The “R” Word
Benjamin Tal – Senior Economist, CIBC World Markets
Presented to the CARF Workshop - Advertising In a Recession – April 6, 2008

In these days of economic uncertainty, Benjamin Tal concludes that while there certainly has been a slow-down in the Canadian economy, especially in the manufacturing sector, there currently is no recession in Canada nor is there likely to be one in the near future. This optimistic view is based on a strong housing market in Canada and in rising commodity pricing, especially for oil.

In the US, declining housing starts and home sales may be generating a recession in that country which may affect Canada at some time in the future. Tal stated that US housing starts are down almost 60% from 2006 figures and house sales are down almost 50% from 2007. In spite of the slow down in home building, the number of “excess houses” – the number of unsold houses compared to the number of houses built in 2007 – is almost one-full-year’s supply. This has generated a decline in the value of the average house in the US to the point where, in 2008, almost 30% of houses are in a “negative equity position” – the value of a house is less than the value of the mortgage – and this is expected to rise to about 50% of all mortgages by 2009.
In Canada, there is a much stronger demand for housing than in the US and house prices continue to rise.

This has generated stability in the Canadian economy that does not exist in the US. Additionally, the price of oil has risen to new heights (about $104 a barrel on April 6, 2008) and Canada has just over 50% of the “investible” oil reserves¹ in the world ensuring a supply of incoming foreign investment in the foreseeable future. The Alberta oil sands which currently are increasing annual output by about 200 thousand barrels of oil per day in 2008 will double this annual output to 400 thousand barrels per day per year in the 2009-2012 time period.

There is, however, a softening in the Canadian manufacturing sector that will cause trouble for some sectors of the economy, especially in central Canada. Over the five-year period between 2002 and 2007, Ontario lost about 16% of its manufacturing jobs and Quebec lost almost 20%. Tal believes that when the recession in the manufacturing sector finally ends – although he does not make any prediction as to when that will be – the manufacturing industry in Canada will be stronger and more productive than ever.

In summary, Tal believes the Canadian economy will outperform that in the US for the rest of 2008 because of (1) the continuing rise in home values due to increased demand and (2) the rising commodity pricing, especially oil, of which Canada has a great supply.

Because of the increase in commodity pricing, Tal predicts that the value of the Canadian dollar will remain high throughout 2008, in the range of $1.01 to $1.05 to the US dollar. While the high value of the Loonie may worsen the situation in the manufacturing sector, the rest of the economy will benefit from it.

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1. Oil reserves that are not off limits due to restrictive foreign investment policies.