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Economist Sees Economic Recovery As Steady But Slow


John Chisholm on December 22, 2010 in Uncategorized

The Burlington Economic Development Corporation (BEDC) welcomed keynote speaker Avery Shenfeld to its Economic Outlook Breakfast on December 2. Shenfeld is Managing Director and Chief Economist for CIBC and gave his audience a sneak peak at what might be expected in terms of economic growth in 2011.

While Shenfeld believes the economy is recovering, it isn’t recovering in ways typically seen after previous financial downturns. In a good year, such as the four years prior to this latest recession, the annual global GDP growth rate is about 5 percent, and in 2010 it slowed to about 4 percent. If 2008 and 2009 were the “Great Recession,” Shenfeld says, “We are now in the Great Disappointment,” and can expect a slower economic growth at about 3.6 percent in 2011 and 3.9 percent in 2012.

“Governments around the world released an unprecedented dose of fiscal stimulus during the recession … and it did work.” However, some of the smaller economies — Greece, Ireland, Spain and Portugal are in deep trouble and must cut back. The larger economies like the U.S., Canada and Germany “think we must restrain, too,” says Shenfeld. “We estimate that government retrenchment will take off about 1 percent for the coming year in OECD economies.” Put in perspective, the growth this year will be about 2.5 percent versus 3.5 percent in a good year.

To counter the prospects of default from the smaller economies, governments will cut government spending and raise taxes, resulting in slower growth.

The United States has the worst jobless rate since the Great Depression and even though emerging economies are growing more quickly their growth is still tied to the growth in major western economies. China, for example, isn’t expected to grow as quickly in 2011. It has inflation problems and is expected to grow at about 9 percent, versus the 12 percent year-over-year previously.

Canada’s, and more specifically south-western Ontario’s major trading partner is still the U.S. and most troubles lingering in the U.S. economy are simply a hangover from “the wakes” after the real estate sector collapsed there.

As millions of houses hit the market over the next couple of years, “that is not a great recipe for recovery of house prices,” Shenfeld warned. In addition to job losses, Shenfeld noted that many people have also lost wealth, in large part due to the staggering losses in the housing market.

Saving versus spending

People are caught in a dichotomy between saving for their future and spending to boost the economy. Consumer spending is expected to grow at the rate of inflation — about 2.5 percent. Another factor in the economy is that governments are going from stimulus spending to restraint.

Some good news for the U.S. economy, according to Shenfeld, is a manufacturing revival south of the border. Canadian manufacturing is still well below 2007, and much of the growth in the U.S. economy is coming from exports and capital spending. “A lot of exports are going to emerging markets (about one-third), which are a force to be reckoned with.” Their slice of the pie has grown significantly since 1992, and Shenfeld says Canada must join that “gravy train of emerging markets.”

He noted, too, that in this recession, Americans have been increasing their productivity and spending on R & D, but that Canada has not done likewise.

What does this mean for the Canadian outlook?

To begin with, Canadians must stop patting themselves on the back thinking our crisis has not been as great as that of the U.S. “We are certainly not immune to what happens in the rest of the world,” said Shenfeld. “When there is trouble in the U.S. we get hit. If the U.S. economy is not growing as quickly as it typically does, we will feel some of that.”

While the Canadian economy entered the New Year “roaring like a lion,” growth is expected to be at 2 percent after inflation and unemployment remains stagnant. The position of the Canadian dollar plays a role here. Parity with the U.S. dollar reflects how the country is performing. In 2008, Canada was exporting more than importing, while today, the strength of our currency is one of the problems, says Shenfeld. Canada is running a huge trade deficit with the rest of the world — “which is having a love affair with investing in the Canadian Bond Market.” This boosted the Canadian dollar to levels that have hurt our exporters; and manufacturing in Canada is not competitive.

However, Shenfeld believes manufacturing is recovering in Canada, although we are losing some market share to the U.S. Canadian debt is at an all time high, so the Bank of Canada will leave interest rates low for now. Housing prices may drop by as much as 10 percent in 2011. In the coming year there will be budget tightening, though the Federal government did just announce an extension of the stimulus spending until October 2011. While oil prices are following a strange path, Shenfeld says it is the financial investors who are driving oil prices, but that they should eventually settle down.

In Summary

  • Growth at roughly 2% in 2011 in US / Canada. Faster growth in 2012.
  • Europe slows to 1% on budget cuts, credit fears. China still at 9% growth in 2011. Emerging markets still lead.
  • Ontario again below national average in 2011.
  • Commodity prices a bit weaker ahead. Oil in $75-$80 range.
  • Bond inflows keep Cdn dollar in $1.01-1.07 C$/US$ range in 2010/11 despite trade gap (C$ worth 93-99 cents US).
  • US rates on hold through 2012; Bank of Canada hikes short-term rates gently in second-half of 2011. Longer rates drift higher. Cdn 10-year above 3.6% in late 2011.
  • Equity markets will be choppy, but total return beats bonds.