Monday, July 06, 2009

Did Joe Biden offer a prediction on the Canadian election?

Joe Biden acknowledged this past weekend that the Obama administration underestimated the depth of the recession. "We misread the economy", he told George Stephanopolous of ABC.

Polls in the past month or so in Canada have shown some strengthening on the part of the Conservatives. Frank Greaves of Ekos Research, which is doing weekly large sample IVR polls on party standings, sees this improvement as linked to the economy:

An increasing number of Canadians say they are already feeling more optimistic about the economy than they were three months ago, and they are naturally concentrated among the most prosperous. This could generate a drift of voters back to the Conservatives from the Liberals in this demographic even as working-class voters become more distressed and perhaps antagonistic to the Conservatives.

There was a rapid run-up in the markets from March until mid-June unsupported by the fundamentals (the economy has continued to decline) and this certainly led to a great deal of speculation about the economy turning the corner and headed upwards. Indeed so optimistic was Jim Flaherty that he thought it was time to think about ending the stimulus.

The positive impressions from media coverage of day after day of positive market news helped the Conservatives as Greaves points out. What then to make of an economy that may stagger for the rest of the year. Following the negative U.S. jobs report last week, Nouriel Roubini commented:

The June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions.

If Roubini's prediction holds true the impact on Canada would produce a similar story. The political implications are clear. Assuming the government falls on a confidence vote in early autumn, the subsequent election would be certain to produce a change in government, most likely a Liberal minority and quite possibly one where the NDP would hold the balance of power.

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