Benjamin Tal
Senior Economist for CIBC World Markets

The most exiting part of any presentation is the Q&A session. It is beneficial not only to the audience but even more so to the presenter. The questions that I get after every presentation enable me to get a better understanding of what’s on peoples’ mind and what (economically speaking) keeps them up at night. In fact, many of the ideas for new research topics come from the Q&A sessions.

Given that, I thought that it will be a good idea to share on an ongoing basis, in this space, some of the more interesting questions and my attempt to answer them.

Q.  What is your favourite letter in the alphabet when it comes to describing the nature of the economic recovery?

A. I am not a big fan of this alphabet soup approach. I think the cost of trying to simplify things too much is much too high. In any case, I think that we are already in a process of a recovery, and while Q3 GDP numbers will not be very impressive, we are already starting the upward trend. The recovery will not be strong enough to bring us back to where we were before the recession. I think that the focus should be on the speed limit of the economy, and I think that given the reduced leverage in the economy and more subdued consumers, this speed limit has been reduced. So we are turning a corner, but it will be a much slower recovery than we have seen in any recovery in the post-war era. Going back to the shape of the recovery, what I see is really a reversed checkmark.

Q. What does it mean for interest rates?

A. The Bank of Canada is telling us that it is planning to keep official rates unchanged until mid-2010. I see no reason not to believe them. In fact, it is very possible that the Bank will sit on its hands for even a longer period. The reason is that the weak recovery in the US, the strong Canadian dollar and still existing high level of capacity in the economy will limit the need to remove liquidity from the market. As well, neither the Bank nor the Fed would like to start raising rates before they are absolutely sure that the recession is over and we when the unemployment rate is still climbing.

As for long-term rates, the situation here is a bit different. While I do not see rates rising in the immediate future, I think that the bond market is very expensive as it reflects no increase in inflation expectations whatsoever. I think that by 2011, we will see some inflation in the system — and you do not need more than 3% inflation in the US to damage the bond market and lead to higher long-term rates. And any increases in
rates in the US will clearly impact the Canadian bond market. So look for long-term rates to start rising in early to mid-2010.

Q. When rates rise, what kind of magnitude are we talking about?

A.  Roughly 200-250 basis points over the course of the next 2 years or so.

More Q&As next week…

Misty Harris, Canwest News Service Canadians are among the most optimistic in the world when it comes to feelings about the job market, personal finances, and readiness to spend, according to a newly released analysis of some 14,000 people in 28 countries.

The report, authored by market research firm The Nielsen Company, finds consumer confidence on a global scale has jumped five points, to 82, since March, with gains in 24 of 28 markets. Confidence in Canada climbed six points to 90, making our nation one of eight countries worldwide in which such lofty levels were achieved — Indonesia, India, Philippines, Brazil, Australia, China, and United Arab Emirates were the other countries.

Nielsen analysts conclude that the notion of recovery is finally taking hold, with most people feeling “hopeful about an end to the global economic downturn.”

Among the optimistic is Helen Goldstein, who lost her corporate wellness business, along with a third of her portfolio, to the recession.

“I feel very positive about the economy, and very positive about the ultimate effects of this (downturn),” says Ms. Goldstein, 62. “It’s been a really good lesson to look at what’s important in life.”

In May, Ms. Goldstein launched a new business venture — a Toronto social salon called Buddha Groove — and has since found that people are “spending, just spending in a wiser way.”

Indeed, the Nielsen report describes Canadians as being “among the world’s most responsible consumers.”

The proportion of Canadians using spare cash to pay down debt has dropped to 40%, from 47% in March, which analysts say is a “positive sign” Canadians are spending in other areas. The most popular of these include out-of-home entertainment (23%), holidays or vacations (23%), clothing (21%), and home improvement (20%.

Thirty per cent of Canadians are funnelling their extra cash into savings, while 11% are using excess funds to invest in retirement.

Almost four in 10 (39%) believe local job prospects over the next 12 months will be good or excellent — impressive, given the 331,000 Canadian jobs shed in 2009 alone — while slightly more than half (52%) feel the state of their personal finances will be good or excellent this year.

Notably, the Nielsen Global Consumer Confidence Survey was conducted June 15 to 29, weeks before the Bank of Canada declared the recession to be technically over.

“Recovery has started in Canada, so consumer confidence is going to reflect that reality,” says Ernest Biktimirov, an associate professor of finance at Brock University in St. Catharine’s, Ont.

Although bank closures continue to plague the U.S., with the latest casualties in Nevada, Alabama, Arizona and Pennsylvania bringing the 2009 total to 77, Canada’s prudent financial institutions are doing comparatively well. Building permits issued to Canadian contractors rose unexpectedly in June — the second consecutive monthly gain — and commodity prices are springing back.

But Mark Meldrum, an assistant professor in the Odette School of Business at the University of Windsor, Ont., cautions that “as quickly as someone can become confident, it takes one crisis to destroy it.”

Click on the link below to read CIBC’s Senior Economist Benjamin Tal’s latest Weekly Economic Report.

weekly-market-insight

Canadian banks are typically leveraged at 18 to 1–compared with U.S. banks at 26 to 1.

Fareed Zakaria

NEWSWEEK

From the magazine issue dated Feb 16, 2009

The legendary editor of The New Republic, Michael Kinsley, once held a “Boring Headline Contest” and decided that the winner was “Worthwhile Canadian Initiative.” Twenty-two years later, the magazine was rescued from its economic troubles by a Canadian media company, which should have taught us Americans to be a bit more humble. Now there is even more striking evidence of Canada’s virtues. Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it’s Canada. In 2008, the World Economic Forum ranked Canada’s banking system the healthiest in the world. America’s ranked 40th, Britain’s 44th.

Canada has done more than survive this financial crisis. The country is positively thriving in it. Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize. The Toronto Dominion Bank, for example, was the 15th-largest bank in North America one year ago. Now it is the fifth-largest. It hasn’t grown in size; the others have all shrunk.

So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada’s more risk-averse business culture, but it is also a product of old-fashioned rules on banking.

Canada has also been shielded from the worst aspects of this crisis because its housing prices have not fluctuated as wildly as those in the United States. Home prices are down 25 percent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for overconsumption that the U.S. code does: interest on your mortgage isn’t deductible up north. In addition, home loans in the United States are “non-recourse,” which basically means that if you go belly up on a bad mortgage, it’s mostly the bank’s problem. In Canada, it’s yours. Ah, but you’ve heard American politicians wax eloquent on the need for these expensive programs—interest deductibility alone costs the federal government $100 billion a year—because they allow the average Joe to fulfill the American Dream of owning a home. Sixty-eight percent of Americans own their own homes. And the rate of Canadian homeownership? It’s 68.4 percent.

Canada has been remarkably responsible over the past decade or so. It has had 12 years of budget surpluses, and can now spend money to fuel a recovery from a strong position. The government has restructured the national pension system, placing it on a firm fiscal footing, unlike our own insolvent Social Security. Its health-care system is cheaper than America’s by far (accounting for 9.7 percent of GDP, versus 15.2 percent here), and yet does better on all major indexes. Life expectancy in Canada is 81 years, versus 78 in the United States; “healthy life expectancy” is 72 years, versus 69. American car companies have moved so many jobs to Canada to take advantage of lower health-care costs that since 2004, Ontario and not Michigan has been North America’s largest car-producing region.

I could go on. The U.S. currently has a brain-dead immigration system. We issue a small number of work visas and green cards, turning away from our shores thousands of talented students who want to stay and work here. Canada, by contrast, has no limit on the number of skilled migrants who can move to the country. They can apply on their own for a Canadian Skilled Worker Visa, which allows them to become perfectly legal “permanent residents” in Canada—no need for a sponsoring employer, or even a job. Visas are awarded based on education level, work experience, age and language abilities. If a prospective immigrant earns 67 points out of 100 total (holding a Ph.D. is worth 25 points, for instance), he or she can become a full-time, legal resident of Canada.

Companies are noticing. In 2007 Microsoft, frustrated by its inability to hire foreign graduate students in the United States, decided to open a research center in Vancouver. The company’s announcement noted that it would staff the center with “highly skilled people affected by immigration issues in the U.S.” So the brightest Chinese and Indian software engineers are attracted to the United States, trained by American universities, then thrown out of the country and picked up by Canada—where most of them will work, innovate and pay taxes for the rest of their lives.

If President Obama is looking for smart government, there is much he, and all of us, could learn from our quiet—OK, sometimes boring—neighbor to the north. Meanwhile, in the councils of the financial world, Canada is pushing for new rules for financial institutions that would reflect its approach. This strikes me as, well, a worthwhile Canadian initiative.

URL: http://www.newsweek.com/id/183670

Further to our blog post yesterday, read what Mark Carney, Governor of the Bank of Canada, has to say about the economy and interest rates:

More Rate Cuts to Come

To view the latest Economic Update from CIBC Senior Economist Benjamin Tal, click on the link below:

Economic Upate

In recent weeks, a great deal of attention has been given to the health of the Canadian mortgage market in relation to events south of the border. The recent action by Congress in Washington has heightened scrutiny on the Canadian mortgage and real estate markets.

Numerous studies have been released regarding Canada’s economic situation and there is no doubt that both the real estate and mortgage markets are slowing in Canada.

CAAMP’s chief economist Will Dunning has prepared a report that provides a timely review of the market and key indicators that separate Canada from the U.S.  Click on the link below to see the report:

Risks Are Maintained Within the Canadian Mortgage Market

Canadians received more proof yesterday of the global credit crunch hitting home after this country’s biggest banks began hiking their residential mortgage rates in an effort to recoup higher funding costs from their customers.

Banks are grappling with higher funding costs in the wake of last year’s subprime mortgage market meltdown in the United States. With the ensuing global credit crunch now in its second year, banks remain wary of lending to each other. The bond market has also been in flux ever since the United States announced a $700 billion (U.S.) bailout plan for American banks. Experts say the plan, while necessary, would likely stoke inflation. That, in turn, has made it more expensive for banks to finance residential mortgages.  The interest rates on mortgages and other short-term borrowing are set based on the price of bonds. With lower demand for bonds and fears of inflation, rates have to rise to lure investors.

It is also intersting to note that lenders are cutting back on their discounts on variable rates.  Some lenders no longer offer a discount to prime.  Once again, they are saying that this is due to investors increasing their costs and so the higher costs are merely being passed on to the consumer (whilst the banks will continue to make huge profits).  These developments should not, necessarily, scare borrowers who already have variable rate mortgages since they will have very attractive discounts to prime and their costs of borrowing are still very low.

These are indeed interesting times and we shall see how the financial turmoil unfolds in the coming weeks and months.

Source: Toronto Star