By Avery Shenfeld
research.cibcwm.com

Economics gets interesting for markets at inflection points, and that’s exactly where the global economy sits as spring turns to summer. But are we seeing a turn for the worse — a period of slower, or slow growth — or a turn for the worst, towards renewed recession?

After their recent pull-back, equities might be able  to muddle through the former, but would have a lot of additional downside if it’s the latter. Two-year Treasuries are back at the lowest levels since the depths of the recession, reflecting the consensus view that whatever fate awaits the US economy, the Fed is a long way away from a tightening. But equities are, of course, still miles from their March 2009 lows, and are counting on earnings gains, not a recessionary dive in profitability.

Trouble is, a turn to a slowdown looks much like a turn towards outright recession in its early stages. That’s particularly the case when the prior period saw very robust growth. China put in 12% growth in the year to Q1 2010. In Canada, we are coming off two quarters averaging 5½% growth. The US wasn’t quite so heated, but averaged better than a 4% pace in the two quarters ending in March.

Our own long-held view is that the global economy will see much slower growth ahead, with a trough at only 1½% growth in both Canada and the US by Q4. If so, we shouldn’t be shocked, shocked, to see purchasing managers indexes for both the US and China move lower, as they did this month, but to levels still consistent with growth.

Today’s anemic US private sector hiring wasn’t the deeply negative figure associated with recession onsets, but was in line with the deceleration to below trend GDP growth we expect in the quarters ahead. Housing data were boosted by tax incentives, so again, a big drop in the month after their expiry is not a surprise. Our two favourite aggregate US measures, the comprehensive Chicago Fed National Activity Index, and the leaner but more contemporaneous ADS index from the Philadelphia Fed, are still both saying green for growth, if a bit less vociferously in the latter.

Closer to home, Canada’s flat GDP for April, was consistent with a deceleration in growth, rather than a turn to recession, given that it came off of a bloated 0.6% March advance. May GDP looks to be much better, as we already know it was a decent month for hiring. But don’t be surprised to see the week ahead’s Canadian jobs data for June show a deceleration. That’s the stuff that slowdowns are made of.

Gross Domestic Product stalled unexpectedly in April after seven consecutive monthly increases as retail and manufacturing dropped, Statistics Canada reported this week.*

At the same time, retail trade fell 1.7% during the same month, following a 1.9% gain in March. Together with smaller declines in manufacturing and utilities were offset by increases in mining, wholesale trade and, to a lesser extent, the public sector and construction.

Nonetheless, it is widely believed that the Bank of Canada will probably raise rates for a second straight time at its July 20 meeting.

Mark Carney had already warned in April that the economy’s rebound from the crisis would slow significantly starting in the second quarter as the housing market was beginning to cool, the dollar was trading near parity with its U.S. counterpart and the impact of government spending was fading.

Those factors, and the arguably more dominant headwinds from Europe and the United States as the these fragile advanced economies walk the tightrope from stimulus spending to deficit-cutting, have kept the central bank insisting that nothing about its path to a more normal monetary policy is “pre-ordained from here forward.”

“The Bank of Canada will take all of this into consideration, including what’s happening in global financial markets, before making its decision,” Krishen Rangasamy, an economist with CIBC World Markets in Toronto, said in an interview. “If you see the stock market plunge 500 points the day before the decision, that may change things. But if we don’t see something like that, if financial markets stabilize, then there’s no reason for the bank to pause in its tightening.”

* The monthly gross domestic product (GDP) by industry data at basic prices are chained volume estimates with 2002 as their reference year. This means that the data for each industry and aggregate are obtained from a chained volume index multiplied by the industry’s value added in 2002. For the 1997 to 2006 period, the monthly data are benchmarked to annually chained Fisher volume indexes of GDP obtained from the constant-price input-output tables.

For the period starting with January 2007, the data are derived by chaining a fixed-weight Laspeyres volume index to the prior period. The fixed weights are the industry output and input prices of 2006. This makes the monthly GDP by industry data more comparable with the expenditure-based GDP data, chained quarterly.

A recently released report by Scotiabank says that Alberta will experience a sharp economic rebound during 2010 and will  lead all of the Canadian provinces in terms of GDP growth at 4.1%.

In general, all provinces have rebounded strongly, and the report forecasts Canadian output growth to average 3.6% this year, the strongest advance in a decade. For 2011, Scotiabank is forecasting that Alberta’s economic growth will be 3.4 per cent while Canada as a whole will average 2.7 per cent.

A strong pickup in investment will fuel growth in the energy and manufacturing sectors,

“Investment has perked up in the oil sands, as easing costs and higher oil prices revived investment intentions in late 2009, with $2.2 billion in outlays scheduled for 2010 alone. Renewed activity in the industry will lead to significant benefits flowing through the economy, with manufacturing and services all heavily tied to conditions in the energy sector. While the bulk of investment will stem from oil sand development and tight oil plays, recent revisions to the province’s royalty framework are a major positive for the natural gas industry.”

The Canadian Association of Drilling Contractors forecasts a significant increase in drilling activity in the third quarter of this year.

Retail sales have also shown strength so far this year, after declines during both 2008 and 2009. With the bulk of job growth still lying further ahead, additional gains are expected. Alberta residents remain the highest per capita spenders in Canada.

The report also points out how the province has also made efforts to diversify its economy with the development of its health sciences industry. Notably, the Alberta Innovates initiative provides funding for a wide variety of domains, including health, energy and the environment.

Alberta’s economy is one of the strongest in Canada, supported by the petroleum industry and, to a lesser extent, agriculture and technology. According to the Fraser Institute, Alberta has very high levels of economic freedom. On its Canadian Provincial Investment Climate Report, it shows how Alberta continues to set the pace and leads the country in terms of creating and maintaining a positive investment climate. It also claims that it is “by far the most free economy in Canada, and is rated as the 2nd most free economy of U.S. states and Canadian provinces.”