• Canadian housing starts strength is timely
• U.S. focus shifts to “how deep, how long?”

Canadian economic data did not disappoint this week, far from it. For starters, total building permits shot back above 230,000 units in February after trending mostly down since the middle of last year. Then, housing starts for March closed out the quarter on a strong note, barely budging from February’s astonishingly high level of around 255,000 units.

Even trade lent a hand

Another positive surprise this week was that even the weakest spot for the Canadian economy in the current cycle, namely exports, fared much better than expected in February. On a month-over-month basis, the volume of exports shot up 3.6% while import volumes were down 1.9%, which combined imply that net exports will have lent a significant hand to growth accounting for February. As a consequence of unexpected strength in construction and exports, overall first quarter growth is not looking nearly as weak as we forecast in March, and will surely be positive. However, for a multitude of reasons which still hold – in particular a strong Canadian dollar, emerging market competition, and mostly, weak U.S. demand – we still hold firm the view that exports will remain the weak spot for the Canadian economy going forward. They will likely continue to exert a significant drag on Canadian growth in upcoming months, with February written off as a blip when all is said and done.

On the other side of the Atlantic, the French seem to be in no mood to kid these days, despite the usual comic antics to come out of Sarkozy’s press conferences. Between virulent protests - what else is new? - in Paris over the Olympic torch relay and the decidedly somber mood from top men at the IMF (Dominique Strauss-Kahn) and the ECB (Claude Trichet), “joie de vivre” seems to be in short supply these days. They are not alone in feeling bearish of course. The little data for the U.S. economy that was released this week did little to change our or central bankers’ views on the U.S. outlook, so allow us to editorialize a bit more than usual this week.

Concerns over the U.S. economy have shifted in recent weeks. The focus up to recently seemed to have been an understandable, but misguided, fixation on whether or not the U.S. is technically in a recession. The jury on this, which is the cycle dating committee of the National Bureau of Economic Research, doesn’t offer its verdict until much later after events have unfolded. Much confusion arises in the meantime as the only thing anyone can provide until then is a forecast, be it theirs or someone else’s. Anyone claiming the U.S. economy is currently in a recession is providing you with their forecast, not a statement of fact. By the same token, anyone claiming the U.S. is not in recession is offering, you guessed it, their forecast. As time passes and more data comes in, uncertainty surrounding the forecast dissipates and the likelihood of it being correct improves – nothing more, nothing less. Think of the NBER as the Pope (insert alternative authoritative religious figure here as needed) of recessions, but given the huge lag, we don’t advise waiting around for the ‘final’ word.

TD Economics’ forecast is that the U.S. economy is indeed currently in the midst of a recession, which will record two non-consecutive quarters of real GDP contraction. By itself, the fact the quarterly contractions are not expected to be consecutive would make this an atypical recession. But there are other more substantive issues which would also make the current recession unlike those past. Overall, our U.S. forecast stands on the slightly pessimistic side of consensus, but is not currently quite as bearish as that of the IMF. The accompanying table compares the IMF forecast from April to ours from March.

Loud and clear

After slashing their U.S. forecast by a full percentage point for 2008 and 1.2 percentage points for 2009, the organization has now come out clearly on the gloomy side of things. Interestingly, it would seem hard to remain poised if one lines up this week’s simultaneous alarm bells rung off by the IMF. First, their latest Economic Outlook has world growth slowing considerably this year – agreed. Second, the IMF thinks there’s a 1 in 4 chance of a worldwide recession (less than 3% growth) – again, we’d agree that the current uncertainty means a wider range of potential outcomes with higher-than-usual probability, so we would not quibble with that figure. According to another IMF report, we are currently facing the worst financial crisis since the great depression, with financial losses forecast at $945 billion. Maybe, but comparisons to the great depression are off the mark in both scope and depth. Specific estimates as to aggregate financial losses vary greatly and depend on market outcomes. Any such calculation is fraught with uncertainty, and the IMF’s estimate is certainly as good as any, if not better than most. Third, food price inflation is causing riots in some developing countries and threatens to seriously compromise efforts to fight poverty in many regions of the developing world. Every one of these concerns is valid, even if slightly over-hyped by the media at times.

But without dismissing any of the aforementioned concerns, dare we remain cautious pessimists while at the same time putting things in perspective and say that the world is not coming to an end? Dare we say that the same financial players in the U.S. which originated much of the currently toxic asset-backed securities (ABS) are also the fastest, certainly with a lot of help from the Federal Reserve, to adjust their books and clear out the mess? Dare we remind observers how many times the American economy has been written off, bound for the heap of history, only to lead the world economy into another decade of growth? None of this means the U.S. economy will fare well in the near term, far from it. It will at best move sideways until mid-2009, at worse face a deeper recession. And we are nowhere near done with alleviating financial markets stresses worldwide, as credit spreads can attest. But it might serve as a friendly reminder that gloom is in part self-fulfilling, and that the remarkably flexible U.S. economy has consistently shown an ability to land on its feet. Just something to keep in mind if your time horizon is longer than 18 months...

Pascal Gauthier, Economist
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