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Less Bad News Expected Later In The Year

Canada is not immune to the global economic crisis but will weather the storm better than most, Warren Jestin, senior vice-president and chief economist with Scotiabank told participants at the Canadian Wheat Board’s annual GrainWorld conference in Winnipeg Feb. 23.

“Canada is still a commodity-rich country in a commodity-short world,” said Jestin. While the recovery will be slow “where you want to be (during the global recession) is Canada.” Jestin said Canada’s banking system, which was never deeply involved in subprime lending, is considered the strongest in the world.

In addition, Canada’s recently announced economic stimulus package only accounts for about two per cent of the country’s economy, which compares to a U. S. deficit representing about 10 per cent of that country’s GDP. As a result, Canada has “more wiggle room” to stimulate the economy.

While the subprime lending crisis in the U. S. was the catalyst for the global economic downturn, Jestin stressed that there was a “remarkable synchronicity” around the world; every economy was being hurt to one degree or another.

Jestin compared the recovery to the global downturn to a marathon race rather than a sprint.

He expected bad economic news would continue to predominate for the next six months, but added that by the second half of the year “the good news will be that there’s less bad news.”

Using another metaphor, Jestin compared the global economy to a ship that has hit an iceberg. Investors looking for a lifeboat have turned to the U. S. Treasuries market, which may be leaky but is seen as relatively safe and secure. The investment in U. S. Treasuries will help the U. S. finance its large deficit, but once the lifeboat reaches the shore and global economy starts to show some improvement, investors will turn their attention elsewhere and the U. S. will once again be paying more in interest rates, creating new problems, said Jestin. He expected to see volatility in foreign exchange, equities, and interest rates over the next couple of years.

Looking at Canada specifically, Jestin said the Canadian dollar would trade at the lower end of a US75-to 85-cents range while the global investment interest remains with U. S. Treasuries. However, he thought that once attention returns to riskier assets, the relative strength of the Canadian economy should help draw in some investment, taking the Canadian dollar higher.

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Phil Franz-Warkentin - MarketsFarm

Phil Franz-Warkentin writes for MarketsFarm specializing in grain and commodity market reporting.

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