Weekly Market update Feb 27 2012

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The title refers of course to a popular movie, in which the protagonist stands helplessly by as history endlessly repeats itself.  High oil prices were one of 2011’s main economic party poopers, prompting many observers to pare their initially high expectations for growth during the year.  Some observers may have thought they were caught up in a real life version of the flick this week, as worrisome energy market developments tied to Persian Gulf tensions stole some of the attention from favourable developments nearer home and across the Atlantic.


First the positive news. While it’s still very unclear if the Greece story will have a happy ending, Tuesday’s much anticipated bailout deal has nevertheless given the leaders of Europe’s major core countries more time to ring fence the periphery, reducing the likelihood of an unraveling of the thirteen-year-old monetary union. Turning from one of the world’s smallest economies to the largest, the week’s four-year low in the claims data is another sign that Corporate America is back in a hiring mood, after years of working existing labour forces harder and boosting productivity. It will take years of job creation at the current pace to fully recoup the recession’s losses. But for now, what had been the economy’s Achilles’ heel is showing signs of gradual healing.


The major potential fly in the ointment is of course the recent parabolic rise in crude prices, with Brent—which sets the prices North Americans pay at the gasoline pumps, rather than pipeline capacity constrained WTI— now just a dollar shy of the highs that caused such consternation last spring. Near-$130 global crude didn’t plunge the world into recession a year ago. There’s little reason, consequently, to think a rise matching thatseen so far will halt the North American economy in its tracks this time, with the US consumer, if anything, looking better underpinned.


That said, a protracted stay near current levels or a bit higher could take some of the shine out of what, till now, had looked to many like a steadily brightening economic picture. Our work suggests a 25% rise in oil prices, a bit more than seen so far, could shave nearly half a point from US GDP over the subsequent four-to-six-quarter period. Nor are higher oil prices the unmitigated plus for the Canadian economy that is sometimes claimed. A comparable price rise would initially lift GDP modestly. However, growth effects turn negative for periods beyond half a year, when account is taken of the drag on exports from both a higher dollar and softer economy stateside.

By Peter Buchanan, CIBC Economist




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About Sky Financial

We incorporated The Mortgage Centre-Sky Financial Corp. in August 1992 in Edmonton Alberta. Furthermore we opened offices in Fort McMurray, Cold Lake, Grande Prairie, Red Deer, Stettler, Saskatoon, Moose Jaw and Prince George BC.

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