Financial Update

Has Canada slipped into recession without anyone noticing? (CP below)

· TSX Big gains in the financial sector helped recover half of yesterdays plunge.+146.24
· Dow +276.74 (Reuters)lower oil prices helped New York indexes close sharply higher as investors also took in some rare good news from the financial sector as the Banks had their best day in 16 years. Wells Fargo, the 5th biggest bank in the US, beat market expectations, despite a 22% decline in 2nd-quarter profit as more customers failed to pay back their loans. But the bank raised its dividend at a time when many other financial institutions are slashing their payouts, and its shares jumped by $6.72
· Dollar flat +.01c to $99.78US
· Oil dropped sharply for a 2nd day in a row-$4.144 to $134.60US per barrel. after a U.S. government report showed a surprise increase in inventories and continued weak demand in the world's top consumer nation. Oil's 6-year rally has also been driven partly by ballooning demand from developing economies such as China and India.· Gold down sharply–$15.90 to $961.80US per ounce as speculators booked profits after the metal hit a 4-month high near $1,000 an ounce the previous day

No housing bubble in Canada: Flaherty
Carrie Tait, Financial Post

CALGARY - Federal Finance Minister Jim Flaherty shrugged off housing worries in Canada Wednesday, saying there is no bubble and that the subprime-mortgage woes crippling financial institutions in the United States are not threatening banks north of the border.

"There is no bubble in the Canadian housing sector," he told reporters after speaking to roughly 400 people at a Calgary Chamber of Commerce event. "That's not been our concern. Our concern has been a tendency for longer amortization periods, like 40 years, and for purchasers putting very little money down. We've seen nothing in Canada like the U.S. subprime situation."
The comments came a day after the Canadian Real Estate Association said the average June resale price for homes was down 0.4% from a year earlier, the first decline in almost 10 years.

Mr. Flaherty reminded the audience that the government last week introduced plans to ditch government-backed mortgages with amortization periods longer than 35 years, and require that down payments total at least five per cent of the purchase price on these types of mortgages.
Despite tightening the rules on mortgage lending, Mr. Flaherty said he is not fretting about the health of Canada's banks, even as subprime mortgage woes hammer financial institutions in the United States.

Canadian analysts, however, continue to speculate on what may happen if the crisis continues to pinch banks -- particularly Canadian Imperial Bank of Commerce -- in this country.
"Our banks are well capitalized in Canada," Mr. Flaherty said. "I'm satisfied they are well capitalized in accordance with the requirements."

He said he has been in contact with bank CEOs and regulators since the subprime problems began to sweep the market last August.

This comes as California-based IndyMac Bancorp Inc. customers have been lining up to yank their money out of the bank, prompting U.S. regulators to take it over last week. And Fannie Mae and Freddie Mac, two major U.S. mortgage institutions, are now being backstopped by the government there.

John Aiken, an analyst at Dundee Capital Markets, speculated this week on what may happen to CIBC should its slide, fuelled by credit exposure, continue to inflict pain.

"Should the regulator become concerned with its capital position and the bank is unwilling or unable to tap the market for incremental equity, CIBC could be forced into the hands of another financial institution as the best solvency alternative," he wrote in a note to clients.

"We believe that the possibility of financial services consolidation is closer than most investors would allow and significantly closer than it was even three months ago."

Mr. Flaherty, however, reiterated the Conservatives' stance on reopening the bank merger debate. "Bank mergers have not been a priority for our government and that remains the case," he said. Further, while he acknowledged that the economy is going through "turbulent times," it remains healthy. "Our economy is strong," he told the audience.

Has Canada slipped into recession without anyone noticing?

By Julian Beltrame, The Canadian Press

OTTAWA - Canada is within a hair's breadth of slipping into a technical recession, economists said Wednesday, a day after the outlook for the North American economy soured sharply.

But they add that it won't seem like recessions of the past. In fact, says University of Toronto economist Peter Dungan, Canadians may already have lived through a technical recession - two quarters in a row of a shrinking economy - and not noticed.

"Our forecast is there's a recession now," Dungan said. "There may be a slight revision to the first quarter, but the second (which ended June 30) is almost certainly negative. "This is nothing like the recessions we had in the early '90s and early '80s, however, when we had serious recessions and serious unemployment," he added.

The early '80s recession came after two major oil price shocks in the 1970s that battered the North American economy and led to a restructuring of heavy industry, especially steel and autos, with the loss of millions of jobs. The early 1990s recession produced widespread bankruptcies in real estate and retail before growth resumed a few years earlier.

Speaking in Calgary, Finance Minister Jim Flaherty expressed confidence that the economy would stay on the positive side of the ledger and insisted Ottawa won't fall into a deficit as a result of the slowdown.

"We are on track in terms of our budget in Canada, that we will continue to run a surplus," he said, adding that the country's "strong fundamentals" and status as an emerging energy superpower will keep it in better shape than the United States, although not immune to a global economic slowdown.

"Canada is not an island," Flaherty said earlier in a speech to a Calgary Chamber of Commerce luncheon. "We are going through turbulent times. I want to assure you that Canada's economic future is bright and I say that based on the economic fundamentals of this country, which are solid."

Following a first quarter contraction that saw gross domestic product fall 0.3% and continuing signs of stress, economists and policy makers have been routinely revising their growth projections for the year, all trending downward.

In the last week, Canadians have been hit by a series of bad news announcements. Employment fell in June for the first time this year and full-time employment tumbled for the second straight month. Average home sale prices edged down during the month, the first year-over year price decline in nearly a decade. And General Motors Corp. announced plans to lay off 20% of its white collar staff in North America, a further cut of thousands of jobs.

Meanwhile, the Bank of Canada warned of rising inflation Tuesday while lowering its 2008 growth forecast from 1.4 per cent in April to one per cent. On Wednesday, the Conference Board of Canada downgraded its projection from 2.2% this spring to 1.7%. For both, it was the second downward revision so far this year.

Both are overly optimistic, says David Wolf, chief economist with Merrill Lynch Canada, who says gross domestic product increase will likely come in at a tepid 0.5 per cent this year, a statistical blip from recessionary times.

"Absolutely, by the informal definition of recession we could be in recession," agrees Global Insight economist Dale Orr, noting that nobody will know for sure until late in August, when Statistics Canada releases the second quarter growth tally. But Orr also points out that the Canadian economy still has some legs, particularly in the resource and oil and sector, consumer spending, and employment and housing that while slowing, are coming off record-setting years.

Even manufacturing showed signs of life in May. Statistics Canada reported Wednesday that manufacturing sales rose 2.7 per cent from April, the fourth increase in five months. The details behind the aggregate number were weaker as sales remain below last year's levels and most of the gain was due to higher prices, not increased production.

The strongest pillar remains high-priced commodities, particularly Alberta oil, which is bringing tremendous wealth into the country and helping grease the general economy through corporate profits, job creation, and higher government revenues that get passed along in lower taxes and higher spending.

"Perhaps the volume of what we produce is going down, but the wealth effect (from commodity exports) is very much there," said Pedro Antunes of the Conference Board.

"We often think that's beneficial for some regions and sectors, but there have been redistributive effects. The federal government has collected dividends that's been fanned out to all Canadians in the form of tax cuts, and the effect on stock prices, wages, employment have been distributed all over the country."

That has kept nominal gross domestic product growth - which measures the actual worth of what Canadians produce - above four per cent, as opposed to the flat performance in real growth, which measures the amount produced.

"The hurt in Canada is narrowly focused in the trade sector," Orr says. "If you are in Windsor, Ont., where unemployment is near 10 per cent and the value of your home is falling, or in the auto sector, or if you are in a forestry one-industry town in northern Ontario or Quebec or B.C., then you are really hurting."

But for most Canadians the slump has yet to register and likely won't if forecasts of a second-half improvement prove accurate. And for those who live off the resource sector, this is boom times, says Orr.

Dungan says another difference between today and recessions of the previous two decades is that inflation, while rising, remains relatively tame, and governments now have the wherewithal to stimulate the economy or at least not inflict further harm.

"The Bank of Canada is trying to keep inflation from rising, not reduce it, and generally speaking prevention is not as costly and not as unpleasant as cure," he explained.

"And our government balances are basically OK. It's not like 1991 when we had huge deficits and therefore you couldn't do anything, if anything you were trying to raise taxes to make those better, which only makes the downturn worse."