How to Fix The Canadian Recession CFA Qubec January 22, 2009 Glen - - PowerPoint PPT Presentation

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How to Fix The Canadian Recession CFA Qubec January 22, 2009 Glen - - PowerPoint PPT Presentation

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How to Fix The Canadian Recession CFA Qubec January 22, 2009 Glen Hodgson Senior Vice-President and Chief Economist hodgson@conferenceboard.ca www.conferenceboard.ca Global Economic Highlights The world economy expanded by 2.4 per cent

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SLIDE 1

How to Fix The Canadian Recession

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CFA Québec January 22, 2009 Glen Hodgson Senior Vice-President and Chief Economist hodgson@conferenceboard.ca

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SLIDE 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

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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

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SLIDE 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

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  • 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

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SLIDE 4

U.S. Existing Home Sales and Prices

(millions SAAR; $’000)

190 200 210 220 230

6.0 6.5 7.0 7.5 8.0

Sales

  • avg. price

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  • 150

160 170 180

4.0 4.5 5.0 5.5

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SLIDE 5

Credit Spreads Narrowing

(diff. between rates on 3-month Libor and 3-month T-bills)

2.60 3.00 3.40 3.80 4.20 4.60 5.00

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  • 1.00

1.40 1.80 2.20 2.60

'sep2 'sep8 'sep12 'sep18 'sep24 'sep30 'oct6 'oct10 'oct 17 'oct23 'oct29 'nov4 'nov10 'nov14 'nov20 'nov26 'dec 3 'dec9 'dec15 'dec19 'dec29

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SLIDE 6
  • 200
  • 100

100 200

U.S. Labour Market

(Change in U.S. Employment, 000s)

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  • 600
  • 500
  • 400
  • 300
  • 200

' J a n 7 M a r M a y J u l S e p N

  • v

' J a n 8 M a r M a y J u l S e p N

  • v
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SLIDE 7

U.S. Consumer Confidence

(1985=100)

70 80 90 100 110 120

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  • 30

40 50 60 70

sep

  • ct

nov dec 'jan07 feb mar apr may jun jul aug sep

  • ct

nov dec 'jan08 feb mar apr may jun jul aug sep

  • ct

nov dec

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SLIDE 8

U.S. Real Consumer Spending Growth

(per cent change, annualized)

  • 1.0

0.0 1.0 2.0 3.0 4.0 5.0

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  • 6.0
  • 5.0
  • 4.0
  • 3.0
  • 2.0
  • 1.0

' 6 1 ' 6 2 ' 6 3 ' 6 4 ' 7 1 ' 7 2 ' 7 3 ' 7 4 ' 8 1 ' 8 2 ' 8 3 ' 8 4 ' 9 1 ' 9 2 ' 9 3 ' 9 4 ' 1 1

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SLIDE 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”

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“smart electricity grid”

  • $92b for infrastructure including transportation

and water projects and repairs to government buildings

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SLIDE 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 earned- income tax credit to include families with 3

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children

  • Tax cuts for businesses including bonus

depreciation for firms investing in new plant and equipment

  • Increas

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SLIDE 11

US Federal Deficit

($billions)

  • 500
  • 400
  • 300
  • 200
  • 100

100 200

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  • 1100
  • 1000
  • 900
  • 800
  • 700
  • 600
  • 500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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SLIDE 12

2 3 4 5

U.S. Real GDP

(per cent change)

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  • 1

1 2 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

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SLIDE 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

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  • 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

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SLIDE 14
  • 5

5 10 15 20

Raw Materials Price Index

(per cent change)

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  • 25
  • 20
  • 15
  • 10
  • 5

01 02 03 04 05 06 07 08e 09f

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SLIDE 15

Adding up Real GDP

Percentage point contribution to growth

1.00 2.00 3.00 4.00 5.00 6.00

Domestic economy Export Import

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  • 4.00
  • 3.00
  • 2.00
  • 1.00

0.00 1.00 2004 2005 2006 2007 2008f 2009f

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SLIDE 16

Interest Rates (90-Day T-Bill)

Quarterly 1999–09

U.S.

4 5 6 7 8

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  • Canada

1 2 3 4 99 1 2 3 4 5 6 7 8 09f 10f

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SLIDE 17

80 100 120 140 0.80 0.85 0.90 0.95 1.00 1.05

Dollar (left) Oil Price (right)

The Loonie and the Oil Price

WTI $US, $US/$C

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20 40 60 0.55 0.60 0.65 0.70 0.75 0.80 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.

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SLIDE 18

80 84 88 92 96 100 104

Exchange Rate 2000–10

U.S. cents per Canadian dollar

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60 64 68 72 76 80

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SLIDE 19

Consumer Price Inflation

Canada 2000–09

1.5 2.0 2.5 3.0 www.conferenceboard.ca

  • 0.0

0.5 1.0 1.5 00 01 02 03 04 05 06 07 08 09

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SLIDE 20

Employment Growth

Canada, 2000–09

0.8 1.2 1.6 2.0 2.4 2.8

380,000 in 2007

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  • 0.8
  • 0.4

0.0 0.4 0.8 00 01 02 03 04 05 06 07 08 09

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SLIDE 21

Index of Consumer Confidence, Canada

Jan 03–Dec 08 (2002 =100)

85 90 95 100 105

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65 70 75 80

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SLIDE 22

85 90 95 100 105 110

Index of Consumer Confidence, Quebec

Jan 03–Dec 08 (2002 =100)

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65 70 75 80 85

J a n ' 3 a p r j u l

  • c

t J a n ' 4 a p r j u l

  • c

t J a n ' 5 a p r j u l

  • c

t J a n ' 6 a p r j u l

  • c

t J a n ' 7 a p r j u l

  • c

t J a n ' 8 a p r j u l

  • c

t

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SLIDE 23

Real Consumer Spending Growth Canada 2001–09

3 4 5

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  • 1

2

2001 2002 2003 2004 2005 2006 2007 08f 09f

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SLIDE 24

Composition of Real Business Investment Growth (2007–09)

2 4 6 8

2007 2008 2009

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  • 6
  • 4
  • 2

Machinery & Equipment Non-Res'd Construction Total Business Investment

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SLIDE 25

Housing Starts vs. Demographic Requirements Canada 2001–09 (000s)

200 220 240

Household formation

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  • 140

160 180 1 2 3 4 5 6 7 08f 09f

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SLIDE 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

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  • Time lags before monetary policy becomes

fully effective

  • Risk of liquidity trap – no demand for credit at

any price

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SLIDE 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

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revenues and automatic stabilizers

  • Passive deficit could be up to $10 billion, 2009–10
  • The big question: active fiscal stimulus, and how

much?

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SLIDE 28

5 10 15 20 25 30 35

Provinces Federal

Federal and Provincial Gov’t Balances

(Public Accounts Basis, fiscal year ending, $billions)

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! "!

  • 20
  • 15
  • 10
  • 5

5

99 1 2 3 4 5 6 7 08f 09f 10f

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SLIDE 29

4 5 6 7

Federal Debt Financing Costs:

Percentage of GDP (annual, 1964–2009)

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1 2 3 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

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SLIDE 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

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changes

  • Move back into fiscal balance as soon as

economy recovers

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SLIDE 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

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  • 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

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SLIDE 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

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  • 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

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SLIDE 33

Real Government Spending on Goods and Services Canada

(per cent change, 2000–09)

2.0 2.5 3.0 3.5 4.0

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  • 0.0

0.5 1.0 1.5 00 01 02 03 04 05 06 07 08 09

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SLIDE 34

Real GDP Growth Rate

Canada 2001–09

1.5 2.0 2.5 3.0 3.5 4.0

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  • 1.0
  • 0.5

0.0 0.5 1.0 1.5 01 02 03 04 05 06 07 08f 09f 10f

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SLIDE 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

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  • 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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SLIDE 36

Visit us at

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Visit us at

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