Thursday, January 12, 2012

Why Canadians think we are in a recession

Blame it on the conflicting headlines. For the last six months media reports, more specifically, media headlines have been rife with messages of doom and gloom, which have dominated over any positive financial reports.  While it’s true there has been much volatility in the world when you look at what has been happening in the US and Europe, that by no means is a reflection of what has been happening in Canada. By reading past the headlines we can get a better picture for what’s truly happening. 

Has the Canadian economy fully recovered? No; and yes, that is a reflection of what has been happening around us. But the economic news for Canadians is pretty good. Strong economic policies, a strong banking system and overall financial conservativeness have helped us weather the storm and continues to do so.

Economists, Statistics Canada and the Bank of Canada have said we are out of a slump but Canadians don’t believe it, choosing instead to buy into the gloomy headlines and the opinions of a few. According to an annual tracking poll by Pollara Strategic Insights, released on January 5, Canadians are the most pessimistic they’ve been in over a decade – and fully 70 per cent believe the nation is in a recession despite the economy’s relative strong health.  There really is no good reason for this pessimism.

Consider these factors:
* On average, economists expect Canada will realize a 2-per-cent gain in gross domestic product in 2012, according to the survey firm Consensus Economics. This is moderate growth despite the turmoil in the world, which is affecting our exports and manufactured goods.
* The Bank of Canada prime rate is holding steady at 1% and will likely continue well into 2012, which keeps us ahead of inflation.
* 17,500 jobs were created in December – reversing two previous months of declines. In the US the unemployment rate fell to 8.5 per cent in December, its lowest level in almost three years, adding 200,000 non-farm jobs in December.
* Still on jobs: The government’s Labour Force Survey, released on January 5 reported the manufacturing sector added 30,000 jobs in December after losing almost 80,000 in the prior three months. 

Let’s take a look at the debt-to-income ratio which has been in the new s lately. Curiously, the rise to 151% has happened despite a slowed pace of borrowing. A recent report by CIBC’s deputy chief economist Benjamin Tal, determined that it is not a debt problem now but an income problem. The pool of Canadian households with debt was divided into three categories: heavy borrowers, medium borrowers and light borrowers. Heavy borrowers are defined by those with a debt-to- gross income ratios of more than 160%. The age of this group is 45+ and they account for only one-third of total borrowers but have over 70% of the total debt.

The report also found that the number of heavy borrowers is rising. In addition, their net financial position has worsened because the growth of their assets has not kept pace with those in the medium and light borrower categories.  So the biggest financial burden and the largest part of that 151% debt-to-income ratio belongs to heavy borrowers aged 45+. The medium and light borrowers have reasonable debt loads.

Another poll just released on Monday, January 9, found that consumer confidence in the economy has risen. The Nanos Economic Mood Index found that about 19 percent of those surveyed said the economy will be stronger in the next six months, up from 16 percent, while the share who said it will be weaker declined to 31 percent from 39 percent.

The poll also showed more consumers said their economic situation had worsened over the past year than in the third quarter, while optimism about the future increased and 34 per cent said their personal debt will decline in the next six months.

What will have a more profound impact on the economy is the business community and what they see for 2012. The Bank of Canada’s Business Outlook Survey was released on Monday, January 9 and the mood of the business community is cautious but not overly negative. They plan for modest investment increases and intend to slightly increase employment. This, despite the fact they are also seeing an increase in borrowing costs and will continue to tighten their budgets.

So which headlines to believe? I would suggest taking a news break. If that’s not possible, read past the headlines – it’s not all bad.

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