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Hang on, the bumpy ride isn’t over

There may not be another U.S. recession this year or next — TD Economics puts the possibility at 40 per cent — but we do know that growth and job creation will be feeble.

There may not be another U.S. recession this year or next — TD Economics puts the possibility at 40 per cent — but we do know that growth and job creation will be feeble.

It may be, as well, that returns from savings will be weak, which is bad news for retirees and Canadians depending on building their nest eggs for future retirement.

This may help explain why Canadians have become more pessimistic about the economy.

The Index of Consumer Confidence in August dropped for the fourth consecutive month. The Conference Board of Canada, which produces the index, explained that Canadians were worried about the prospects for jobs.

Consumer pessimism has a negative impact on the economy because just over half of respondents to the confidence index said this was a bad time to make a major purchase, the lowest response since April, 2009.

Canadians, of course, are influenced by bad news emanating from the U.S. and Europe, where politicians and policymakers are failing to come to grips with the big challenges they face and, in the process, creating great uncertainty in financial and other markets. Leaders in the U.S. and Europe give the impression they have run out of ideas while, at the same time, their traditional anti-recession weapons are much weaker.

Perhaps the rich countries of the West are facing a new age of austerity, a function not only of high levels of public and household debt but also the pressure from the new economic powers on wages and investment. Volkswagen recently opened a major production plant in Tennessee but the workers will be paid only half the rate of unionized auto workers — it’s that or put the factory in Mexico.

HIS Global Insight has lowered its economic growth forecast for this year to just 1.6 per cent in the U.S., and 1.7 per cent in the Eurozone and, for next year, to 1.9 per cent in the U.S. and 1.0 per cent in the Eurozone.

Early this year forecasters had expected the U.S. economy to expand at more than 3 per cent in 2011. The U.S. Congressional Budget Office, in its most recent analysis, forecasts that the U.S. economy won`t be operating at potential until 2017, with unemployment remaining above 8 per cent until 2014.

In its analysis, TD Economics argues that the vulnerability of Canadian households has risen, not only because unemployment remains more than a full percentage point higher than in its pre-recession trough but also because household debt as a share of household income is “considerably higher” than it was in 2007 — it has risen from 133 per cent of disposal income to 147 per cent.

The pressure on households will be to lower debt levels, especially if interest rates rise and take a bigger bite out of family budgets. This is the advice that the Bank of Canada keeps voicing - Canadians should lower their debts.

Many Canadians may be counting on rising house values as a buffer but TD Economics estimates houses are currently overvalued by 10-15 per cent.

While Canadian businesses are in better shape today because they have reduced debt and have stronger financial reserves — something in the order of $350 billion — they are vulnerable if the U.S. economy stagnates, as it is doing right now, and the Canadian exchange rate rises, making our exports less competitive.

Given our high dependence on the U.S. for exports, a slow-growth U.S. outlook is unwelcome news for the pace of Canada’s recovery. The Congressional Budget Office forecasts the U.S. dollar will continue to decline over the decade.

The Conference Board of Canada and the Business Development Bank, in a series of industry forecasts, project that it will be 2014 before the wood products industry gets back to 2007 output and employment levels, that even by 2015 the paper products industry, the printing industry and the furniture industry will each have less output and fewer jobs than in 2007, and that while the auto parts industry will return to 2007 levels of output by 2015 it will have fewer jobs.

Essentially, the world faces a great restructuring. As HSBC economist Stephen King has warned, “any plausible resolution to the current financial crisis must involve burden-sharing on a scale not seen since the 1930s. Unemployment, defaults, inflation, currency crises, stock market collapses, austerity: all these are consistent with the new, lower, level of economic activity and are not unique to any one country or part of the world.”

David Crane can be reached at crane@interlog.com.