Posted by: Daryl & Wendy Ashby | December 21, 2011

The European Affect

We saw the Canadian economy slow in the second quarter of 2011, then gain considerable momentum over the next two quarters, but it has now begun to slow again as we roll into the new year. We are very much a commodity driven economy and rely heavily on what’s happening around the world.

Given the instability in the global economy, it appears that we will experience a slowdown in the coming year. Without a real solution, the trouble in Europe will only get worse before it gets better, and a significant recession is in the forecast for Europe at least for the first six months.Even if things turn around globally after the first half, it will take a while for the train to steam along at full speed. As of lately, we’ve seen exports and manufacturing slow, as well as softer employment numbers. Businesses are wary of hiring, especially permanent, full-time jobs because the global economy is on such a teeter totter. At the same time, income hasn’t grown at the same pace as inflation, which is a reason why many Canadians are reigning in their spending.

If we see a European recession, which at this point is very possible, the effects travel far and wide. Major players such as the US and China will suffer from export demand and will drag global growth even lower. Being dependent on other countries, we should see slower exports in the new year, and therefore prices for these commodities should be lower as well. With this being forecasted, the Canadian dollar should lose some steam, helping to offset the demand for our commodities.

As for the latter half of next year, in order to move ahead the Eurozone will have to begin a long road to recovery, which will help bolster the economies in the rest of the world. Either way you cut it, it’s going to be a long, dragged out recovery.

When it comes to housing in the near term, it may be more of a drag than we are used to over the past couple of years. With households topping out in debt and many first-time home buyers already in the market over the past couple of years, it’s expected the market will begin to normalize beginning in 2013 when interest rates will begin to get back on track.

With such a bleak outlook for the near future, we shouldn’t see any increases to short-term rates by the Bank of Canada. Rates are at all-time lows, so unless there unforeseen circumstances, we shouldn’t see rates drop in the near future either.

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