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The Canadian Economy: Recession, Recovery and Transformation

The Canadian Economy: Recession, Recovery and Transformation. APEGGA April 23, 2009 Glen Hodgson Senior Vice-President & Chief Economist hodgson@conferenceboard.ca. The economic outlook in exceptional times The financial crisis

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The Canadian Economy: Recession, Recovery and Transformation

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  1. The Canadian Economy: Recession, Recovery and Transformation APEGGA April 23, 2009 Glen Hodgson Senior Vice-President & Chief Economist hodgson@conferenceboard.ca

  2. The economic outlook in exceptional times The financial crisis Transformation: what will the world look like after recovery? www.conferenceboard.ca Three Themes for Today

  3. The world economy will contract by 1 per cent in 2009, even with 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, is barely blunting the impact of a U.S. slowdown www.conferenceboard.ca Global Economic Highlights

  4. www.conferenceboard.ca U.S. Outlook • U.S. economy is in deep recession • Consumer spending to fall for 5 quarters as confidence collapses • Heavy government intervention to address the financial crisis and provide stimulus • Some faint glimmers of good news beginning to emerge

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

  6. U.S. Labour Market(Change in U.S. Employment, 000s) Source: Bureau of Economic Analysis.

  7. U.S. Consumer Confidence – Lowest in History(1985=100) Source: The Conference Board Inc.

  8. U.S. Real Consumer Spending Growth(per cent change, annualized) Sources: BEA; CBoC

  9. US Federal Deficit(Unified, $billions) Sources: BEA; Moody’s Economy.com

  10. U.S. Real GDP(per cent change) Sources: BEA; CBoC.

  11. Canada dragged down by global recession and sharp drop in commodity prices Fiscal stimulus packages in Canada and the United States will eventually pull us out of recession Employment will decline throughout 2009 and the unemployment rate will peak at just below 9.5 per cent in mid 2010 A recovery is in store for 2010, with real GDP growth rebounding to 2.5 per cent Canadian Outlook

  12. Raw Materials Price Index (per cent change) Sources: The Conference Board of Canada; Statistics Canada

  13. Real Exports (per cent change, 2000–10) Sources: The Conference Board of Canada; Statistics Canada.

  14. Interest Rates (90-Day T-Bill) Quarterly 1999–11 U.S. Canada Sources: The Conference Board of Canada; BEA; Statistics Canada.

  15. Exchange Rate 2000–10U.S. cents per Canadian dollar Sources: The Conference Board of Canada; Statistics Canada.

  16. Index of Consumer Confidence, CanadaJan 2003–Mar 09 (2002 =100) Source: The Conference Board of Canada.

  17. Employment GrowthCanada, 2000–10 340,000 job losses Sources: The Conference Board of Canada; Statistics Canada.

  18. Unemployment Rate vs. Natural Rate (percent), 1981-2013 Unemployment Rate Natural rate Sources: The Conference Board of Canada; Statistics Canada.

  19. Unemployment Rate vs. Natural Rate (percent), 1981-2013 Unemployment Rate Natural rate Sources: The Conference Board of Canada; Statistics Canada.

  20. Real Consumer Spending Growth Canada 2001–10 Sources: The Conference Board of Canada; Statistics Canada.

  21. Housing Starts vs. Demographic Requirements Canada 2001–10 (000s) Household formation Sources: The Conference Board of Canada; Canada Mortgage and Housing Corporation.

  22. Pre–Tax Corporate Profits(per cent share of net domestic income) 18 per cent in 2008Q3 Sources: The Conference Board of Canada; Statistics Canada.

  23. Real Business Investment Growth (Canada 2001–10) Sources: The Conference Board of Canada; Statistics Canada.

  24. Federal and Regional BalancesNational Accounts Basis ($ billions) Sources: Statistics Canada; The Conference Board of Canada.

  25. Real Government Spending on Goods and Services Canada (per cent change, 2000–10) Sources: The Conference Board of Canada; Statistics Canada.

  26. Real GDP Growth Rate Canada 2001–09 Sources: The Conference Board of Canada; Statistics Canada.

  27. 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 Conclusions

  28. Two underlying conditions: Global savings – investment imbalances Massive global savings available – Asia and oil Supported by accommodative U.S. monetary policy Unconstrained financial market innovation and leveraging Insufficient financial market regulation at all levels New financial instruments (securitization, credit swaps) Global distribution networks www.conferenceboard.ca The Financial Crisis: A Perfect Storm

  29. Phoenix -44 Las Vegas -43 Miami -41 San Francisco -39 Sacramento -36 Los Angeles -36 Tampa Bay -32 Detroit -32 www.conferenceboard.ca www.conferenceboard.ca Worst-Hit U.S. Housing Markets (price declines Dec. 2008/Dec. 2006, %)

  30. U.S. government intervention to save two investment banks – but not Lehman Brothers Nationalization of key U.S. institutions (Fannie and Freddie, AIG) $700 B funding obtained from Congress, of which $250 B in government equity invested in banks Coordinated intervention by EU governments – equity injections, guarantee inter-bank credit lines www.conferenceboard.ca Global Action, Sept–Oct 2008

  31. Credit Spreads Have Stabilized(3-month Libor minus 3-month US T-bills) Source: Moody’s Economy Inc.

  32. Financial markets not back to normal anywhere Central banks forced to slash rates and even introduce quantitative easing to kick-start their economies Governments are purchasing and guaranteeing loan assets to inject liquidity and free up bank capital www.conferenceboard.ca So Where Are We, Six Months On?

  33. Central banks around the world have taken aggressive action U.S. and Japan; rates almost at zero Bank of England has cut short rates to lowest level ever – since 1694! Many have introduced quantitative easing (QE) -- money creation via bond purchases ECB is finally cutting rates on the continent www.conferenceboard.ca Aggressive Global Monetary Policy

  34. Short-term Interest Rates (per cent) Source: Consensus Economics.

  35. Spread between High Yield Debt and 10-Year Treasury Notes Inc.

  36. Federal Reserve Balance Sheet(total assets, $billions) Source: FRB.

  37. Create a $1 trillion public-private market for illiquid mortgage-backed securities, rather than a “bad bank” Stress testing of banks to ensure they can withstand a prolonger recession U.S. Treasury to supplement credit program with up to $1 trillion in new government credit $175 billion mortgage refinancing plan: $100 billion more to backstop Freddie and Fannie Individual incentives to refinance mortgages – how to separate “can’t pay” from “won’t pay” ? www.conferenceboard.ca Renewed U.S. Action: The Geithner Plan

  38. Saving the financial system: more equity and guarantees, or nationalization? Government ownership of Citigroup to rise to 36 per cent of common stock But government is very reluctant to fully nationalize key institutions – even AIG Major banks begin shift to black – W-F, B of A, Citi $175 billion mortgage refinancing plan: $100 billion more to help Freddie and Fannie Incentives to refinance mortgages – how to separate “can’t pay” from “won’t pay” ? www.conferenceboard.ca Equity or Nationalization?

  39. March 18, the Fed threw everything it has at the financial crisis: QE: $300 billion to purchase long-maturity Treasuries, driving down long rates by 50 bps Doubling, to $1.45 trillion, the securities purchased from Fannie Mae and Freddie Mac $1 trillion to buy private securities and rebuild credit markets www.conferenceboard.ca The Fed’s Latest Bold Moves

  40. Obama budget for 09–10 includes another $250 billion on-budget for re-starting credit Price tag so far: $10 trillion and rising And the bottom is not yet reached—more to come through ‘09 www.conferenceboard.ca And Room for Even More

  41. U.K. government prepared to use taxpayer money to ensure that banks survive prolonged recession Iceland was forced to nationalize its major banks last year following collapse German banks hold $1 trillion euros in risky assets and have only written down 25 per cent More trouble on horizon, since banks in Western Europe hold 90 per cent of East European debt www.conferenceboard.ca Action in Europe

  42. Canada doing much better than other countries, but we too are feeling the pain Federal government offer to purchase up to $125 billion in CMHC-insured mortgages from banks ABCP market freeze has been resolved –after a year $350 million capital to BDC and EDC, with increased leverage www.conferenceboard.ca Canadian Action

  43. Canadian Secured Credit Facility—Fed govt. will purchase up to $12 billion in asset-backed securities Assurance Facilities: Fed govt. ready to insure borrowing by banks and insurers to reduce any competitive disadvantage Bank of Canada accepting much riskier collateral www.conferenceboard.ca Direct Government Intervention (cont.)

  44. Total bank lending to business up by 11.5 per cent in Jan ‘09 over previous year But commercial paper market still shrinking Risk spreads up by about 2 per cent Banks rebuilding balance sheets and loss provisions Canadian banking system still profitable; Q4 2008 bank profits down but positive Non-banks and foreign banks retreating from Cdn. market, Cdn. banks buying key assets (e.g. car loans) www.conferenceboard.ca Canadian Access to Credit

  45. Annual mortgage lending up 10.7 per cent (Dec 2008) Last 2 decreases in bank rate matched by decreases in mortgage rates freeing up purchasing power and improving affordability But senior loan officers continue to report tightening in lending conditions Consumer credit remains under pressure www.conferenceboard.ca Mortgages and Other Credit Markets

  46. U.S. government will stabilize the financial system —regardless the huge cost Outright nationalization a last resort, to be avoided if at all possible This means continuing equity and guarantee support for key banks—while others will fail Fed has jumped in with both feet Mortgage refinancing plan will help to form a bottom for the housing market But subject to further adjustment and cash injections www.conferenceboard.ca U.S Financial Crisis: Our Assessment

  47. Governments at different stages of response U.K. government seems ready to ensure its banks will survive prolonged recession Some other governments still in earlier stages of reacting – e.g. Germany The big scare: Eastern European debt Canadian financial system looks remarkably well-positioned , although it will take all of 2009 to rebuild more normal credit. www.conferenceboard.ca Global Financial Crisis: Our Assessment

  48. Recessions are usually a catalyst for transformation So what will be different when the economy recovers? We expect macro forces to be at work as well as structural changes within industries www.conferenceboard.ca Transformation: Where Are We Going Next?

  49. Shifting economic tectonic plates: the rise of China, India and other emerging nations Global value chains and “integrative trade” Energy and climate change Aging labour force in the industrialized world www.conferenceboard.ca www.conferenceboard.ca Big Global Drivers

  50. Americans to save more and spend less World economy needs a new growth driver since American consumer retrenching But consumers in Asia-Pacific won’t pick up all the slack —cultural reasons, need to save due to lack of safety net Therefore, global economy to experience sub-par medium-term growth (2.5% per year) www.conferenceboard.ca www.conferenceboard.ca The World Economy: Slower Growth Potential

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