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Weekly Economic Letter

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Canadian economy ready for takeoff: Financial Conditions Index reflects massive easing

Tue, Jun 2 2009, 04:59 GMT
by Economic and Strategy Team

National Bank of Canada

Summary

• Unable, alas, to dodge the financial crisis and the U.S. recession, Canada has just recorded its worst real GDP contraction since the 1990-91 recession. Indubitably, the Canadian economy remains hitched to the United States for the sheer volume of trade between the two countries.

• Nevertheless, the Canadian downturn, though very severe at first glance, stands in sharp contrast with the 1981-82 and 1990-91 recessions. For one thing, the current episode is coloured by sharp regional and sector disparities.

• If we weigh all the components of our Canadian Financial Conditions Index (FCI), the loonie’s earlier depreciation, the brutal drop in short rates and the stock market rally have converged for massive easing on the order of 800 basis points.

• Given the usual transmission lag of any movement in our Canadian FCI to economic activity, the recent marked relaxation reflected in the index brightens the real GDP growth outlook for the second half of the year.

• This is not to say that the Canadian economy is on the verge of decoupling from the U.S. economy just because our FCI has made a spectacular turnaround.

• However, if we also consider the recent movements in the leading economic indicators, the traditional bellwethers of recovery, the Canadian economy is ready for take-off, standing as it is in particularly good stead to benefit from an eventual rebound south of the border.

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Published on  Tue, Jun 2 2009, 05:28 GMT