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Surely the collapsing housing market and falling commodity prices both constitute domestic shocks, no?

The concern I think, is that despite the overnight rate falling to a 50 year low, credit conditions are still quite tight - and so the impact of very accomodative monetary policy seems to have ben mitigated somewhat.

Moreover, commodity prices have tanked and as Declan points out, housing and construction (massive job creators over the past 5 years) are slowing.

Therfore, the 1/3 x US shock + slowing commodity based investment spending + housing slowdown = a worse recession than that being forecasted.

The rule of thumb I have in my had for transmission of US GDP shocks is about 1/3 as well, nice to see some validation of that here. I read an IMF paper awhile back that estimated trade + finanical shocks that were as high as 0.6, might be more realistic in the current situation.

Curious about something - what variables are in your SVAR?

They were real quarterly GDP annualised growth rates: y = 400*(log(x(t)) - log(x(t-1))).

To the extent that falls in commodity prices are generally associated with US recessions, it's not clear how much of that can be thought of as an independent, domestic shock. But it's certainly worth considering: the Bank of Canada's new model explicitly takes term of trade into account.

It's not too hard to add to the model; I'll see what it generates. But maybe not today.

What about the effects of contracting credit? In the West, especially Alberta, lots of big cap-ex has been canceled. As current projects wind down, unemployment is going to increase, and many Albertans are stuck with high debt levels and big mortgages from their spending spree during the boom years. I think it could get ugly.

Just some data relevant to my previous post. From here:

http://www.albertacanada.com/statpub/1112.html

In the October numbers the total project value was $286527.2 x 10^6. For the November update it was $279300.0 x 10^6. That's about a 2% decline in 2 months (start of October to end of November). Granted, two months does not a trend make, nonetheless ...

There has been a housing bubble in Canada just like in the US. Prices in Vancouver are 300x rent and 10x income. Toronto is similar. Calgary and Edmonton are already crashing. Banks are have issued 40 year mortgages with no down payment that require two full time incomes to pay. What if one spouse loses their job? Did anyone account for the massive additional risk involved? Not likely. I'd say we're screwed. Not as screwed as the US mind you, and certainly not as screwed as Britain (tits up?), but everybody here is going to get a bad hit. Most people seem totally unprepared and/or oblivious to the situation. Thanks media!

"it's not clear how a forecasting model is going to generate a prediction of a severe recession in Canada."

Haven't you heard ? The problem is that we have relied too heavily on models and they assume closed systems.

Sentiment has changed and my guess is your models do not capture that either.

Trade is collapsing. Great Depression ?

Financing is collapsing. Banks are unable and unwilling to lend.

Household networth is collapsing (House, RSP, savings, investments)

Employment and income are declining.

Put these 'shocks' into your model.

I like your optimism. But please take off the rose colored glasses.


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