Sunday, 16 March 2008

Looks like the Canadian economy is heading towards a recession

I went to do some shopping here in the Greater Toronto Area a couple of times during the last month and noticed several new things that I did not quite like. I view them as alarming signs that many things in the Canadian economy are not as robust and steady as Canadian politicians are painting them for the general public. What are these signs?

First, a number of people in shopping malls went down considerably. I remember weekends in GTA stores and malls during 2005-early 2007. Back then, malls were packed with shoppers and by shoppers I mean the Shoppers - people were buying different stuff like crazy, loading up their cars with multiple bags and boxes of new things. This shopping enthusiasm is not there anymore. There are still some people in stores and malls, but they are not active buyers. Most of them are just looking and probably killing their time in the malls simply out of their long-term shopping habit. This radical change tells me that Canadians in general: (a) are becoming concerned about the economy and the sustainability of their future sources of income; (b) are taking new debt more cautiously and are hesitant to make big purchases; and (c) do not think that the good old deals are not there anymore.

Out of the last point, comes my second observation: prices have been going up on almost everything in stores. A simple example: I was replacing my fragrance spray a couple of weeks ago and immediately noticed a jump in its price from $55 to $63. A 15% increase? On a bottle of fragrance, which is an example of a product in a highly competitive consumer goods market? Are you kidding me? The same observation applies to numerous other items you can find in stores, including food and basic necessities. There are several reasons for these noticeable increases in consumer prices: (1) overinflated costs of fuel which push up producer prices and eventually all other prices down retail chains; (2) the big-time inflation in the States, from where a lot of consumer products are reimported/supplied to Canada; and (3) higher producer costs in Asia and other developing countries which traditionally manufacture a huge share of intermediate and final goods for the North American consumer markets.

The price of oil is behaving ridiculously lately, which is, in my opinion, is an organized and well-planned effort being executed (very well) by several cooperating forces. The consumer inflation in the United States has been in double digits for months now, despite the patheticly lying inflation stats from the US government. The inflation in China and other Asian countries has been accelerating lately as well. Here in Canada and the US, most of people do not even question how most of manufactured consumer products sold in Canadian and US stores end up being so cheap. Well, I do not think that $1-5 daily wages of Chinese workers, who have been busting their backs working long 10-18 hour days, are sustainable in the long run. It will surely change, and with this change will come the painful realization that a lot of slavery-like labour is put into almost every single widget that we love buying so much on those 50%-75% off sales.

We do not live on the island, we are just a small open economy according to classical textbook definitions and are therefore pretty vulnerable to coughs and sickness of the world economy and, of course, of our big southern neighbor. With all those efforts to stimulate the slowing-down Canadian economy through rate cuts and liquidity injections, the Bank of Canada is also putting the upward pressure on already rising prices. It will be a tough call for the B of C deciding on what is more important - maintaining and defending the 2+/-0.5% inflation target or the efforts to fight off the recessionary pressures. It looks like the US Federal Reserve has clearly made its choice, and it also appears that the Bank of Canada is a part of this game too.

Finally, the third alarming thing that I noticed was a deteriorating variety and volume of consumer merchandise in Canadian department stores. I see a lot of empty floor space lately, and what is left on the shelves does not impress me in terms of the variety, design, and quality. To give you an example, I think that HBC's stores are an exhibit of this troubling trend.

What are my conclusions based on these three observations? Well, first of all, the Canadian retail and wholesale sectors are being increasingly hit by the deteriorating market conditions, and we will learn about their troubles as soon as their first- and second-quarter financing reports will be published. The relevant advice here is to avoid or short retailing stocks at least over the next several quarters because their prices are still far away from reaching the bottom. Second, a growing strain on many sectors of the Canadian economy, balloned energy costs, and a strong loonie are very likely to translate into a negative impact on the labor market in most Canadian provinces. It means some people will lose their jobs and the majority of Canadians will become more cautios and frugal in their spending decisions (the last thing is good, by the way). Third, we should prepare ourselves to seeing growing consumer prices. It is true that our loonie is strong and we can buy much more of cheaper foreign goods than we could a year ago, but it is also true that we are too much dependant on high fuel prices and intermediate- and final-good imports, which are getting more and more expensive too fast.

Let's keep our fingers crossed that the Canadian economy will only cough a bit rather than will take a sick leave for several years.

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