Steepest Fall In Canadian’s economy

April 24, 2009

The Canadian economy took a shocking fall during the first quarter, dropping at the steepest pace in at least 50 years. The central bank dropped the overnight target interest rate to 0.25 per cent, and committing to keep it there for a year.

Gross domestic product fell an estimated 7.3 per cent – the biggest contraction since 1961. The contraction in the Canadian’s economy is worse than the United States which showed a contraction of  3 per cent. The main reason is that U.S. weakness in the housing and auto sectors is hammering critical Canadian export industries – vehicles, parts and forest products.

If the low policy fails to stimulate growth, the central bank had in mind to injecting new money into credit markets through what it calls quantitative and credit easing.

1) Quantitative Easing

The more dramatic approach would be quantitative easing – essentially increasing the money supply to improve the availability and cost of obtaining credit.

This would flood credit markets with money, making loans more easily available to businesses and households and, given the law of supply and demand, less costly.

One of the Bank of Canada’s roles is to print money – there are about $50 billion worth of banknotes currently in circulation – but Carney said quantitative easing would be “an electronic fashion of creating new central bank money.”

2) Credit Easing

The second measure would be credit easing, a more targeted approach for the bank to enter specific stressed credit markets, such as commercial paper or car leasing.

“Credit easing does not need to be financed through an expansion of settlement balances (printing money),” the bank said. “It could, instead, be financed either by reducing holdings of other assets or by increasing government deposit liabilities, so that the monetary base remains unchanged.”

Will  this be a protracted recession? 

Until there are signs of recovery in the global economy, Canada will experience a protracted slow down. The depth of Canada’s economic despair is reflected in the Bank of Canada’s revision to its estimate for the Canadian economy in the first quarter to contract at an annual rate of 7.3 per cent.

An article by foreignpolicy.com – “The Worst Is Yet to Come” previews the next stage of the global financial crisis.

Kindly contact me (Elsie Tse) at 604-716-3369 or Email Me 

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