How to Fix The Canadian Recession CFA Québec January 22, 2009 Glen Hodgson Senior Vice-President and Chief Economist hodgson@conferenceboard.ca
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
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
U.S. Existing Home Sales and Prices (millions SAAR; $ 000) 8.0 7.5 Sales avg. price 230 220 7.0 210 6.5 200 6.0 190 5.5 180 5.0 170 4.5 160 4.0 150 Source: National Assn. of Realtors.
5.00 4.60 4.20 3.80 3.40 3.00 2.60 2.20 1.80 1.40 1.00 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.
U.S. Labour Market (Change in U.S. Employment, 000s) 200 100 0-100 -200-300 -400-500 -600 'Jan07 Mar May Jul Sep Nov 'Jan08 Mar May Jul Sep Nov Source: Bureau of Economic Analysis.
120 110 100 90 80 70 60 50 40 30 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.
U.S. Real Consumer Spending Growth (per cent change, annualized) 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0-5.0-6.0 '061 '062 '063 '064 '071 '072 '073 '074 '081 '082 '083 '084 '091 '092 '093 '094 '101 Sources: BEA; CBoC
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
Obama Package (cont.) $153b for making improvements to education and healthcare Tax cuts of $500 per individual worker and $1000 per family and expansion of earnedincome tax credit to include families with 3 children Tax cuts for businesses including bonus depreciation for firms investing in new plant and equipment Increas
200 100-100 0-200 -300-400 -500-600 -700-800 -900-1000 -1100 US Federal Deficit ($billions) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sources: BEA; CBoC
5 U.S. Real GDP (per cent change) 4 3 2 1 0-1 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 Sources: BEA; CBoC.
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
20 15 10 5 0-5 -10-15 -20-25 Raw Materials Price Index (per cent change) 01 02 03 04 05 06 07 08e 09f Sources: The Conference Board of Canada; Statistics Canada
Adding up Real GDP Percentage point contribution to growth 6.00 5.00 4.00 3.00 2.00 1.00 0.00-1.00-2.00-3.00-4.00 Domestic economy Export Import 2004 2005 2006 2007 2008f 2009f Sources: The Conference Board of Canada; Statistics Canada.
Interest Rates (90-Day T-Bill) Quarterly 1999 09 8 7 6 5 4 3 2 1 0 U.S. Canada 99 0 1 2 3 4 5 6 7 8 09f 10f Sources: The Conference Board of Canada; BEA; Statistics Canada.
The Loonie and the Oil Price WTI $US, $US/$C 1.05 140 1.00 0.95 Dollar (left) Oil Price (right) 120 0.90 100 0.85 0.80 0.75 80 60 0.70 40 0.65 0.60 20 0.55 0 99 00 01 02 03 04 05 06 07 08 09 10 Sources: The Conference Board of Canada; U.S. Energy Information Administration; Statistics Canada.
Exchange Rate 2000 10 U.S. cents per Canadian dollar 104 100 96 92 88 84 80 76 72 68 64 60 Sources: The Conference Board of Canada; Statistics Canada.
Consumer Price Inflation Canada 2000 09 3.0 2.5 2.0 1.5 1.0 0.5 0.0 00 01 02 03 04 05 06 07 08 09 Sources: The Conference Board of Canada; Statistics Canada.
Employment Growth Canada, 2000 09 2.8 2.4 2.0 1.6 1.2 0.8 0.4 0.0-0.4-0.8 380,000 in 2007 00 01 02 03 04 05 06 07 08 09 Sources: The Conference Board of Canada; Statistics Canada.
Index of Consumer Confidence, Canada Jan 03 Dec 08 (2002 =100) 105 100 95 90 85 80 75 70 65 Source: The Conference Board of Canada.
Index of Consumer Confidence, Quebec Jan 03 Dec 08 (2002 =100) 110 105 100 95 90 85 80 75 70 65 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.
Real Consumer Spending Growth Canada 2001 09 5 4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 08f 09f Sources: The Conference Board of Canada; Statistics Canada.
Composition of Real Business Investment Growth (2007 09) 8 6 4 2 0-2 -4-6 Machinery & Equipment 2007 2008 2009 Non-Res'd Construction Total Business Investment Sources: The Conference Board of Canada; Statistics Canada.
Housing Starts vs. Demographic Requirements Canada 2001 09 (000s) 240 Household formation 220 200 180 160 140 1 2 3 4 5 6 7 08f 09f Sources: The Conference Board of Canada; Canada Mortgage and Housing Corporation.
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
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, 2009 10 The big question: active fiscal stimulus, and how much?
Federal and Provincial Gov t Balances (Public Accounts Basis, fiscal year ending, $billions) 35 30 25 20 15 10 5 0-5 -10-15 -20 Provinces Federal 99 0 1 2 3 4 5 6 7 08f 09f 10f Sources: The Conference Board of Canada; Statistics Canada; various government budgets.
Federal Debt Financing Costs: Percentage of GDP (annual, 1964 2009) 7 6 5 4 3 2 1 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 Sources: The Conference Board of Canada; Statistics Canada.
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
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
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
Real Government Spending on Goods and Services Canada (per cent change, 2000 09) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 00 01 02 03 04 05 06 07 08 09 Sources: The Conference Board of Canada; Statistics Canada.
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 Real GDP Growth Rate Canada 2001 09 01 02 03 04 05 06 07 08f 09f 10f Sources: The Conference Board of Canada; Statistics Canada.
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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