Is Canada The Next Black Swan For The US Economy?Friday August 28, 2015 08:33
China steals spotlight, but Canada matters more to US economy
As world stock markets plunge and rally driven by Chinese economic data and subsequent government actions to stave off equity market crisis, are traders getting caught up with the wrong risk factor?
There is no denying the importance of the Chinese economy, now the second largest in the world. But, when it comes to direct trade with the Americans, the Canadian economy could matter more for economic growth prospects ahead.
Traders and market commentators remain tied up in knots about when the Federal Reserve will pull the trigger on its first rate hike since before the global financial crisis in 2008-2009. Will the recent global stock market volatility delay lift-off? Or, will the Fed stay focused on its domestic imperative of stable employment and low inflation? The U.S. economic data matters and that is what the economists at the Fed focus on all day long.
Let's take a look at Canada and how important it is to the U.S. economy. Strictly looking at the relationships on a trade basis, Canada is the U.S. largest export market, according to BNP Paribas. "When Canada hurts, U.S. exporters hurt too," BNP Paribas analysts wrote. U.S. exports to Canada make up about 19% of total exports versus exports to China total only 7%, BNP Paribas says.
The Canadian official overnight rate now stands at 0.50%, following a 25 basis point rate cut in July. The Bank of Canada adjusted lower its growth expectations for the end of 2015, and the continuing weakness in the global energy markets continues to weigh on the Canadian economy, which is a major oil producer. Economists warn that further rate cuts may be ahead for Canada.
Economists are expecting the Canadian economy to register an official recession for the first half of 2015. Technically, a recession is defined as two consecutive quarters of negative gross domestic product growth.
Bottom line? While China may be the bigger economy, Canadian growth prospects could matter more to the U.S. ahead. "The outlook for Canada has deteriorated sharply on the back of the plunge in energy prices with a very likely technical recession in H1…Things in Canada are currently bad and, while they are expected to improve some, the risk is that we get a much larger hit to growth that slows U.S. import demand markedly," wrote BNP Paribas analysts.
What does this mean for gold? The yellow metal has stabilized and built a base above its July low around $1,080 per ounce. Gold remains a safe-haven, an alternative currency and will continue to garner on-going demand amid the sluggish and slow growth economic conditions that plague much of the advanced industrialized world.
It's not just China that is seeing growth expectations ratcheted back. Canada's economy has been hit hard by the more than 50% drop in crude oil prices. Economies are interconnected and interdependent. The U.S. economy is no island n the global economy. What happens overseas and what happens next door matters. Despite global central banker's best intentions, sub-par and below trend growth continues to unfold in the West. Gold will remain attractive in this environment as a safe-haven of surety in an uncertain world.
By Kira Brecht, contributing to Kitco News;
Follow her on Twitter @KiraBrecht