warned the U.S. about “Buy America.’ Any protectionist measures implemented by the United States WILL be met in kind by retaliatory measures.

The tone in the U.K. is very different where Gordon Brown announced in a press conference with Chinese Premier Wen that he is looking to double trade in the next eighteen months. Wen may be using the U.K. as a foil to the United States, in effect saying, “Look America, we have other options.” Nevertheless, Brown and Wen are demonstrating that global trade does not have to collapse due to the economic downturn despite protests because of job losses.

When I find a video or quote from the press conference, I will post it.  Also, you should note that the Financial Post editorial begins with a picture of Obama and Biden, linking the Obama Administration with Canada’s perception of protectionism.

Sources
Comment: ‘Buy America’ policy a veiled attempt to export unemployment – Financial Post
Wen Says China to Begin European Procurement Missions – Bloomberg

Related posts:

• Beijing starts a ‘Buy China’ policy
• China launches retaliatory investigation into U.S auto subsidies
• Will Asia’s downturn be worse than America’s?
• Stephen Roach sees a W-shaped recovery for China
• ‘Buy American’ will translate into a 21st century Smoot-Hawley

Politicians in Washington D.c. have cooked up a nice way to re-create the mistakes of the Great Depression by attaching a ‘Buy American’ provision onto the stimulus bill making its way through Congress.  Apparently the Canadians and Europeans have already voiced their concerns, with the Europeans threatening to retaliate.

The White House has promised to review the protectionist proposals, passed last week by Democratic allies in the House of Representatives, which would ban the use of non-American steel in the $800 billion of construction projects.

Obama officials are under pressure from what European diplomats in Washington describe as a discreet but outspoken campaign of “quiet fury” from America’s closest allies.

They regard the move as a provocative shift away from free trade and towards economic populism at a time of turmoil.

Anyone who has read a cursory history of the Great Depression knows that protectionism and the banking system were at the core of events. As time goes on, I have become increasingly pessimistic about the skill of the political establishment in the U.S. and elsewhere to navigate this economic crisis. Certainly, the response to the banking crisis has been less than stellar. However, increasingly, it is also apparent that countries are turning to export subsidies and protectionism in a bid to favor domestic producers as trade plummets. The auto sector is front and center in this effort. I am certainly not convinced that Obama’s team will brush back the tide of protectionism — his record on the issue is dubious at best. However, America’s neighbors to the north are trying to stop the protectionist train from gathering steam.

Canada and other nations fear “Buy American” barriers could trigger a cycle of retaliation that would strangle world trade and undermine efforts to end the global economic crisis.

The measure would not raise any illegal tariffs but some experts say it may violate public-procurement provisions signed with the World Trade Organization by Canada, the United States, the European Union and other countries.

“There’s some pretty furious legal research that’s going on right now to see where it potentially may cross the line,” Day said.

Let’s see where this leads.  The Telegraph in the U.K. has reported this:

Privately, diplomats are withering about the “excitable” US rhetoric in support of the Buy America proposals. But they are resigned to a solution that leaves Mr Obama with something he can sell as protecting American workers, so long as it does not violate the letter of the trade arrangements.

European Commission representatives and diplomats from the British, French, Canadian and Mexican embassies in Washington have all launched an intensive lobbying operation to convince senators to strike the provisions from the bill they will debate this week.

A Western diplomat in Washington made clear that otherwise a trade war was in prospect. “The EU has said it will not stand idly by and let this happen. I’ve not heard words that strong from Brussels in 20 years,” the official said.

This certainly is not the makings of recovery and prosperity. Stay tuned. Apparently, in uncertain economic times, it’s every nation for itself. Economic nationalism has well and truly arrived.

Sources
Barack Obama to dilute ‘Buy American’ plan after Europe threatens US with trade war – Telegraph
Canada may raise “Buy American” issue with Obama – Reuters
Protectionism could destroy us all – Telegraph
Buying American – Economist

Related posts:

• ‘Buy American horror stories’ in Canada
• The absurdities of ‘Buy American’
• China: we “will take steps to protect the interests of our domestic industries”
• The U.S. is exporting unemployment with ‘Buy America’
• Is Mexico imploding?

I am going to post a BBC article here that gives an anecdote about western Canada and how the boom in oil and commodities is causing economic problems there. Make of it what you will, but my bottom line is that Canada is neither immune from global pressures or from the commodities savaging.  This type of thing will com to an end.

Marshall Auerback has said to me that the Canadian economy is much less dependent on commodities than it once was. However, in my recent consulting experience there, it seemed very leveraged to commodities especially as regards employment, with many young people moving out west to take advantage of the high wages. One Canadian company executive told me last year that they were struggling to get entry level personnel because McDonald’s was paying $14 an hour in Alberta. I wonder if that’s the case today.

I meet Jaz at the Centre of Hope homeless drop-in centre in downtown Fort McMurray, Alberta, on a freezing cold morning.

She comes here during the day, but says she spends the nights in the woods and offers to show me where, for a fee. I explain that BBC policy forbids it, but she takes me anyway.

We stomp through the snow along the Athabasca River, past apartment blocks. She leads me through some thinly spaced trees to a campfire. A bit further on is the tent she uses to store food, and a second tent she sleeps in.

Jaz, 34, originally from the neighbouring province of Saskatchewan, is fairly media-savvy. With a smile, she describes being photographed for National Geographic magazine a few months ago. That was not her first media encounter.

Fort McMurray has attracted a lot of attention as the boomtown at the heart of Canada’s oil sands rush.

Established as a trading post in the late 19th Century, by the 1960s Fort McMurray had grown to a modest town of about 6,000.

With the commercial development of the oil sands industry in the late 1960s, the town grew to 32,000 in 1982.

Its current population is more than 65,000, with an extra 18,500 people in the so-called shadow population – oil workers who live in hotels or residential camps on the outskirts of town.

Population growth has averaged 9% a year for the past six years, and soared to 16% last year. Local police say they are working on the assumption that the population could reach 250,000 by 2030.

“We’re bursting at the seams. We’ve got this massive population growth, and we don’t have the infrastructure to accommodate it or service it,” says Fort McMurray’s mayor, Melissa Blake.

Working town

Ask any newcomer what brought them to this remote part of northern Canada, and the answer is always the same: money.

“People come here for the work, the whole town runs on the plants,” says John Keegan, an oil worker who arrived from Ireland almost 30 years ago.

The workers come mostly from other parts of Alberta, and from depressed parts of eastern Canada such as Newfoundland.

To attract and keep workers in a remote community where the jobs are often dull and repetitive, wages are high. Truck drivers can make C$175,000 ($146,000, £95,000) a year with overtime.

Teenagers working at a local fast food chain can make C$14 a hour – almost twice the minimum wage.

Housing costs are among the highest in Canada, with a small bungalow costing from C$550,000, about C$100,000 higher than in large urban centres such as Calgary or Edmonton.

Rent for a small apartment can range from C$1,800 for a one-bedroom flat.

“A lot of people do come here thinking the streets are paved with gold and that they’re going to walk into the big paying jobs,” says Mayor Blake.

“But the housing market is inaccessible to those that don’t have the highest income.”

The article goes on to recount from a very personal level how everything is expensive there and that things have become quite “stressful.” Alcoholism and cocaine are a problem. While this is merely an anecdote from one BBC reporter it describes an economy that is severely strained by events tied to commodities.

I think this type of thing is going to end soon. What effect this will have in Canada overall, in provinces like Quebec and Ontario, I don’t know.  Either way, if I were from Fort McMurray, I would not be happy with the picture the article paints of my town.

Source
Canada boomtown under pressure – BBC News

Related posts:

• Canada: Boom in progress
• Canada joins the list of housing busts
• Canada’s largest province on road to recession
• Canada is furious about U.S. protectonism
• Canadian housing crisis warning

Canada has been one of the last housing bubble markets to crack. But, crack it has. The Toronto Real Estate Board reported that house prices crashed 13% from $434,022 on average last October to $376,896 this past October. With job losses mounting on Bay Street in Toronto as the financial services sector contracts globally, Toronto is the first in a chain of dominoes to fall in the housing market in Canada.

The figure was also down from the 2006 average October sale price of $386,807.

In the greater Toronto area, the average price of a home sold in October was down 10% from a year ago to $352,974. GTA average prices were off 1% from October, 2006.

“Consumer confidence is critical to the housing market and it appears that consumer uncertainty has been prevalent in today’s market conditions,” said Maureen O’Neill, president of TREB. “We are confident levels will return as demand for housing in the GTA continues.”

That demand for housing appears to be drying up quickly. TREB reported GTA sales in October were 5,155, down 35% from a year earlier and 25% from two years ago. In the City of Toronto, sales were off 38% from a year ago. In the 905 region, sales dropped 32% from October, 2007 levels.

I have reported a number of times on Canada’s housing market, warning that it was unlikely to escape the global slowdown. However, now that commodity prices have plummeted, I would expect the housing bust to be even more severe in provinces like Alberta and British Columbia. Markets like Calgary, Edmonton and Vancouver have cooled significantly and should expect to be next to fall after Toronto

Related posts
Canada’s housing market is coming unstuck
Canadian housing crisis warning
Canadian housing hits the wall
Canada joins the list of housing busts
Canada’s largest province on road to recession
Canada: Boom in progress

Related posts:

• Nationwide: UK house prices down 10.5%
• Canada joins the list of housing busts
• Nationwide: UK house prices rise for fourth month
• Nationwide: UK house prices down 15.9% from last year
• UK: House price fall moderates, prices still down 13.9% in year

I have run several stories in the past about Canada’s housing bubble because I have visited a number of Canadian cities over the past few years and all of them seemed to be building like mad. Vancouver and Toronto were the worst of the lot as far as condos go. But, as the United States housing market imploded, Canadians were deep in denial about what was to come.

That is about to change as this clip from the National Post makes clear.

Holly Wood’s first hint that something was “smelling fishy” in Vancouver’s champagne-infused construction market came several weeks ago, when she discovered that the presentation centre for the city’s most glamorous project was strangely closed.

The Ritz-Carlton hotel and condos is among the richest development to begin construction in Vancouver, a $2,500-per-square foot, 58-storey ultra-luxury tower with an eye-catching 45-degree twist designed by Arthur Erickson.

But that $500-million design is currently little more than a half-completed hole in the ground – the most glittering symbol of the troubled times that have humbled real estate development in Vancouver, a city that spent the last half-decade treating new condos like an evergreen money tree.

Credit turmoil, construction costs and the threat of a recession have left several towers stranded, unfinished and searching for either new designs or new money, while some developers are now threatening to sue buyers who are walking away from huge cash deposits, unwilling to commit to condos they pre-bought.

The problems have extended from suburbia to downtown Vancouver where Ms. Wood, an agent with Re/Max Masters Realty, had sold a unit in the Ritz-Carlton, a place where “cheap” begins in seven figures. But Holborn Group, the developer had not paid her commission. Concerned that something was terribly wrong, she did something that would have been unthinkable a year ago, in the days when real-estate was still quick money and worry-free.

She marched into the office of Holborn, sat in the board room and demanded her money.

-Financial Post

I’m sure you are wondering whether she got her money. Well, read the rest of the article and find out. But, the real point of this story is that Canada is not immune. House prices there have risen far above the rate of inflation for a number of years. With Ontario in recession and the rest of Canada to follow and with the commodities boom in retreat, expect house price declines soon in previous hot markets in Ontario, BC and Alberta. You have been warned.

The only question is what the net effect will be on Canadian lenders. To date, they have been looking very good.

Related posts
Canadian housing crisis warning
Canadian housing hits the wall
Canada joins the list of housing busts
Canada’s largest province on road to recession
Canada: Boom in progress

Related posts:

• Canada joins the list of housing busts
• Canadian housing hits the wall
• Toronto house prices in free fall
• Canadian housing crisis warning
• Canada: Boom in progress

Canada, along with Australia, ranks as one of the two last major bubble markets to remain relatively immune to the types of house price falls we have seen in the UK, Ireland, the U.S. and Spain. Yes, there has been some damage in Alberta, where prices had been rising too rapidly. But the rest of the country has stayed on a pretty even keel.

According to a report by Merrill Lynch, this is about to change.

Merrill Lynch is warning that Canada could be headed for a housing and mortgage meltdown similar to the one that has devastated the United States economy.

A report issued Wednesday by Merrill Lynch Canada economists says many Canadian households are more financially overextended than their counterparts in the United States or Britain.

They say it’s only a matter of time before the “tipping point” is reached and the housing and credit markets crack in Canada.

The Merrill Lynch Canada report by economists David Wolf and Carolyn Kwan acknowledges that the analysis is more pessimistic than the prevailing view.

Many economists have been saying that Canada’s housing and banking sectors are much more stable than their American counterparts and will likely slow down but not crash.

But Merrill Lynch – whose U.S. parent is one of the biggest victims of a crisis in financial markets that is rooted in the American housing and mortgage meltdown – says Canadians should be wary.

Household net borrowing in Canada amounted to 6.3 per cent of disposable income in 2007 – meaning they’re carrying more debt than households in the United Kingdom and not far off the peak U.S. shortfall in 2005 – just before the subprime mortgage crisis erupted.

“These data imply that the Canadian household sector is now overextending itself as much as the U.S. or U.K. ever did, challenging the consensus view that Canadian lenders and borrowers have been far more conservative through the cycle,” the Merrill report says.

It also says housing prices are now falling and inventories of unsold homes are rising sharply in Canada suggesting that this market turnaround will not be a transitory phenomenon.

However, the prevailing view is that Canada’s lenders have issued few of the type of subprime mortgages that sparked the U.S. crisis, which is continuing to ripple through the financial system.

In addition, many observers argue that Canadian residential properties are, by and large, not overvalued – considering the strength of regional economies in resource-rich provinces.

For what it’s worth, it is plainly evident that there has been overbuilding in Canada’s boom province of Alberta. But, more than that, the condo building on Toronto, Montreal and Vancouver is clearly evident to anyone who has been to Canada’s major cities these past few years. As far back as 2005, the economist showed that Canadian property prices were rising at a fairly rapid clip. It is only a matter of time before the global slowdown, hits Canada’s residential property market. The same is true for Australia.

The question is not whether the slowdown will hit house prices in Canada, it is how hard.

Related posts
Canadian housing hits the wall
Canada joins the list of housing busts
Canada’s largest province on road to recession
Canada: Boom in progress

Source
Canadian housing crisis warning – Toronto Star

Related posts:

• Canadian housing hits the wall
• Toronto house prices in free fall
• Canada joins the list of housing busts
• Canada’s housing market is coming unstuck
• Australia: housing slowdown?

The global economy is in the relatively unique but unenviable position of being bullied by both recession and inflation at the same time. This leaves central banks in a bit of bind. The Federal Reserve has thrown all caution to the wind and cut rates in a reflationary ploy rivaling its actions during the last downturn. On the other hand, commodities-rich countries like Brazil, Norway, and Australia are at the top of the list for raising rates as the are not suffering anywhere near the difficulties that one sees in the United States. Fair enough.

The only question I have about all of this, as one can see on the chart below is: what the devil is commodity-rich Canada doing?

Source
Benchmark interest rates, The Economist

Related posts:

• Chart of the day: low ARM rates
• Norway makes three
• Don Kohn says Fed policy has kept rates down 100 basis points
• Chart of the day: Total US Debt
• Why should central banks cut interest rates?

Canada is one of the last bubble markets to hit the wall. Buoyed by the commodities boom in the west, Canada looked set to keep on an upward path even while its largest trading partner, the U.S. had already started to see a bust. But, evidence of the housing slowdown is everywhere in Canada.

Will this be a US-style crash or a easing from a high plateau? If one listens to the happy talk from the Canadian Real Estate Association (CREA), one might think Canada is set to resume the upward path shortly. However, to my ears, this chatter sounds eerily reminiscent of the denial we witnessed in the UK and the U.S. before.

First it was Canada’s top 25 markets that were feeling that pain from a slowdown in housing, now it’s clear the malaise has hit the entire country.

Two weeks ago statistics from the Canadian Real Estate Association showed the average sale price of a house in the country’s 25 largest markets was down 0.4% last month from a year ago.

New statistics released Monday show housing across the country is now losing out to inflation. The average sale price of a home in Canada last month was $314,028, a tiny $35 increase from a year ago. For the first six months of the year, prices were up 3.6% from a year ago.

“In essence, Canada’s housing market has pulled back from the record-setting pace set in 2007, but in most provinces it continues at or near sales levels set in the years before that,” says Calvin Lindberg, president of CREA. “The increase in housing prices is also pulling back from the record-setting pace of last year, but we have yet to see any of the price contractions that have impacted the housing market in the United States.”

CREA said there is plenty of good news in the numbers. For the fifth straight year, more than a quarter of a million units were sold in Canada. However, sales over the first six months of the year are down 13.1% from a year ago.

-Financial Post, 28 Jul 2008

Related posts
Canada joins the list of housing busts
Canada’s largest province on road to recession
Canada: Boom in progress

Related posts:

• Canada joins the list of housing busts
• Canadian housing crisis warning
• Toronto house prices in free fall
• Canada’s housing market is coming unstuck
• Canada: Boom in progress

For the first time in 9 years, year-on-year prices in Canada are down. With the largest province, Ottawa Ontario, in a recession, it is no wonder that house prices have followed suit.

Canadian home prices have started falling, marking the first decline in almost a decade, according to the Canadian Real Estate Association.

The Ottawa-based group said Tuesday that the average sale price in the country’s top 25 markets in June was $341,096. That’s actually down from a year ago when the average sale price was $342,615. It’s the first decline since January, 1999.

“The frenzied pace of sale activity last year has faded, with buyers now better able to shop around before making an offer,” said Gregory Klump, chief economist with CREA. “Price increase are expected to be modest in the second half of 2008, as sales continue easing and new listings remain high.”

I mentioned in an earlier post that the Toronto Condo market was a bubble. The same is certainly true in the Western provinces and in major markets there like Vancouver.

The average sale price of a home in Calgary was $416,866 in June, down 2% from a year ago. Sales activity in Alberta’s largest city dropped 21.5% from a year ago.

Edmonton’s housing market had just as poor a month. Prices in Edmonton averaged $341,376, a 2.6% drop from a year ago. Edmonton unit sales were down 14.9% from a year ago.

The downturn in house prices in Canada should come as no surprise given how tied to the U.S. the Canadian economy is. But the slowdowns in Alberta should be a warning sign of the impending fall in oil demand and prices.

Related posts
Canada’s largest province on road to recession
Canada: Boom im progress

Source
Canadian housing prices fall, Financial Post, 15 Jul 2008

See other Canadian-related posts at the tag Canada.

Related posts:

• Canadian housing hits the wall
• Toronto house prices in free fall
• Canadian housing crisis warning
• Add South Africa to housing victims list
• Canada’s housing market is coming unstuck

Ontario’s economy shrank last quarter with GDP adjusted for inflation declining by 0.3%. With the largest economy in Canada in tatters, the mining boom in Alberta and BC is ever more important.

From the Globe & Mail:

Ontario’s economic growth dipped into negative territory during the three months ended March 31, putting Canada’s largest province well on the road to recession.

The government announced today that real gross domestic product declined 0.3 per cent in the first quarter this year. The government said the outlook for the remainder of this year has deteriorated since the provincial budget was unveiled in March, largely because of sharply higher oil prices and weak demand in the United States for the province’s exports.

“We are in some challenging times,” Finance Minister Dwight Duncan told reporters. “I think those challenges continue.”

Mr. Duncan refused to say whether he believes Ontario is poised for a recession. But he said the McGuinty government has taken a number of steps to help jump-start the economy, including investing in skills training for laid-off workers, investing in transit and other infrastructure projects to create jobs, and in lowering business costs by eliminating capital taxes.

Although not mentioned specifically in the Globe & Mail, I know that auto manufacturing has been a drag on the economy in Ontario, as Windsor is a major North American site for production. With Ontario’s economy in the doldrums, the TSX (Toronto Stock Exchange) blowing up the past two days, it is only a matter of time before the housing bloom is off the rose.

Toronto has a speculative condo boom right now. Anyone who has visited in the last two or three years will have seen cranes going up left and right on the drive in from Pearson. This boom will be well and truly over by year’s end.

Related Posts
Canada: Boom im progress

Related articles
Two Ontario Auto Parts Makers Cut 2,250 Jobs, Star Reports, Bloomberg News, 3 Jul 2008
Ontario minister to meet with GM over cuts, Canada.com, 7 Jun 2008
Toronto’s Condo Kings: Is their boom sustainable?, Financial Post,2 Jun 2008
Chrysler, GM workers in Ontario approve three-year deal, Canada.com, 17 May 2008
Toronto waterfront, Wikipedia

Related posts:

• Canada joins the list of housing busts
• Canada: Boom in progress
• Toronto house prices in free fall
• Canadian housing crisis warning
• Canada’s housing market is coming unstuck

This from the Financial Post.

The note from Blackmont analyst Brad Smith followed news late on Friday that Moody’s Investors Service had downgraded XL Capital Assurance. CIBC has exposure to XL Capital since the bond insurer provides it with guarantees on some investments.

“Based on this downgrade and XLCA’s credit default swap spreads … we expect CIBC will write off its remaining fair value exposure to XLCA in its Q3/08 results,” Mr. Smith wrote in the note.

According to Moody’s, the downgrade reflected XL Capital’s impaired financial flexibility and its proximity to minimum regulatory capital requirements.

CIBC took a big loss in the second quarter, after taking additional charges of $2.5-billion for U.S. structured credit securities and other positions hurt by the credit crunch.

-Financial Post, 23 Jun 2008

To date, writedowns by Canadian banks have been rather limited. As a result, the likes of Royal Bank of Canada have been posited as suitors of struggling U.S. regional banks. However a blog entry from Calculated Risk makes me question this possibility:

… regional banks which may find it difficult to find suitors since accounting rules require that a takeover target’s portfolio is marked to market at the time of acquisition …

And that might just leave FDIC receivership as the only option for many banks. From the WSJ:

There is often only one option left for a capital-starved U.S. bank that can’t attract a suitor — receivership under the auspices of the Federal Deposit Insurance Corp. While hardly ideal, that works fine as long as only a few banks stumble. But if the pressures of the credit crunch cause too many to fail, the FDIC could be overwhelmed. … No wonder FDIC Chairwoman Sheila Bair has said bank problems are giving her heartburn.

-Calculated Risk, 23 Jun 2008

It will be quite interesting to see how the regionals fare as real economy effects in credit cards, commercial real estate and auto loans take hold. For now, the CIBC’s and RBC’s of the world may be a bit gun shy.

Related Posts
Royal Bank of Canada: time for takeover talks
New Crisis Threatens Healthy Banks

See: Credit Crisis Timeline for a full list of writedowns and capital raising by institution and a timeline of the credit crunch.

Related posts:

• More warnings on regional banks
• KeyCorp to raise $1.5 billion, cut dividend 50%
• Another massive write-down: Deutsche Bank
• What if a large US regional bank goes to the wall?
• Global Bank write-offs and failures

I have been following a story for a few months in the Canadian Press on Transat, a tour operator. I hadn’t reported on it until now because they were just bailed out. It seems they have gotten tangled in the ABCP (Asset-Backed Commercial Paper) market. The market has become frozen and they are having cash flow difficulties.

The latest from the Globe & Mail is that they have been bailed out by the National Bank of Canada. This story does not seem to be getting much press, but given that they are a non-American non-Financial, I think it’s pretty big news that they are getting ensnared in this web as they have.

Collateral damage is working its way through the system. Could there be more stories like this to come?

Transat A.T. Inc. has reached a new financing deal with National Bank of Canada in connection with the $143.5-million in cash the tour operator has locked up in the frozen market for third-party asset-backed commercial paper.

The bank has agreed to provide the Montreal company with three-year credit facilities for up to $107.6-million or 75 per cent of the funds it has tied up in ABCP, renewable as many as four times, at the bank’s discretion, Transat said Monday.

In return, Transat has agreed to drop its appeal of a recent court judgment that approved a restructuring plan that will see the $32-billion in ABCP converted into notes that will mature in nine years.

Ontario Superior Court Judge Colin Campbell approved the plan June 5, giving the banks and brokerages that sold the paper immunity from lawsuits except in specific cases where fraud is alleged to have been involved.

Sources
National, Transat in ABCP deal, Globe & Mail, 23 Jun 2008
Transat reaches ABCP deal with National Bank, Financial Post, 23 Jun 2008

Previous stories
Transat profit trimmed by ABCP writedown, Financial Post, 12 Jun 2008
Transat results rattled by competition, ABCP exposure, Globe & Mail, 12 Mar 2008

Related posts:

• Credit crunch changing Britons’ holiday-making
• Is Lehman the next Bear Stearns?
• Canada: Boom in progress
• Bank of Canada blames Geithner for financial mess
• Student Loans: New Credit Crunch Casualty

The Globe & Mail has a storyline out today that caught my eye. It suggests that Royal Bank of Canada (RBC) would find some god takeover opportunities in the US. While I dismissed a similar storyline regarding UBS in Europe from the Financial Times, the Globe & Mail story does make sense.

This past week, the FT suggested that UBS look to go shopping for other European banks.

The European banking sector has not been this cheap – now trading on a single digit prospective price/ earnings ratio – for 16 years. There are high-quality Spanish names on seven times earnings and more wobbly, but ultimately fine, UK banks below five times. Price-to-book ratios are at decade lows.

Yet in spite of the bargains most banks say they have little interest in large acquisitions, claiming to be happy with their existing business models and strategies. That is delusional for quite a number of banks and just lazy thinking for others. For well-capitalised banks such as UBS, now is a perfect time to consider acquisitions as part of a more general restructuring.

Nor should highly valued banks such as Credit Suisse sit back and think that their premium ratings vindicate their strategy. Many were either lucky to avoid or late to get into the products that have damaged their rivals – such banks would be wise to use their equity currency before valuation gaps close.

-Financial Times, Lex, 9 Jun 2008

This idea is good outside the box thinking, So, I hate to rubbish the idea, but UBS is not over the hurdle yet. UBS is a bank that has written down nearly $40 billion in equity due to investment missteps before the global financial crisis. Moreover, events in the UK, Ireland and Spain have yet to play out in full. I know that UBS has exposure to the UK and I suspect more writedowns are to come. Therefore, they company is ill-placed to consider a takeover at this point in time. Credit Suisse might give it a go despite the obvious risks.

Now, RBC is a different story altogether. They have had few writedowns from U.S. exposure, they have a limited U.S. presence and Canada does look less fragile than the U.S. in terms of housing and the economy. This is an intriguing idea.

In a note to clients yesterday titled Fish or Cut Bait, Time to Start the U.S. Acquisition Machines, CIBC World Markets analyst Darko Mihelic argued that RBC, followed by Bank of Montreal, is best positioned to take advantage of opportunities cropping up in the U.S. and “perhaps now is the time to think big.”

RBC has spent nearly $5-billion (U.S.) since 2001 to build up a presence of about 450 branches in six U.S. states, but its U.S. and international segment accounted for little more than 3 per cent of profits in the past year, Mr. Mihelic noted.

The bank signalled in April that it was increasingly looking for growth outside of Canada when it promoted Jim Westlake to run its international banking and insurance operations.

The bank wants half of its revenue to come from non-Canadian sources in the next five to 10 years, Mr. Westlake said in an interview at the time.

“Canada’s a relatively small country in the global marketplace and we want to look at all opportunities.” Currently, almost one third of the bank’s revenue comes from non-domestic sources.

Mr. Mihelic cited Alabama-based Regions Financial Corp. and North Carolina-based BB&T Corp. among the banks that RBC could profitably swallow.

-The Globe & Mail, 13 Jun 2008

The U.S. regionals are in dire straits at present. They might welcome a foreign suitor with a strong balance sheet. Moreover, cultural differences between the U.S. and Canada are limited, making integration potentially much easier. The idea had been floated that RBC would make a go at Lehman Brothers (or Bear Stearns back before JP Morgan stepped in). However, culturally, that would be a bad fit and a disaster. Lehman’s freewheeling Investment Bank culture would not sit well under the auspices of a foreign commercial bank.

The risks are high because we are not even close to fully through this crisis, but valuations for regionals are low. Now might be the time to get in there and give it a go.

Related posts:

• Bank of Canada blames Geithner for financial mess
• Canada: Boom in progress
• Transat: credit crunch now hitting non-financials
• Is Lehman the next Bear Stearns?
• Canada’s largest province on road to recession

Canada has experienced a housing boom, not unlike many other English-speaking countries globally. According to the Globe and Mail, housing prices have doubled there nationally in the last 10 years. So, what are the prospects for Canadian housing and for the Canadian economy going forward?

The prospects for Canada certainly are better than in the US; after all, Canada has a commodity-rich business environment, which bodes well as commodity prices remain at elevated levels. However, Canada will not be able to fully de-couple from the US, its main trading partner. Canada’s economy will suffer along with the downturn in the US. And, above all else, don’t expect a repeat of the last ten years on the housing front.

Economy
Just at the end of last month, Statistics Canada released a surprising GDP report for the Canadian economy. GDP actually contracted in Q1 2008. This had the Canadian Finance Minister Jim Flaherty defending the government and predicting that Canada will avoid recession. The Globe and Mail reported broad weakness in the economy.

Data released by Statistics Canada showed a widespread softening, with the declines clustered in the goods-producing side of the economy.

Major cutbacks in manufacturing activity, especially in the auto sector, were behind much of the poor performance, Statistics Canada said, but bad weather was also to blame.

For the month of March, economic output also contracted, falling 0.2 per cent from a month earlier, similar to the revised 0.3 per cent decline seen in February.

Canada’s economy has lost steam sharply over the past year. In the first quarter of 2007, the economy was expanding at a robust 4.1 per cent pace, declining to 2.3 per cent by the middle of last year, and 0.8 per cent in the fourth quarter.
-Globe and Mail, 30 May 2008

As a result, consumer confidence has really suffered. The Conference Board of Canada recently reported that consumer confidence was at its lowest level in seven years, with eastern and central Canada most pessimistic. With consumer confidence at a low ebb, the export market to the U.S. hurting and statistics confirming an actual contraction in Canadian GDP, it’s unlikely that Canada will not have a fairly major slowdown. If Canada does escape with a mild slowdown, the booming oil and gas and commodities sectors will be the country’s saving grace.

Housing Bubble
As for housing, Canada has been one of the more bubblicious housing markets in the global economy. But, Canada’s housing market has yet to fall, supported by a hot economy in the western provinces. Signs of a slowdown in the housing sector are beginning to accumulate. According to the Financial Post, house price growth is slowing, even in Alberta.

Canadian new housing prices rose at a slower pace in March than in February as a slowing market in Alberta was only partially offset by a real estate boom in other western provinces, Statistics Canada said on Monday.

The price of new homes edged up 0.2% in the month compared with a 0.3% rise in February, in line with market expectations. Year-over-year price growth slowed to 6.1% from 6.2% in February.

“This deceleration continues a downward trend that started in September 2006 due mainly to the softening market in Alberta,” the state-run agency said.
-Financial Post, 12 May 2008

Inflation and Monetary Policy
So, with the economy and the housing sector slowing, inflation and monetary policy are particularly important. Petroleum and coal product increases are pushing up raw materials costs and cutting profit margins. Inflation is becoming a concern and could prevent the Bank of Canada from reducing interest rates as the economy slows. Previously, the Canadian central bank cut interest rates down to 3% on April 22nd, it’s third cut already in 2008.

Final thoughts
Ultimately, Canada is looking a lot better than some other Anglo-Saxon economies. As with Australia, a commodity-rich export culture has helped the local currency and bolstered the economy. Yet, imbalances remain and the housing sector is looking stretched, especially in overbuilt Toronto. I am certainly watching to see how things develop in Canada. But, things there certainly look a whole lot better than in Ireland, the U.S. or the UK indeed.

Sources
Housing’s 10-year boom saw prices double, Globe and Mail, 3 Jun 2008
Consumer confidence plunges, Globe and Mail, 2 Jun 2008
Toronto’s Condo Kings: Is their boom sustainable?, Financial Post, 2 Jun 2008
From boom to gloom?, Financial Post, 30 May 2008
Flaherty rejects recession fears as economy shrinks in quarter, Globe and Mail, 30 May 2008
Manufactured goods, raw materials prices hit record highs in April, Globe and Mail, 30 May 2008
Alberta cools Canada’s house price growth, Financial Post, 12 May 2008
Canada’s housing market cools in April, Financial Post, 8 May 2008
Canada’s housing boom is ‘officially over’, National Post, 17 Apr 2008

Related posts:

• Canada joins the list of housing busts
• Canadian housing hits the wall
• Toronto house prices in free fall
• Canada’s largest province on road to recession
• Canadian housing crisis warning

As I have mentioned in previous posts, the housing bubble was an international phenomenon. As a result, the U.S. subprime meltdown is indeed spreading beyond this limited sector. In the US, expect Alt-A and prime mortgages to feel the pain as the economy suffers recession. However, I would like to turn the focus to areas beyond the US.

The markets that I will increasingly look to are Ireland, Spain, Canada and Germany. I will look to reporting from domestic sources in those markets, so I apologize in advance if some of the article links are in Spanish or German. However, I feel one can get a more accurate picture of what is happening on the ground by looking at domestic sources.

As time permits, I may be able to investigate other markets. My focus will be on the prospect for credit-infected economic changes and any conclusions I can draw from those changes.

Happy Sunday.

Related posts:

• Germany: Hertie as a symbol of recession
• Hypo Real Estate need for 10 billion also reveals huge problems in Spain
• Spain and Ireland ‘thrown to the wolves’ after ECB move
• Spain can’t sell its bonds
• Royal Bank of Canada: time for takeover talks