This week, the UK tipped back into a recession (which is technically two consecutive quarters of negative growth) after trying to battle the European debt issues with extreme austerity measures.   This is an example of how austerity measures can stifle economic growth just when it is most needed.  This leads us to the situation in the US, where tax cuts implemented by the Bush administration are set to expire at the beginning of 2013.   Although this will provide much needed revenue for the US, the expiration of the tax cuts will happen at the same time as $1 trillion in budget cuts take place.

These measures may, at first glance, appear to be just what the US needs to rise from the debt issues that have plagued it for the past few years.   However, as the UK has experienced, cutting budgets and increasing taxes at the wrong time will likely slow any existing growth and possibly reverse it to the point where another US recession is likely.  Some pundits are claiming that this situation poses as much risk to the global economy as the European debt debacle. 

The one wild card in all this is the US presidential election.  As with politicians of all stripes, promises will be made and a few of those might even be kept.  Changes in policy are inevitable when elections roll around so we will have to sit back and watch whether the potential US economic shutdown of 2013 comes to be.

Interest rates in Canada are experiencing some minor upwards pressure and rate increases of 0.1% to 0.2% may be seen over the next couple of weeks.

Despite a drop in oil prices, the Canadian dollar remained strong this week.  This is mostly due to expectations of the Prime rate increasing slightly by the end of the year.

Jason McLean  BSc, AMP
jason@garibaldimortgage.com