How to prepare for another slowdown

There has been considerable boasting, especially from our own Harper government, on how well, compared to other countries, the Canadian economy has fared during the great global meltdown of 2008-09.

There has been considerable boasting, especially from our own Harper government, on how well, compared to other countries, the Canadian economy has fared during the great global meltdown of 2008-09.

Yet while it is true, for example, that Canada’s jobless rate rose less than in the U.S., GDP performance in the two countries has been the same for the past two years, according to estimates from the global research group at HSBC, one of the world’s top banks.

Now, HSBC forecasts stronger growth in the U.S. than in Canada for this year and 2011. And in what is a disappointing outlook for the next several years, there is a consensus among the leading Canadian bank economists that Canada faces a lengthy period of slow growth and weak job creation for some years to come. The Great Recession may be over but the climb out will be slow. We face sub-par growth heading into the second decade of the 21st century.

For its part, HSBC sees the Canadian unemployment rate rising this year to an average of nine per cent, compared to 8.3 per cent in 2009. Moreover, even in 2011 it is forecasting an unemployment rate of 8.7 per cent.

In other words, “the Canadian economy, although having emerged from the recession in the third quarter of 2009, has by and large disappointed expectations.”

One of our big challenges is to rein in the growing rise of consumer debt, something that Bank of Canada governor Mark Carney has issued strong warnings about.

As HSBC warns,” while American consumers appear to be taking advantage of the shelter provided by low (interest) rates to restore their balance sheets to a healthier position, in Canada low rates are supporting the continued consumer binge on credit.”

Consumer debt in Canada is already high, with the debt/disposable income ratio hitting a record 142 per cent, versus 134 per cent a year ago. “This cheap cost of consumer credit is driving consumer leverage to worryingly high levels,” warns HSBC.

Other factors affecting the Canadian outlook include slow growth in the U.S., especially in autos and housing, which will stifle growth in Canada, and the risks of an even stronger Canadian dollar not driven by productivity gains in Canada but by higher oil and other commodity prices.

Several prominent American economists at the recent annual meeting of the American Economic Association warned that the U.S. over the coming decade is likely to see the slowest economic growth since the decade of the 1930s.

Likewise, Michael Mussa, former director of economic research at the International Monetary Fund, has warned that the high U.S. unemployment rate may take some time to come down. “There are a lot of people who have lost jobs — where those jobs are not going to come back — and they’re going to need to find alternative employment, retool their skills, and so forth,’ he says. People may also have to move to find work, so moving high unemployment levels down “takes time — there’s no doubt about it.”

Two industries in trouble have implications for Canada. One is autos where U.S. sales have declined from about 16.5 million units a year down to about 9 million units at an annual rate during 2009. By the end of 2010, sales could be back up to 12.5 million but it will be some time before sales return to 16 million, Mussa warns.

U.S. housing construction, a big user of Canadian lumber, is also weak. Housing starts had been running at about 2.2 million units a year, but in the spring of 2009 were running at about 500,000 units at an annual rate. Mussa predicts construction could be running at about one million units a year at the end of 2010, well below the annual average of earlier years.

As if this were not bad enough, Stephen King, who heads global research at HSBC, warns that “the idea that we are on the brink of a return to decent growth, a pick-up in inflation to more ‘normal’ rates and a very modest tightening of policy is too good to be true. There are surprises ahead. Not all of them will be pleasant.”

This means two things. First, we should not rush to end economic stimulus and balance the budget by slashing spending. It also means government should be ready, if need be, to provide additional stimulus if growth flags and unemployment gets stuck at a high level.

David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com

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