Speed of Recent Change Breathtaking

(Export Development Canada – Peter G. Hall)

The adage “one month does not a trend make” was shattered in October. The speed of change in key economic indicators was breathtaking, and wasn’t confined to single economies, industries or ideologies. Analysts’ views on the economy’s near-term path, disparate just weeks ago, now vary only on the severity of the downturn. The dust kicked up by the rapid change and resulting post-October volatility has clouded the economic line of sight significantly.

How swift were the changes? Consider stock markets. Octobers in the past would be hard to beat on the decline scale, but this one made the grade. To exceed the 17% beating the S&P 500 took last month, you have to go back to October of 1987, and prior to that, only May of 1940 and the Dirty Thirties compare. Indexes for most other large economies yield similar results. The TSX index, more influenced by commodities, has seen just three October-style drops since 1940.

Consider also commodities. They are well known for their volatility, but October was a standout. Oil prices have only experienced a one-month tumble greater than last month’s once in the past 25 years – when prices were in freefall in 1986, unwinding the oil price shocks of the 1970s. Base metals also had a rough month. Nickel prices were battered yet again, but the drops in zinc, and more alarmingly in copper–the most prescient base metal–were unprecedented in recent years.

Currencies also shifted radically. The trade-weighted US currency – which measures the greenback’s fluctuations against key trading-partner currencies, rose by 6.7% in October, the largest monthly gain recorded in at least 38 years. The jump reflects global flight to quality US assets during the month, rapid covering of short US dollar positions and foreign bank recapitalization activities. The drop in the Canadian dollar was likewise without precedent, and was even more pronounced at 11.7%, given the additional effect of lower commodity prices.

Other yet-unreleased October indicators will likely tell a similar tale. Confidence, which usually reflects concurrent economic behaviour, tumbled badly in the month. Pundits aren’t waiting for all the data, though. Forecasts are being revised downward swiftly. For example, the IMF has taken the highly unusual step of revising its October 2008 World Economic Outlook just days after its release. Most others are also scrambling to adjust their outlooks downward.

Speaking of speed, governments have vaulted into action. From bailouts of the financial sector to provisions of liquidity, interest rate cuts, statements of confidence and intent, and massive stimulus packages, governments around the world have wasted little time crafting and enacting policies to meet the challenges head-on. And more is expected before the dust settles.

The bottom line? The speed of change seen in October was alarming, and the effects are continuing. Further bad near-term economic news is almost a certainty, and as such, market volatility is likely to persist. There are no models that pinpoint economic behaviour in today’s environment, adding considerably to the challenge of forecasting. The current economic tumble is bad – but not bottomless. And we know we are now nearer to the economy’s true floor than we were two months ago. When October’s dust settles, the path to recovery will become clearer.