FINANCIAL ICEBERG

Always consider hidden risks

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CHARTS

Canada Imports and Exports

Canadian Economy Slowing Tremendously

( From CPB, Statistic Canada , Globe And Mail , BOC, The Star,com, IMF, Motley Fool )

Global World Trade Volume

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Given the historical relationship between cross-border trade and global economic activity, report from the Netherlands Bureau for Economic Policy Analysis that world trade volumes seem to be consolidating but are within a hair's breadth of turning negative on a year-over-year basis suggests that another global downturn is on the cards. ​Weak economic data from Europe, China, Japan and the U.S. reinforced fears of a deeper global downturn.​Europe's troubles continued to hit exporters around the world. ( see graph below ).

Canada is not immune of a global slowdown

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Because exports contribute to near 30% of GDP for Canada, our destiny is tied to the global economy.



Canada's merchandise exports rose to $39.1 billion, as prices increased 1.3% and volumes were up 0.9%. But on an year-over-year basis, Canadian exports were down 1.4%. The main contributors to the monthly gain in exports were crude oil and crude bitumen as well as unwrought precious metals and precious metal alloys. Exports to the United States rose 2.6% to $29.0 billion in January, on the strength of crude oil and crude bitumen. Exports to countries other than the United States increased 0.9% to $10.1 billion, as a result of a 14.0% gain in exports to the European Union.

​​( See graph below )

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Retail Sales

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Because retail sales makes around 71% of total gdp in Canada, it is crucial to the economic activity.



​​Retail sales rose 1.0% to $38.9 billion in January, partially offsetting the decline in December. Gains were reported in 7 of 11 subsectors, representing 52% of total retail trade. The increase was led by higher sales at motor vehicle and parts dealers.



After removing the effects of price changes, particularly higher prices at new car dealers, retail sales in volume terms were flat.

( See graph below )



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The Canadian Economy has been caught in a Perfect Storm : World demand slowing, commodity prices weakening and Canadian consumers extremely leveraged... We will go through the main factors why I think so

Wholesale Trade

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Wholesale sales rose by 0.3% in January to $49.0 billion. The increase was mainly a result of higher sales in the computer and communications equipment and supplies industry.



In volume terms, wholesale sales were up 0.5% in January.





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Manufacturing sales

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Manufacturing sales edged down 0.2% in January to $48.0 billion, the fourth decline in five months . Sales in January were down in the transportation equipment industry as well as the petroleum and coal product industry. Overall, 7 of 21 industries posted lower sales in January, representing approximately 52% of the manufacturing sector.



Constant dollar sales fell 0.4% in January, indicating that the decline in manufactured goods sold was a result of lower volumes.

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Total value of permits

Canadian Retail Sales

On the graph above, we see clearly the change in trend since the end of 2011 : since then, Canadian exports has been on a decline, nothing to help the economy...

Commodity Prices



Because Canada is a huge exporter of basic products and commodities, prices of those are really a huge factor of richness. We took the CRB Index to overview the evolution of the prices of commodities. What we observe is the same trend ( with a lag ) as the​​ Canadian exports. ( Compare graph above/below )

Canadian Oil



​​Recent developments in the Canadian energy sector have been ​less favourable than anticipated. Lower energy prices, together with temporary disruptions in transportation and production facilities, have dampened economic activity in recent quarters through a deterioration in Canada’s terms of trade as well as lower investment, exports and production. These developments are estimated to have reduced annualized real GdP growth by 0.4 percentage points in the second half of 2012 .



​​And production of Canadian oil are on the rise : according to the Canadian Association of Petroleum Producers , Western Canada oil supply is forecasted to grow 19% this year from 2011 levels and an additional 7% in 2014 -- to 3.7 million barrels per day.

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But transportation bottlenecks have create a local maket for that oil. ​In simpler terms, the existing network of pipelines isn't just enough to transport the rising volumes of crude oil to refineries across North America.

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The consequence of that ? Western Canadian Select, the local benchmark, is trading at a discount of $37 per barrel compared to the WTI. Which means, WCS is discounted to Brent by around a massive $55/barrel. Obviously, exploration and production companies operating in the sands are losing out on a substantial chunk of possible revenues. All simply because of a lack of takeaway capacity.



According to a Bloomberg report, investment bank PPHB Securities estimates that "Canadian companies are forgoing about C$2.5 billion a month because of the lower prices ." Now that's a huge amount of revenue to lose every month. ( See graph below )



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So declining commodities prices and especially the price for Canadian Oil are not putting the real value of Canadian production and then put pressure for a declining export trend...

Canadian Manufacturing sales

Canadian Wholesale sales

Sales at motor vehicle and parts dealers rose 2.8% in January, partially offsetting the 6.5% decline in December. Higher receipts at new car dealers (+2.4%) accounted for most of this gain. Used car dealers (+5.3%) reported higher sales for a third straight month.



General merchandise stores reported a 2.8% increase. Department stores sales advanced 11.5%. Despite this gain, sales in this store type have been on a downward trend since the middle of 2012. Sales at other general merchandise stores declined 3.5%.



Miscellaneous store retailers reported a 9.4% gain in January, the fourth increase in five months. Stores in this subsector include office supplies and stationery stores, gift stores and pet supplies stores.



Sales at clothing and clothing accessories stores rose 1.2%, a second consecutive monthly gain. Higher sales at clothing stores led the gain, rising 1.7%. Shoe stores (-0.5%) and jewellery, luggage and leather goods stores (-0.3%) reported sales declines in January.



Following double-digit fluctuations in November and December, sales at electronics and appliance stores rose 2.3% in January.



The largest decline occurred at gasoline stations (-1.4%), where sales decreased for a third consecutive month.



Food and beverage store sales decreased 0.4%, mainly reflecting lower sales at supermarkets and other grocery stores (-0.8%). Following eight straight monthly gains, sales at speciality food stores declined 2.8% in January. Beer, wine and liquor store sales increased 2.2%, more than offsetting the decline in December. This gain coincided with the resumption of the National Hockey League season.







But when we consider the trend by observing the year-over-year cahnge in % ( See graph below ), the result are scary at negative 0.1%.

And if we take into account the inflation rate at +1.2% yoy, we obtain real retail sales at negative 1.3% : just scary!​

Construction

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Buiding Permits

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Municipalities issued building permits worth $5.8 billion in January, up 1.7% from December. The increase in the residential sector more than offset a decrease in the non-residential sector. Despite the advance, the total value of building permits has been trending downwards since October 2012. And Total Value of building permits on a year-over-year basis is down 4.3%.



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Canadian household debt

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​Canadian household debt, too, is at all-time highs. Today, the balance sheets of households are stretched. After 11 consecutive years with household outlays exceeding disposable income, household debt burdens have increased substantially. Household debt as a percentage of disposable income has risen by almost 60 percentage points to 165 per cent today, and Canadians are now more indebted than the Americans or the British. ( see graph below ).

Conclusion



The International Monetary Fund laid out their predictions for 2013 : the IMF​expects growth to come in at 1.8 per cent in 2013 and 2.25 per cent in 2014. And here the main factors :



​​The weaker economic momentum reflects lower growth of private domestic demand

​External demand hasn’t picked up the slack, and the current account continued to deteriorate

​Fiscal policy has also continued to be a drag on growth, as the stimulus is being withdrawn

The balance of risks is tilted to the downside, as near-term uncertainty remains elevated

Domestic imbalances make Canada more vulnerable to these possible shocks

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​Canada on the short term economic oulook are position for a perfect storm :​​ World demand slowing, commodity prices weakening and Canadian consumers extremely leveraged.



A weakening trade sectors combined with a softening housing market could act as a tremendous drag GDP.

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Canada’s economy performed relatively well in the aftermath of the financial crisis, as low borrowing costs spurring a credit boom, much of which was used to buy houses.



But with household debt at record levels, consumers are beginning to pullback, which is causing the housing boom to deflate to more normal levels.

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Canadian firms have been facing competitiveness challenges in recent years resulting from the persistent strength of the Canadian dollar and poor productivity performance relative to major trade competitors, other factors such as to whom Canada sells its products and the product it sells, have also significantly affected the performance of Canadian exports. Over the past decade, the structure of the geographic market to which Canada exports, with a large weight on the relatively slow‐growing U.S. market, and a small weight on

other economies, particularly the relatively fast‐growing emerging market economies, has exerted the majority of the overall net negative impact on Canadian exports.

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Though we Canadians like to convince ourselves that it's different here and the economy will behave differently from the world trend despite overwhelming evidence to the contrary, history remind us that this belief is as irrational as it is dangerous.



Canada is not immune of an economic slowdown...