OTTAWA — After three months of doom and gloom, events this week have raised hopes — faint ones — that Canada’s economy may not only avoid a recession but emerge stronger in the next year.
Economists use the somewhat odd term “upside risk” to describe the recent developments in Europe and the United States that lift prospects for the global and Canadian economies more than expected.
Markets saw much to cheer about in Europe’s latest attempt to resolve its gargantuan debt problems early Thursday.
They got more encouragement later in the morning with news that the U.S. economy had registered a relatively healthy 2.5 per cent boost in the third quarter, which ended Sept. 30.
Both the Toronto and New York exchanges soared — rising 279 points and 339 points respectively.
The Canadian dollar gained almost a cent a half to well past parity at 100.88 cents US as investor confidence in currencies other than the greenback grew.
Economists pointed out there was much to pick apart in the European announcement. It calls for, among several measures, using leverage to expand the C440-billion emergency bailout fund to C1 trillion, and convincing banks to take a voluntary 50 per cent scalp on Greek bonds.
“We don’t know how it is going to work, we don’t know if it is going to work, we don’t know if it will be enough,” said TD chief economist Craig Alexander.
But he added that it was encouraging that European leaders had hammered out a comprehensive solution to the problem that encompassed Greece, private sector banks and sovereign debt in other countries that use the euro currency.
“If Europe was capable of delivery on the announcements and they are effective, that event could create a very significant improvement in business and consumer confidence in North America,” he said.
Prime Minister Stephen Harper, who had been among the most critical of Europe’s dithering, said in Australia that “progress has genuinely been made.”
Economists pointed out there was always an outside chance in their forecasts, which they’ve been downgrading since August, that the risks pointing south would turn around.
Even the Bank of Canada’s gloomy monetary policy review on Thursday predicting snail’s pace growth in Canada and U.S. until 2013, and a recession in Europe, acknowledged the view may be overly pessimistic.
The advisory that things may turn out better if certain unlikely events happen came on the last page of the report.
“The three upside risks,” it said, is that growth in emerging economies will be better, Canadian households will keep borrowing and spending more than expected and lastly, “more decisive action in the major advanced economies ... (that) could lift confidence more rapidly than currently expected.”
Several economists originally reacted to the bank’s outlook as being overly dour, and as not giving enough credence to underlying strengths in the economy.
“I believe there is a very good case to be made that the bank’s forecast has a lot of bad news factored in, and the high side risks could actually be more dominant now — for a complete change of pace,” said economist Doug Porter of the Bank of Montreal.
Most specifically, say economists, Canadian companies are sitting on a pile of cash they can invest to expand their operations the moment the outlook brightens. The same can be said of U.S. firms, notes CIBC’s Peter Buchanan, who points out that the latest reports on U.S. corporate earnings this week beat market expectations 70 per cent of the time.
“If there’s been a strong card to the North American recovery, offsetting still fragile U.S. labour markets, it’s been corporate earnings,” he said.
Porter said the Bank of Canada’s outlook may have been a victim of poor timing, being put to bed before the good news broke.
Economists are not yet ready to start reversing their downward trending forecasts as yet, although they concede the prospects of a double-dip recession have receded.
They say they want more evidence that the crisis in confidence that was triggered by market turmoil, beginning in August, hasn’t convinced consumers and businesses to pull back.
And some, like Scotiabank’s Derek Holt, are still firmly in the bearish camp. He points out that the U.S. economic bounce comes off a weak second quarter.
The trouble both in the U.S. and Canada was always going to be the current fourth quarter and early part of 2012, he said, given that it takes businesses time to react to new risks. He says the Bank of Canada is correct in thinking the current quarter will brake to below one-per cent growth, and that the U.S. will approach recession territory.
Europe, he adds, is doubling down on its debt issues by using leverage — usually a form of borrowing — to expand the fund beyond what governments are willing to put in.
“You can’t use leverage to solve leverage, that’s just alchemy. They have to pray to all the powers that be that there is never another default coming out of the eurozone because if it does the whole leveraged pyramid would collapse.”
Holt said consumer confidence may be lifted in the short term, but down the road, household spending will continue to be constrained by weak labour markets and flat incomes.
“Stay tuned,” says Alexander.