Anglo agony

The soothsayers

You’ve probably been ignoring it, enjoying the summer instead, but in case you’re wondering how the economy in the Anglosphere is looking these days, on this first business day of the second half in Canada, and first official day of a bear market in the U.S., two words: pretty bad.

Here in Canada, even BMO economist Doug Porter has capitulated, admitting that the charts suggest that Canada’s real estate market is following the U.S. by a two-year lag. As, coincidentally, it always has. “It’s a bit unnerving to see how Canadian performance is beginning to look like that of the U.S. two years down the line,” Porter told the Globe and Mail. I imagine it would be, if for some reason you’d convinced yourself that Canada was uniquely exempt from the world wide collapse of the asset bubble. For the rest of us, it’s common sense.

Porter hasn’t really given in all together though. Despite what the graph says, he’s still convinced Canada’s real estate market will break away and decouple at some point, due to a “litany of reasons” that make the Canadian market different. The “litany” now appears to have been reduced to two items: strong job growth and low interest rates. The latter doesn’t seem to be bolstering the US market to any noticeable extent. The OECD forecast today that Canadian employment will shrink. All eyes on what happens with jobs.

And what’s happening in the US, you wonder? Well, as auto sales plummet and Americans cut back on driving and Starbucks, there’s now talk that a drop in demand could lead to a turnaround from inflation (and/or stagflation) to deflation due to lack of demand. Of course, lack of demand in the US would hit its suppliers — hello, emerging economies! hope you enjoyed your middle class idyll! — hard.

There are also whispers that the US is entering a classic liquidity trap, yet another concept that sounds vaguely familiar from a first-year economics course that is now excitingly playing itself out in real time. In a liquidity trap, the actions of the central bank to ease lending conditions don’t have any effect because companies don’t want to borrow to expand — they’re too busy hunkering down. Japan had a liquidity trap that lasted years — anyone remember negative real interest rates? Fun times. And you know how Japan is a really different economy, so its experience doesn’t apply to the U.S.? Well, the co-heads of global asset strategy at Societe Generale couldn’t agree more, as they told the welling@weeden newsletter at the end of May:

At least in Japan companies didn’t cut jobs, because there was no social security net. Companies hoarded labour in the downturn, which meant margins totally collapsed, and profits. But the whole economy consumption never really collapsed because there weren’t big drops in employment.

Yes, they couldn’t agree more… they think the effects could be worse in the U.S..

In Britain, the housing market has come to a screeching halt, with prices continuing to fall and mortgage approvals 64% lower than last year, at the lowest level since 1993 — mostly due to a reluctance by non-bank lenders to lend at all. Low productivity readings point to coming layoffs and consumer credit — already, remember, at the highest per-capita level in the worldcontinues to rise.

In the immortal words of Bananarama, it’s a cruel, cruel summer.