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The Canadian Economy:

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Interest Rates (90-Day T-Bill) Quarterly 1999 11. U.S.. Exchange Rate 2000 10 ... Sources: United Nations; Statistics Canada. Population Growth is Waning ... – PowerPoint PPT presentation

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Title: The Canadian Economy:


1

The Canadian Economy Recession, Recovery and
Transformation
APEGGA April 23, 2009 Glen Hodgson Senior
Vice-President Chief Economist hodgson_at_conferenc
eboard.ca
2
Three Themes for Today
  • The economic outlook in exceptional times
  • The financial crisis
  • Transformation what will the world look like
    after recovery?

3
Global Economic Highlights
  • 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

4
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(1985100)
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 Moodys Economy.com
10
U.S. Real GDP(per cent change)
Sources BEA CBoC.
11
Canadian Outlook
  • 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

12
Raw Materials Price Index (per cent change)
Sources The Conference Board of Canada
Statistics Canada
13
Real Exports (per cent change, 200010)
Sources The Conference Board of Canada
Statistics Canada.
14
Interest Rates (90-Day T-Bill) Quarterly 199911
U.S.
Canada
Sources The Conference Board of Canada BEA
Statistics Canada.
15
Exchange Rate 200010U.S. cents per Canadian
dollar
Sources The Conference Board of Canada
Statistics Canada.
16
Index of Consumer Confidence, CanadaJan 2003Mar
09 (2002 100)
Source The Conference Board of Canada.
17
Employment Growth Canada, 200010
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 200110
Sources The Conference Board of Canada
Statistics Canada.
21
Housing Starts vs. Demographic Requirements
Canada 200110 (000s)
Household formation
Sources The Conference Board of Canada Canada
Mortgage and Housing Corporation.
22
PreTax 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 200110)
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, 200010)
Sources The Conference Board of Canada
Statistics Canada.
26
Real GDP Growth Rate Canada 200109
Sources The Conference Board of Canada
Statistics Canada.
27
Conclusions
  • Some signs that key U.S. markets are nearing
    bottoma 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

28
The Financial Crisis A Perfect Storm
  • 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

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

30
Global Action, SeptOct 2008
  • 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

31
Credit Spreads Have Stabilized(3-month Libor
minus 3-month US T-bills)
Source Moodys Economy Inc.
32
So Where Are We, Six Months On?
  • 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

33
Aggressive Global Monetary Policy
  • 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

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
Renewed U.S. Action The Geithner Plan
  • 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 cant pay from wont pay ?

38
Equity or Nationalization?
  • 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 cant pay from wont pay ?

39
The Feds Latest Bold Moves
  • 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

40
And Room for Even More
  • Obama budget for 0910 includes another 250
    billion on-budget for re-starting credit
  • Price tag so far 10 trillion and rising
  • And the bottom is not yet reachedmore to come
    through 09

41
Action in Europe
  • 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

42
Canadian Action
  • 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

43
Direct Government Intervention (cont.)
  • Canadian Secured Credit FacilityFed 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

44
Canadian Access to Credit
  • 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)

45
Mortgages and Other Credit Markets
  • 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

46
U.S Financial Crisis Our Assessment
  • 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 bankswhile 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

47
Global Financial Crisis Our Assessment
  • 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.

48
Transformation Where Are We Going Next?
  • 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

49
Big Global Drivers
  • 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

50
The World Economy Slower Growth Potential
  • Americans to save more and spend less
  • World economy needs a new growth driver since
    American consumer retrenching
  • But consumers in Asia-Pacific wont 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)

51
Fiscal Policy, Give and Take
  • Short-term fiscal stimulus is critical to
    recovery and will boost output in 2010 and 2011
  • But fiscal stimulus will be withdrawn as
    governments grapple with deficits and debt burden
  • Fiscal consolidation means slower MT growth

52
What About Globalization?
  • Globalization process similar to period around
    World War I
  • Increased trade protection, despite promises from
    politicians
  • Fewer bilateral trade deals
  • Tension Need for investment, but pressure for
    controls on FDI due to fears of sovereign wealth
    funds

53
Aging Among the G-7
  • Most G-7 countries are aging rapidly and facing
    much slower economic growth
  • Japan, Italy and Germany at ZPG
  • Despite higher birth rates and immigration, U.S.
    growth potential will ease to 2.5 per cent in
    2020
  • U.S. still has advantage of more flexible
    economy, younger and growing population
  • But twin deficits are a major medium-term risk

54
Canada to 2030
  • Aging population will drive changes in the
    economy
  • Supply constraints on labour already here
  • Immigrants will be the sole source of population
    growth by 2030
  • Potential output weakens through 2030
  • Capital spending the strongest source of growth
  • Productivity gains would help sustain GDP

55
Energy
  • Renewed upward pressure on oil and gas prices as
    global demand returns and supply gets tighter
  • Greening of energy production is here to stay
  • Race to find alternative energy sources will mean
    strong diversification within the industry
  • Industry rationalization on the rise again as
    well as expanded role for emerging market players

56
Resource Processing
  • Products that new markets demand, rather than
    trying to convince them to buy what we make
  • High value-added niches, not commodities --
    compete on quality, design and service
  • E.g. derive more value from forest resources by
    making energy substitutes rather than pulp and
    lumber
  • Transitioning workforces and regional economies
    to new and/or growing products and services

57
Life Sciences
  • Demographic pressures mean shift from disease
    treatment to maintenance and prevention
  • Long-term and chronic care will increasingly take
    precedence over acute care
  • Diseases in developing countries will grow in
    importance
  • Emerging markets will demand access to drugs at
    low prices via forced licensing or even ignoring
    patent protections
  • Growing financing requirements for RD etc

58
Automotive
  • Fewer players -- Detroit 3 becomes the Detroit 2
    or even Detroit 1, and Japan will go off-shore
  • Changed product offerings -- fewer light trucks,
    more fuel efficient vehicles, decline of internal
    combustion engine
  • New selling model -- fewer dealerships, leasing
    changes, on-demand supply
  • Lower cost structure wages, pressure on
    suppliers
  • Designers and marketers, or builders?

59
Aerospace
  • Higher energy costs drive demand for ever more
    fuel efficient airframes and engines
  • Materials science produces lighter weight
    materials and innovations in vehicle design
  • Military seeking more off-the-shelf components
    and solutions rather than design from scratch
  • New air travel demand from middle class in
    developing markets
  • New infrastructure for air travel -- air traffic
    control, regional airports, noise, GHGs

60
Conclusions
  • We are about half-way through the current
    financial mess and recession
  • The Canadian recovery is not here yet but its
    on the horizon
  • The world will not be the same as we emerge into
    recovery
  • So be ready to dance on your toes!

61
Highlights Canada to 2030
  • Aging population will drive changes in the
    economy
  • Supply constraints on labour already here
  • Immigrants will be the sole source of population
    growth by 2030
  • Potential output weakens through 2030
  • Capital spending the strongest source of growth
  • Productivity gains would help sustain GDP

62
Population of Those Aged 65 and Over(per cent
share of total population)
Sources United Nations Statistics Canada.
63
Population Growth is Waning
  • Aging boomers and weak fertility rates will
    reduce number of births
  • Deaths will increase as the numbers entering
    older cohorts continues to grow
  • Natural rate of increase will slow dramatically
    over the forecast horizon

64
Population Distribution by Age, 2007
Sources The Conference Board of Canada
Statistics Canada.
65
Source Population Growth(per cent change,
compound annual growth)
Sources The Conference Board of Canada
Statistics Canada.
66
Population Distribution by Age, 2030
Sources The Conference Board of Canada
Statistics Canada.
67
Labor Force Participation Rate (per cent,
1985-2030)
Sources The Conference Board of Canada
Statistics Canada.
68
Labour Force Growth(per cent change, compound
annual growth)
Sources The Conference Board of Canada
69
Changing Composition of Production
  • Much weaker growth in the labour force, and in
    employment, means that organizations will have to
    change their capital-labour ratio
  • They will need to replace labour with capital
    (i.e. technology) to keep operating
  • This will put strong upward pressure on wages,
    and require workers with deeper skills who can
    adapt quickly

70
Machinery and Equipment Investment Growth(per
cent change, compound annual growth)
Sources The Conference Board of Canada
Statistics Canada.
71
Private ME Investment (share of total GDP)
Sources The Conference Board of Canada
Statistics Canada.
72
Non-Farm Private Labour Productivity(per cent
change, compound annual growth)
Sources The Conference Board of Canada
Statistics Canada.
73
Real GDP Canada (per cent change, compound
annual growth)
Sources The Conference Board of Canada
Statistics Canada.
74
Replenishing the Workforce
  • There are essentially three inter-related options
    for adapting to aging demographics
  • Invest in education increase the skills of the
    workforce
  • Raise levels of immigration, and speed up
    integration
  • Encourage older workers to work longer

75
Invest in Education and Skills
  • Canadas education system gets an A in The
    Conference Boards report card on Canada, How
    Canada Performs
  • But this high overall grade masks low basic
    skills and literacy for over 7 million Canadians
  • We also under-perform at the high end investing
    in educational excellence
  • And education funding is being crowded out by
    public health care spending

76
Expenditures on Public Education as a Share of
GDP(per cent)
Source OECD.
77
Adult Literacy ProficiencyProportion with
Low-Level Skills (per cent)
Sources The Conference Board of Canada OECD.
78
Invest in Education and Skills Priorities
  • Make education funding a higher priority
  • Improve education levels and skills
  • Increase innovation in our education system
  • Expand international experience and language
    skills
  • Address the skilled trades gaps
  • Enhance aboriginal and immigrant education
  • Embrace lifelong learning
  • Address basic literacy and numeracy skills

79
Productivity A Conceptual Policy Framework
North American Integration
International Trade Investment
80
Conclusion
  • Future domestic labour supply will be more scarce
  • Investment in education and skills is critical
  • Immigrants build workforce capacity
  • Attracting and keeping older workers is a
    critical source of talent

81
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