Economy shows surprisingly strong signs of rebound

OTTAWA — The economy is showing unmistakable signs of having recovered from a year-long recession, economists said Wednesday, citing a string of surprisingly strong growth indicators across a wide spectrum of activity.

OTTAWA — The economy is showing unmistakable signs of having recovered from a year-long recession, economists said Wednesday, citing a string of surprisingly strong growth indicators across a wide spectrum of activity.

The biggest surprise came with the release of July factory shipments, the Achilles heel of the Canadian economy, showing a robust one-month 5.5-per-cent pop in manufacturing sales, more than double the consensus forecast.

And the Conference Board of Canada reported new online jobs postings also rose in August, signalling that the employment slide — a critical piece of the puzzle on a sustainable recovery — was at least close to bottom.

The new figures follow Tuesday’s shocking 2.7 per cent increase in U.S. consumer spending that augers more good news for Canadian exports of autos and other manufactured goods.

There were additional signals this week that home sales remain strong and auto sales continue to recover.

“This is very good news,” said economist Sal Guatieri of BMO Capital Markets.

“The global economy is on an upswing. We are seeing a faster than expected recovery, not just in Canada but in the U.S. as well.”

The Bank of Canada also said last week that the recovery was happening faster and stronger than they expected even two months ago.

In a new forecast, Royal Bank economists said in retrospect the just-past recession looks like the “shallowest and shortest” of the past three dating back to the early 1980s, and that the rebound will average 2.2 per cent in the second half of 2009.

Although close to half a million full-time jobs have vanished, that is about half the carnage that has occurred in the U.S.

The recent numbers, although still early and incomplete, point to the much-desired V-shaped recovery, so-called because the rebound is as steep as the slide.

But economists caution that is unlikely to happen. They note the quick rebound is partly a reflection of such temporary factors as the U.S. cash-for-clunkers program, very low interest rates, temporary government stimulus and the fact numbers reflect a low starting base.

Most expect the pace of growth going forward will be modest and that some sectors of the economy, such as the pivotal labour market, may not recover until well into 2010.

The 30-nation Organization for Economic Co-operation and Development (OECD) issued the most grim outlook for Canadian jobs, predicting that the unemployment rate would hit 10 per cent next year before it starts to rebound, although that is gloomier than the Royal Bank’s 9.2 per cent estimate for mid-2010.

Employment is usually among the last aspects of an economy to recover because firms typically resort to other strategies, such as hiking their employees hours or introducing productivity gains before taking the decision to start rehiring.

Still, Royal Bank assistant chief economist Paul Ferley said the danger of a more U-shaped recovery, or even a double-dip W-type return to recession are fading.

”Our view is that this recovery has legs, but some of these initial numbers may be exaggerated,“ he explained.”

”People who are concerned about a double-dip are expecting once the support from fiscal policy subsides, there won’t be anything else that will kick in. Our view is … improving tone of financial markets will continue and that will kick and help sustain this recovery.“”

Ferley said there is now a general consensus that government stimulus, and the interventions of central banks such as the Bank of Canada and the U.S. Federal Reserve have been successful in averting a much more severe crisis, even a possible global depression.

The OECD estimated that Ottawa’s stimulus in the January budget likely kept employment from dropping further by 0.7 to 1.1 per cent of the work force — or between 118,000 and 185,000 jobs — next year. In the budget, Ottawa predicted 190,000 jobs would be saved or created over two years.

In response to a question in the House, Finance Minister Jim Flaherty said “job maintenance figures are even better” than projected so far, although he gave no specifics.

Economists say the quandary for policy makers now is when to start withdrawing the public sector boost.

Economics professor Nouriel Roubini of the Stern School of Business in New York, one of the first to warn “the party” was ending in February 2007, is now calling for an orderly exit strategy, while cautioning that getting it wrong risks a second economic dip if stimulus is removed too soon, or stagflation — high inflation and low growth — if it the brake is applied too late.

Ferley agrees. “The actions you saw last fall (were) very aggressive. That’s what was thought to be what was missing in 1930,” he said. “The question is what do you do now.”

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