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The Canadian Economy:
Recession, Recovery and
Transformation
APEGGA
April 23, 2009
Glen Hodgson
Senior Vice-President & Chief Economist
[email protected]
www.conferenceboard.ca
Three Themes for Today
• The economic outlook in exceptional
times
• The financial crisis
• Transformation: what will the world look
like after recovery?
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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
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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
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U.S. Existing Home Sales and Prices
(millions SAAR; $’000)
8.0
7.5
230
Sales
avg. price
220
200
6.0
190
5.5
180
5.0
170
4.5
160
4.0
150
n0
'ja
ju
Se l
p
N
o
'ja v
n0
9
6.5
ju
l
se
p
no
6- v
Ja
n
m
a
m r
ay
ju
l
se
p
no
'J v
an
07
m
a
m r
ay
ju
l
se
p
no
'J v
an
08
m
a
m r
ay
210
4
m
a
m r
ay
ju
l
se
p
no
'ja v
n0
5
m
a
m r
ay
7.0
Source: National Assn. of Realtors.
www.conferenceboard.ca
U.S. Labour Market
(Change in U.S. Employment, 000s)
'J
an
07
Fe
b
M
ar
A
pr
M
ay
Ju
n
Ju
l
A
ug
Se
p
O
ct
N
ov
D
'J ec
an
08
Fe
b
M
ar
A
pr
M
ay
Ju
n
Ju
l
A
ug
Se
p
O
ct
N
ov
D
'J ec
an
09
Fe
b
200
100
0
-100
-200
-300
-400
-500
-600
-700
Source: Bureau of Economic Analysis.
www.conferenceboard.ca
U.S. Consumer Confidence – Lowest in History
(1985=100)
se
p
oc
no t
v
de
'ja c
n0
7
fe
b
m
ar
ap
m r
ay
ju
n
ju
au l
g
se
p
oc
no t
v
de
'ja c
n0
8
fe
b
m
ar
ap
m r
ay
ju
n
ju
au l
g
se
p
oc
no t
v
de
'ja c
n0
9
fe
b
m
ar
120
110
100
90
80
70
60
50
40
30
20
Source: The Conference Board Inc.
www.conferenceboard.ca
U.S. Real Consumer Spending Growth
(per cent change, annualized)
'06
1
'06
2
'06
3
'06
4
'07
1
'07
2
'07
3
'07
4
'08
1
'08
2
'08
3
'08
4
'09
1
'09
2
'09
3
'09
4
'10
1
'10
2
'10
3
'10
4
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
-7.0
-8.0
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Sources: BEA; CBoC
US Federal Deficit
(Unified, $billions)
500
300
100
-100
-300
-500
-700
-900
-1100
-1300
-1500
-1700
-1900
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: BEA; Moody’s Economy.com
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U.S. Real GDP
(per cent change)
5
4
3
2
1
0
-1
-2
-3
'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Sources: BEA; CBoC.
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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
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Raw Materials Price Index
(per cent change)
Sources: The Conference Board of Canada; Statistics Canada
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Real Exports
(per cent change, 2000–10)
8.0
4.0
0.0
-4.0
-8.0
-12.0
00
01
02
03
04
05
06
07
08
09
10
Sources: The Conference Board of Canada; Statistics Canada.
www.conferenceboard.ca
Interest Rates (90-Day T-Bill)
Quarterly 1999–11
8
7
6
U.S.
5
4
Canada
3
2
1
0
99
0
1
2
3
4
5
6
7
8
09f
10f
11f
Sources: The Conference Board of Canada; BEA; Statistics Canada.
www.conferenceboard.ca
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.
www.conferenceboard.ca
Index of Consumer Confidence, Canada
Jan 2003–Mar 09 (2002 =100)
105
100
95
90
85
80
75
70
65
Source: The Conference Board of Canada.
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Employment Growth
Canada, 2000–10
340,000 job losses
Sources: The Conference Board of Canada; Statistics Canada.
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Unemployment Rate vs. Natural Rate
(percent), 1981-2013
13
12
11
Unemployment Rate
10
9
8
7
6
Natural rate
5
1981 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Sources: The Conference Board of Canada; Statistics Canada.
www.conferenceboard.ca
Unemployment Rate vs. Natural Rate
(percent), 1981-2013
13
12
11
Unemployment Rate
10
9
8
7
6
Natural rate
5
1981 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Sources: The Conference Board of Canada; Statistics Canada.
www.conferenceboard.ca
Real Consumer Spending Growth
Canada 2001–10
5
4
3
2
1
0
2001 2002 2003 2004 2005 2006 2007
08f
09f
10f
Sources: The Conference Board of Canada; Statistics Canada.
www.conferenceboard.ca
Housing Starts vs. Demographic
Requirements Canada 2001–10 (000s)
Household formation
240
220
200
180
160
140
1
2
3
4
5
6
7
08f
09f
10f
Sources: The Conference Board of Canada; Canada Mortgage and Housing Corporation.
www.conferenceboard.ca
Pre–Tax Corporate Profits
(per cent share of net domestic income)
18 per cent in 2008Q3
Sources: The Conference Board of Canada; Statistics Canada.
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Real Business Investment Growth
(Canada 2001–10)
Sources: The Conference Board of Canada; Statistics Canada.
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Federal and Regional Balances
National Accounts Basis ($ billions)
20
10
0
-10
-20
Federal
Provinces
-30
-40
Sources: Statistics Canada; The Conference Board of Canada.
www.conferenceboard.ca
Real Government Spending on Goods
and Services Canada
(per cent change, 2000–10)
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
10
Sources: The Conference Board of Canada; Statistics Canada.
www.conferenceboard.ca
Real GDP Growth Rate
Canada 2001–09
Sources: The Conference Board of Canada; Statistics Canada.
www.conferenceboard.ca
Conclusions
•
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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The Financial Crisis: A Perfect Storm
Two underlying conditions:
1. Global savings – investment imbalances
–
–
Massive global savings available – Asia and oil
Supported by accommodative U.S. monetary policy
2. Unconstrained financial market innovation and
leveraging
–
–
–
Insufficient financial market regulation at all levels
New financial instruments (securitization, credit
swaps)
Global distribution networks
•
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Worst-Hit U.S. Housing Markets
(price declines Dec. 2008/Dec. 2006, %)
• Phoenix
• Las Vegas
• Miami
-44
-43
-41
• San Francisco
-39
• Sacramento
-36
• Los Angeles
-36
• Tampa Bay
-32
• Detroit
-32
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Global Action, Sept–Oct 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
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Credit Spreads Have Stabilized
(3-month Libor minus 3-month US T-bills)
4.80
4.40
4.00
3.60
3.20
2.80
2.40
2.00
1.60
1.20
0.80
0.40
0.00
'sep2 'sep17
'oct1
'oct16 'oct30 'nov13 'nov 28 'dec12 'dec30 'jan14
'jan29 'feb12 'feb26 'mar12
Source: Moody’s Economy Inc.
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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
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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
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Short-term Interest Rates
(per cent)
U.S.
Japan
UK
Euro Zone
2006
2007
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2002
2003
2004
2005
2008
2009
Source: Consensus Economics.
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Spread between High Yield Debt
and 10-Year Treasury Notes
2200
2000
1800
1600
1400
1200
1000
800
600
aug
sep
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oct
nov
dec
'jan09
feb
Inc.
Federal Reserve Balance Sheet
(total assets, $billions)
'ja
n0
9
de
c
no
v
oc
t
se
p
au
g
ju
l
ju
n
ay
m
ap
r
ar
m
fe
b
'ja
n0
8
2400
2200
2000
1800
1600
1400
1200
1000
800
600
Source: FRB.
www.conferenceboard.ca
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 “can’t pay” from “won’t pay” ?
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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
“can’t pay” from “won’t pay” ?
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The Fed’s 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
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And Room for Even More
•
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
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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
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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
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Direct Government Intervention (cont.)
• Canadian Secured Credit Facility—Fed govt.
will purchase up to $12 billion in assetbacked 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
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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)
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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
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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 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
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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.
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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
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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
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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 won’t pick up
all the slack —cultural reasons, need to save
due to lack of safety net
• Therefore, global economy to experience subpar medium-term growth (2.5% per year)
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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
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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
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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
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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
• www.conferenceboard.ca
Productivity gains would help sustain GDP
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
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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
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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 R&D etc
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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?
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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
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Conclusions
• We are about half-way through the current
financial mess and recession
• The Canadian recovery is not here yet – but it’s
on the horizon
• The world will not be the same as we emerge
into recovery
• So be ready to dance on your toes!
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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
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Population of Those Aged 65 and Over
(per cent; share of total population)
Sources: United Nations; Statistics Canada.
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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
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Population Distribution by Age, 2007
Sources: The Conference Board of Canada; Statistics Canada.
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Source Population Growth
(per cent change, compound annual growth)
Sources: The Conference Board of Canada; Statistics Canada.
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Population Distribution by Age,
2030
Sources: The Conference Board of Canada; Statistics Canada.
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Labor Force Participation Rate
(per cent, 1985-2030)
Sources: The Conference Board of Canada; Statistics Canada.
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Labour Force Growth
(per cent change, compound annual growth)
Sources: The Conference Board of Canada;
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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
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Machinery and Equipment Investment
Growth
(per cent change, compound annual growth)
Sources: The Conference Board of Canada; Statistics Canada.
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Private M&E Investment
(share of total GDP)
Sources: The Conference Board of Canada; Statistics Canada.
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Non-Farm Private Labour Productivity
(per cent change, compound annual growth)
Sources: The Conference Board of Canada; Statistics Canada.
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Real GDP Canada
(per cent change, compound annual growth)
Sources: The Conference Board of Canada; Statistics Canada.
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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
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Invest in Education and Skills
•
Canada’s education system gets an “A” in The Conference
Board’s 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
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Expenditures on Public Education as a Share of GDP
(per cent)
Source: OECD.
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Adult Literacy Proficiency—Proportion
with Low-Level Skills
(per cent)
Sources: The Conference Board of Canada; OECD.
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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
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Productivity: A Conceptual Policy Framework
Skills/Human
Capital
Innovation
Investment
National Operating Environment
including Infrastructure
North American Integration
International Trade & Investment
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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
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