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The Recession is Over... Cue the painfull recovery


The recession is over, but not the pain.

Canada's central bank predicted Thursday that the economy would expand this quarter, suggesting the economic contraction lasted for about nine months, considerably shorter than the previous two recessions in the early 1990s and the early 1980s.

The Bank of Canada's reassessment of the state of the economy is perhaps the clearest signal yet that the worst of the recession is over.

Buoyed by the prospect of better days ahead, investors rushed to buy Canadian stocks, adding new life to an near five-month rally that economists said has played a big role in reversing Canada's fortunes.

The Standard & Poor's /TSX Composite Index rose 243.33 points to 10,675.68, the highest in six weeks. Canada's dollar jumped about 1 per cent to 92.04 U.S. cents, the strongest in almost two months.

Yet Bank of Canada Governor Mark Carney stopped short of celebration, saying it will take more than a year to replace the wealth destroyed by the financial crisis.

A graphic example of the hole out of which Canada's economy has to climb is the “output gap,” which measures the difference between current economic activity and the level of production policy makers reckon the economy can sustain without causing rapid inflation.

The Bank of Canada's conventional measure of output gap was -4.3 per cent in the second quarter, the widest deficit on record dating back to 1985.

“We are on track for the recovery both in Canada and globally,” Mr. Carney said at a news conference. “But it's early days. It's a long road.”

Canadian policy makers attributed their brighter outlook to improved confidence around the globe, reflected in the Dow Jones Industrial Average's 2-per-cent jump yesterday, sending the New York-based index above 9,000 for the first time since January.
The Bank of Canada, which employs more than 300 economists and runs 21 models, predicted in April that gross domestic product would contract 1 per cent in the current quarter and that growth wouldn't return until the final three months of 2009.

As it turns out, policy makers underestimated Canadian consumers' ability to weather the deepest global recession since the Second World War and the central bank's own ability to erect a bulwark against the storm.

Mr. Carney and his senior deputies remain surprised that household credit continued to expand through the recession, providing a measure of support for domestic spending that kept the collapse in exports and rising unemployment rates from taking a greater toll.

The fact that family borrowing continued to increase at its historic pace of about 8 per cent a quarter reflects an increase in home buying – purchases that were encouraged by mortgage rates that fell to record lows as the Bank of Canada dropped its benchmark lending rate to an unprecedented 0.25 per cent and set up emergency cash auctions to ensure banks had access to enough money to continue lending.

“We've seen some remarkable policy response to the economic issues, not just on a regional basis, but on a global basis,” said Daniel Bain, president and chief investment officer at Toronto-based Thornmark Asset Management Inc., which oversees investments worth about $460-million. “It's almost unimaginable where we would be if there had not been some intervention.”

It will be months before Statistics Canada officially dates the latest economic downturn.

Merix Financial, July 24th, 2009

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