OTTAWA — A strong economic rebound after a painful year of recession is laying a trap for policy-makers that could derail a smooth, sustainable recovery over the next few years, economists are warning.
With leaders of the G20 meeting on the economy later this week, several economists are issuing a caution not to believe all the strong indicators pointing to a robust V-shaped rebound that would quickly erase the losses of the past year.
Scotiabank economists say Canada’s economy is behaving like a trampoline.
With retail sales data on Tuesday expecting to show a strong gain in July, the bank’s economists say it is possible for economic growth to have advanced about one per cent during the month, constituting the best one-month gain in five years.
The economists have now joined Merrill Lynch’s Sheryl King who is forecasting the economy to grow as much as 3.5 per cent in the third quarter that ends Sept. 30. That’s a remarkable turn-around for an economy that shrank 3.4 per cent in the second quarter and 6.1 per cent in the first.
“This is a flash in the pan and not sustainable into next year, but I don’t know that markets will see it that way,” cautioned Derek Holt, vice-president of economics at Scotia Capital.
“The danger is that policy-makers believe the recovery is going V-shaped and back off the gas pedal. I hope they can resist the market, political and rating-agency pressure around the world and keep the foot on policy stimulus, but it’s an open debate.”
Douglas Porter, deputy chief economist at BMO Capital Markets, adds that what appears to be a quick rebound is stalling momentum for financial market reforms, including executive compensation rules and tighter oversight.
Prime Minister Stephen Harper gave every indication that he does not believe the time has yet come to apply fiscal or monetary brakes on the economy.
He told reporters Monday that while the recession may be ”technically over,” a true recovery will come only when labour markets recover.
“I think the recovery, while it exists, is extremely fragile and does require the concentration of governments at all levels and in the G20 to ensure that the recovery,” Harper said.
And in a speech in Gatineau, Que., Finance Minister Jim Flaherty said while he expects Canadian growth to top the G7 next year, he also does not believe it is time for exiting from stimulus yet. He pointed out that January’s budget set in motion a two-year stimulus plan and he intended to “stay the course.”
The signs that the rebound is stronger than even many optimists could have predicted as recently as two months ago continue, however.
On Monday, the U.S. Conference Board issued it’s forecast of leading indicators projecting economic activity three-to-six months ahead. The thank-tank’s forecast rose 0.6 per cent in August, following an upwardly revised 0.9 per cent gain in July.
In Canada, a new Nanos Economic Monitor survey found confidence in the economy has risen sharply to a level not seen since the fall of 2007, before the recession hit. The tracking finds 45 per cent of Canadians believe the economy will strengthen in the next six months, two and a half times more than think it will weaken. As well. 66 per cent said their personal job situation was secure.
The BMO Capital Markets commodity price index also advanced 6.1 per cent in August, a strong signal for Canada’s resource sector.
“Whether you are looking at Canada’s, the U.S. or even the OECD’s leading indicators, they are all pointing to a straight-on V-shaped recovery,” Porter said.
“I’m quite convinced we are in recovery, but even two months (of growth) doesn’t quite seal the deal.”