The Bank of Canada (BOC) press release today had some interesting tidbits of information. Many of these issues have been discussed on my blog here before so I won’t belabor the points. I will quote from the release and then give you my translation of what the BOC statement really means.
While the economic expansion in the United States continues at a gradual but somewhat slower pace, developments in Europe point to a renewed contraction.
Growth in the US is slow. The growth is slow but it is still growth. Europe is a mess and headed for a slow down. Many Europeans don’t understand that production comes before consumption, but don’t worry they will learn their lesson.
In China and other emerging economies, the deceleration in growth has been greater than anticipated, reflecting past policy tightening and weaker external demand. This slowdown in global activity has led to a sizeable reduction in commodity prices, although they remain elevated. The combination of increasing global excess capacity over the projection horizon and reduced commodity prices is expected to moderate global inflationary pressures. Global financial conditions have also deteriorated since April, with periods of considerable volatility. The Bank’s base case projection assumes that the European crisis will continue to be contained, although this assumption is subject to downside risks.
China is a mess. The Chinese economy has been artificially manipulated for a long time. The Chinese real estate bubble has burst and the long held belief that real estate prices only rise will soon be a myth. The real estate and infrastructure bubble in China has led to a dramatic rise in commodity prices. China consumes the vast majority of commodities in the world while only contributing a much smaller percentage of global GDP. Europe is also a mess along with many other emerging countries. All of these factors are aligning such that commodity prices will fall, and fall hard.
While global headwinds are restraining Canadian economic activity, domestic factors are expected to support moderate growth in Canada. The Bank expects the economy to grow at a pace roughly in line with its production potential in the near term, before picking up through 2013. Consumption and business investment are expected to be the primary drivers of growth, reflecting very stimulative domestic financial conditions. However, their pace will be influenced by external headwinds, notably the effects of lower commodity prices on Canadian incomes and wealth, as well as by record-high household debt. Housing activity is expected to slow from record levels.
Despite a huge real estate bubble in China and Europeans who think they can continually live off the backs of others, Canada is in for a wild ride. Lower commodity prices will lead to lower inflation. Being that Canada is a huge commodity producing country, the economic impact here will be widespread. The effect of lower commodity prices will reduce incomes and wealth in Canada. The record level of household debt bodes well for a dramatic increase in bankruptcies. Housing activity and prices will also fall, perhaps the hardest in Toronto and Vancouver.
The Bank projects that the economy will grow by 2.1 per cent in 2012, 2.3 per cent in 2013 and 2.5 per cent in 2014. The economy is expected to reach full capacity in the second half of 2013, thus operating with a small amount of slack for somewhat longer than previously anticipated.
The Bank has no idea how of the economy will perform. We previously anticipated faster growth but we were wrong. Don’t worry though we now have it all figured out and you should believe us going forward.