Sunday, July 26, 2009

Carney: Recession is over!

Mark Carney made headlines this week as he proclaimed that the recession is over.

This post will not be to critique his forecast, although as you may guess, I am skeptical. This post will cover how much it is dangerous to put too much faith any one person's forecast (including yours truly).

Carney is stating that GDP will grow this quarter and forever so by definition, that makes this recession over. Time will tell.

The combination of his declaration (and similar ones from Bernanke and other central bankers) combined with the sharp rally since March, with the new highs of this past week, has the bulls sitting pretty, and bears like myself, look very wrong.

A very close family member asked me today if he should reduce some of his high cash position due to this rally and Carney's comments.

Watch the bank economists get all giddy by Carney's words.

"It is there in black and white, that the recovery has effectively begun," said Douglas Porter, deputy chief economist at BMO Capital Markets. "I think it is astonishing how quickly the economy turned to the good in the last four or five months."

He may be right. Perhaps GDP will be positive this quarter. That does not necessarily mean that the recession is over. Recession can have positive quarters. Carney may also be wrong. We are only 25% of the way through the third quarter. There is nothing written in stone that this quarter will be positive. Recession ending? Let's wait and see, but I am very skeptical.

Let's also remember another bold forecast by Carney (again, he may be right this time):

From almost exactly 1 year ago today (July 17/08), from the Toronto Star:
today's update on the central bank's thinking, governor Mark Carney expressed hope that the worst might be over for the Canadian economy, which slumped badly in the first three months of 2008 but could slowly rebound in line with a recovery in the United States.

My comment: The worst hadn't even begun. Terrible forecast.

As a result, Carney indicated the bank, which held its trend-setting overnight rate at 3 per cent on Tuesday, will be no hurry to adjust rates up or down.

My comment: There was a hurry: to drop rates to zero.

The bank says "a gradual recovery in the U.S. economy" and other factors will help Canada's economy pick up steam early next year and return to normal growth in 2010.

My comment: How did that gradual recovery work out for you. Pick up steam? Yeah, the steam from a train going off the tracks!

But the 8-page "Monetary Policy Update" issued this morning concludes that "growth in the United States could also be weaker than expected, particularly in those sectors that are most relevant for Canadian exports."

The bank has consistently underestimated the impact of the U.S. economic slump on Canada's business conditions. At the beginning of the year, it forecast 2008 growth in Canada at 1.8 per cent but has now nearly halved that estimate to 1 per cent growth--the worst performance by the Canadian economy since the early 1990s.

Today, the bank said it missed the mark because growth in household spending fell short and a drop in inventory investment - after a buildup in late 2007 - was steeper than it had thought in April.

It also said today that, because of high oil prices, consumer price inflation in Canada will peak at 4.3 per cent in the first months of next year, a level well above the bank's target of 2 per cent.

But Carney predicted that as energy prices stabilize next year, inflation is likely to return to the 2 per cent level.

My comment: Oil prices plummeted, again not forecast by Carney & Co. Inflation was peaking back then and not in first months of 2009. Energy prices did not stabilize and fell to $33 early in 2009, from $147 in July 2008. They have stabilized around $60-70 (for now) but not at $147.

Again, this post is not to criticize Carney's current forecast, only to point out that his crystal ball is about as murky as they get. I have chosen July 2008 since it was exactly a year ago and it shows the danger of false hope.

Millions of Canadians, including family members of yours truly, are putting some faith in Mr. Carney's proclamation this week. I am just saying to have some healthy skepticism as he has made some poor predictions before, and he is basically a cheerleader for the Canadian economy. The history of these types of post-bubble credit contractions are such that the establishment types often proclaim victory at the most dangerous moments. Perhaps this time will be different?


BBC said...

This seems to be mimicking the last bubble in 2008. What are the differences....we are not quite at the peak yet? We probably won't go that high again.

I am seriously considering selling my house in Vanc. (westside) since prices are going through the roof. My house can fetch $200-$250grand more than the beginning of this year. I will keep you posted because I will need to know how to protect my money! I will be renting of course ;)

Anonymous said...

The worst is over dude!

realtor jay said...

I agree, it is too early to say if the recession has ended. But even if it is actually over, the next months are going to be tough. Recovering is difficult and might be even worse than the recession itself. In addition, the currently very strong Canadian dollar might slow it down. Hopefully it will not take too long. Best, Jay.