How to Fix The Canadian Recession

Transcription

1 How to Fix The Canadian Recession CFA Québec January 22, 2009 Glen Hodgson Senior Vice-President and Chief Economist

2 Global Economic Highlights The world economy expanded by 2.4 per cent in 2008 and growth will slow down to a miniscule 0.4 per cent in 2009, absent policy intervention The U.S. financial crisis and recession has rippled around the world Sustained but slower growth in emerging markets, led by China and India, will help blunt the impact of a U.S. slowdown

3 U.S. Outlook U.S. economy is in recession Continued sharp decline in home prices Consumer spending falls for 5 quarters Good news is difficult to find some key sectors will eventually hit bottom; decline in energy prices helping Forecast incorporates our guess of a possible Obama stimulus package

4 U.S. Existing Home Sales and Prices (millions SAAR; $ 000) Sales avg. price Source: National Assn. of Realtors.

5 Credit Spreads Narrowing (diff. between rates on 3-month Libor and 3-month T-bills) 'sep2 'sep8 'sep12 'sep18 'sep24 'sep30 'oct6 'oct10 'oct 17 'oct23 'oct29 'nov4 'nov10 'nov14 'nov20 'nov26 'dec 3 'dec9 'dec15 'dec19 'dec29 Source: Moody s Economy Inc.

6 U.S. Labour Market (Change in U.S. Employment, 000s) 'Jan07 Mar May Jul Sep Nov 'Jan08 Mar May Jul Sep Nov Source: Bureau of Economic Analysis.

7 U.S. Consumer Confidence (1985=100) sep oct nov dec 'jan07 febmar apr may junjul aug sepoct nov dec 'jan08 febmar apr may junjul aug sepoct nov dec Source: The Conference Board Inc.

8 U.S. Real Consumer Spending Growth (per cent change, annualized) '061 '062 '063 '064 '071 '072 '073 '074 '081 '082 '083 '084 '091 '092 '093 '094 '101 Sources: BEA; CBoC

9 Obama Stimulus Package $825b over two years - $550b on spending and $275b for tax cuts $58b for energy initiatives including renewable energy tax cuts and funding for smart electricity grid $92b for infrastructure including transportation and water projects and repairs to government buildings

10 Obama Package (cont.) $153b for making improvements to education and healthcare Tax cuts of $500 per individual worker and $1000 per family and expansion of earnedincome tax credit to include families with 3 children Tax cuts for businesses including bonus depreciation for firms investing in new plant and equipment Increas

11 US Federal Deficit ($billions) Sources: BEA; CBoC

12 5 U.S. Real GDP (per cent change) '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 Sources: BEA; CBoC.

13 Canadian Outlook Canada s economy falls victim to a global recession and sharp drop in commodity prices, real GDP is forecast to contract by 0.5 per cent in 2009 Fiscal stimulus packages in Canada and the United States do not suffice to keep respective economies out of recession The trade sector will take a huge chunk out of growth this year; auto sector will be particularly hard hit Employment will decline this year, as the unemployment rate peaks at just over 8 per cent at the end of 2009 A recovery is in store for 2010, with GDP rebounding with growth of 3.6

14 Raw Materials Price Index (per cent change) e 09f Sources: The Conference Board of Canada; Statistics Canada

15 Adding up Real GDP Percentage point contribution to growth Domestic economy Export Import f 2009f Sources: The Conference Board of Canada; Statistics Canada.

16 Interest Rates (90-Day T-Bill) Quarterly U.S. Canada f 10f Sources: The Conference Board of Canada; BEA; Statistics Canada.

17 The Loonie and the Oil Price WTI $US, $US/$C Dollar (left) Oil Price (right) Sources: The Conference Board of Canada; U.S. Energy Information Administration; Statistics Canada.

18 Exchange Rate U.S. cents per Canadian dollar Sources: The Conference Board of Canada; Statistics Canada.

19 Consumer Price Inflation Canada Sources: The Conference Board of Canada; Statistics Canada.

20 Employment Growth Canada, ,000 in Sources: The Conference Board of Canada; Statistics Canada.

21 Index of Consumer Confidence, Canada Jan 03 Dec 08 (2002 =100) Source: The Conference Board of Canada.

22 Index of Consumer Confidence, Quebec Jan 03 Dec 08 (2002 =100) Jan'03 apr jul oct Jan'04 apr jul oct Jan'05 apr jul oct Jan'06 apr jul oct Jan'07 apr jul oct Jan'08 apr jul oct Source: The Conference Board of Canada.

23 Real Consumer Spending Growth Canada f 09f Sources: The Conference Board of Canada; Statistics Canada.

24 Composition of Real Business Investment Growth ( ) Machinery & Equipment Non-Res'd Construction Total Business Investment Sources: The Conference Board of Canada; Statistics Canada.

25 Housing Starts vs. Demographic Requirements Canada (000s) 240 Household formation f 09f Sources: The Conference Board of Canada; Canada Mortgage and Housing Corporation.

26 Limits of Monetary Policy Rate cuts not being passed on fully by banks as they repair their own balance sheets Much tighter credit conditions globally Time lags before monetary policy becomes fully effective Risk of liquidity trap no demand for credit at any price

27 Canadian Fiscal Context Today Surpluses and paying down debt have given us the room to provide stimulus Accept passive fiscal deficits caused by slowing revenues and automatic stabilizers Passive deficit could be up to $10 billion, The big question: active fiscal stimulus, and how much?

28 Federal and Provincial Gov t Balances (Public Accounts Basis, fiscal year ending, $billions) Provinces Federal f 09f 10f Sources: The Conference Board of Canada; Statistics Canada; various government budgets.

29 Federal Debt Financing Costs: Percentage of GDP (annual, ) Sources: The Conference Board of Canada; Statistics Canada.

30 Principles for Active Fiscal Stimulus Inject stimulus of at least 1 per cent of GDP in 2009 around $13 billion Temporary stimulus measures, not structural changes Move back into fiscal balance as soon as economy recovers

31 Specific Fiscal Action Proposed Infrastructure Projects already through the approval process, and public capital expenditures (like rail cars) Quick spending next 6-12 months Boost spending on labour market programs Improve access to and duration of employment insurance for Ontario, B.C., Alberta Programs for older displaced workers Wage insurance and subsidies for low-skilled workers

32 Specific Fiscal Action (cont.) Support for sectors in need US action on autos made intervention inevitable, to protect Canadian trade advantage Conditions will be key credible medium-term business plan for firms, up-side for taxpayers Short-term income tax rebate an option, but: Not directed to sectors or workers most in need Significant leakage into imports and savings Therefore, target low-income tax payers via working income tax benefit and child tax benefit

33 Real Government Spending on Goods and Services Canada (per cent change, ) Sources: The Conference Board of Canada; Statistics Canada.

34 Real GDP Growth Rate Canada f 09f 10f Sources: The Conference Board of Canada; Statistics Canada.

35 Conclusion Some signs that key U.S. markets are nearing bottom a modest recovery in residential construction and auto sales is forecast for the second half of 2009 Strengthening raw material prices in 2010 will provide a boost to domestic economy Recession will lift unemployment rate but labour markets will remain tight across many occupations Path back to balanced budget will be slow for the federal government while provincial governments are in a more difficult bind.

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