balanced fund quarterly report
March 31, 2008
Economic Commentary
The fall-out from the subprime mortgage meltdown in the U.S. is considerably more toxic than we expected at the turn of the year. In turn, the negative impact on banks' and investment dealers' balance sheets, both in the U.S. and elsewhere, has exceeded our expectations.
The U.S. economy will record little or no growth in the first half of 2008, whether or not the slowdown is technically classified as a recession. Employment growth is a key variable in supporting the consumer sector. In the U.S., both housing and employment are weakening and employment growth is approaching levels that are consistent with prior recessions. In Canada, employment growth remains remarkably strong in light of the U.S. environment, and consumer spending is holding up well. The combination of the strength in the Canadian dollar and sluggish U.S. demand will certainly impact the Canadian economy but we expect the slowdown to be modest compared to the U.S. situation.
The U.K. is experiencing a weak housing market but not to the extent of the U.S. situation. Widening credit spreads and more restrictive lending policies will likely prompt the Bank of England to continue cutting short rates. In Europe unemployment is at 25 year lows although it is apparent that economic growth is moderating. Japan is experiencing moderate but slowing growth and the Bank of Japan reports that credit conditions are favourable. There has been considerable debate centered on whether continued strong growth in Asia will shelter the global economy from a U.S. slowdown. We expect the global economy will certainly feel the effect of the American slowdown especially in view of the monetary tightening stance of the Peoples' Bank of China and the reluctance of the European Central bank to ease in the face of building inflationary pressure.
