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Title: How to Fix


1
How to Fix The Canadian Recession

CFA Québec January 22, 2009 Glen Hodgson Senior
Vice-President and Chief Economist hodgson_at_confere
nceboard.ca
2
Global Economic Highlights
  • The world economy expanded by 2.4 per cent in
    2008 and growth will slow down to a miniscule 0.4
    per cent in 2009, absent policy intervention
  • The U.S. financial crisis and recession has
    rippled around the world
  • Sustained but slower growth in emerging markets,
    led by China and India, will help blunt the
    impact of a U.S. slowdown

3
U.S. Outlook
  • U.S. economy is in recession
  • Continued sharp decline in home prices
  • Consumer spending falls for 5 quarters
  • Good news is difficult to findsome key sectors
    will eventually hit bottom decline in energy
    prices helping
  • Forecast incorporates our guess of a possible
    Obama stimulus package

4
U.S. Existing Home Sales and Prices (millions
SAAR 000)
Source National Assn. of Realtors.
5
Credit Spreads Narrowing (diff. between rates on
3-month Libor and 3-month T-bills)
Source Moodys Economy Inc.
6
U.S. Labour Market(Change in U.S. Employment,
000s)
Source Bureau of Economic Analysis.
7
U.S. Consumer Confidence(1985100)
Source The Conference Board Inc.
8
U.S. Real Consumer Spending Growth(per cent
change, annualized)
Sources BEA CBoC
9
Obama Stimulus Package
  • 825b over two years - 550b on spending and
    275b for tax cuts
  • 58b for energy initiatives including renewable
    energy tax cuts and funding for smart
    electricity grid
  • 92b for infrastructure including transportation
    and water projects and repairs to government
    buildings

10
Obama Package (cont.)
  • 153b for making improvements to education and
    healthcare
  • Tax cuts of 500 per individual worker and 1000
    per family and expansion of earned-income tax
    credit to include families with 3 children
  • Tax cuts for businesses including bonus
    depreciation for firms investing in new plant and
    equipment
  • Increas

11
US Federal Deficit(billions)
Sources BEA CBoC
12
U.S. Real GDP(per cent change)
Sources BEA CBoC.
13
Canadian Outlook
  • Canadas economy falls victim to a global
    recession and sharp drop in commodity prices,
    real GDP is forecast to contract by 0.5 per cent
    in 2009
  • Fiscal stimulus packages in Canada and the United
    States do not suffice to keep respective
    economies out of recession
  • The trade sector will take a huge chunk out of
    growth this year auto sector will be
    particularly hard hit
  • Employment will decline this year, as the
    unemployment rate peaks at just over 8 per cent
    at the end of 2009
  • A recovery is in store for 2010, with GDP
    rebounding with growth of 3.6

14
Raw Materials Price Index (per cent change)
Sources The Conference Board of Canada
Statistics Canada
15
Adding up Real GDP Percentage point contribution
to growth
Sources The Conference Board of Canada
Statistics Canada.
16
Interest Rates (90-Day T-Bill) Quarterly 199909
U.S.
Canada
Sources The Conference Board of Canada BEA
Statistics Canada.
17
The Loonie and the Oil PriceWTI US, US/C
Sources The Conference Board of Canada U.S.
Energy Information Administration Statistics
Canada.
18
Exchange Rate 200010U.S. cents per Canadian
dollar
Sources The Conference Board of Canada
Statistics Canada.
19
Consumer Price InflationCanada 200009
Sources The Conference Board of Canada
Statistics Canada.
20
Employment Growth Canada, 200009
380,000 in 2007
Sources The Conference Board of Canada
Statistics Canada.
21
Index of Consumer Confidence, CanadaJan 03Dec
08 (2002 100)
  • Source The Conference Board of Canada.

22
Index of Consumer Confidence, QuebecJan 03Dec
08 (2002 100)
Source The Conference Board of Canada.
23
Real Consumer Spending Growth Canada 200109
Sources The Conference Board of Canada
Statistics Canada.
24
Composition of Real Business Investment Growth
(200709)
Sources The Conference Board of Canada
Statistics Canada.
25
Housing Starts vs. Demographic Requirements
Canada 200109 (000s)
Household formation
Sources The Conference Board of Canada Canada
Mortgage and Housing Corporation.
26
Limits of Monetary Policy
  • Rate cuts not being passed on fully by banks as
    they repair their own balance sheets
  • Much tighter credit conditions globally
  • Time lags before monetary policy becomes fully
    effective
  • Risk of liquidity trap no demand for credit at
    any price

27
Canadian Fiscal Context Today
  • Surpluses and paying down debt have given us the
    room to provide stimulus
  • Accept passive fiscal deficits caused by slowing
    revenues and automatic stabilizers
  • Passive deficit could be up to 10 billion,
    200910
  • The big question active fiscal stimulus, and how
    much?

28
Federal and Provincial Govt Balances (Public
Accounts Basis, fiscal year ending, billions)
Sources The Conference Board of Canada
Statistics Canada various government budgets.
29
Federal Debt Financing Costs Percentage of GDP
(annual, 19642009)
Sources The Conference Board of Canada
Statistics Canada.
30
Principles for Active Fiscal Stimulus
  • Inject stimulus of at least 1 per cent of GDP in
    2009 around 13 billion
  • Temporary stimulus measures, not structural
    changes
  • Move back into fiscal balance as soon as economy
    recovers

31
Specific Fiscal Action Proposed
  • Infrastructure
  • Projects already through the approval process,
    and public capital expenditures (like rail cars)
  • Quick spendingnext 6-12 months
  • Boost spending on labour market programs
  • Improve access to and duration of employment
    insurance for Ontario, B.C., Alberta
  • Programs for older displaced workers
  • Wage insurance and subsidies for low-skilled
    workers

32
Specific Fiscal Action (cont.)
  • Support for sectors in need
  • US action on autos made intervention inevitable,
    to protect Canadian trade advantage
  • Conditions will be key credible medium-term
    business plan for firms, up-side for taxpayers
  • Short-term income tax rebate an option, but
  • Not directed to sectors or workers most in need
  • Significant leakage into imports and savings
  • Therefore, target low-income tax payers via
    working income tax benefit and child tax benefit

33
Real Government Spending on Goods and Services
Canada (per cent change, 200009)
Sources The Conference Board of Canada
Statistics Canada.
34
Real GDP Growth Rate Canada 200109
Sources The Conference Board of Canada
Statistics Canada.
35
Conclusion
  • Some signs that key U.S. markets are nearing
    bottoma modest recovery in residential
    construction and auto sales is forecast for the
    second half of 2009
  • Strengthening raw material prices in 2010 will
    provide a boost to domestic economy
  • Recession will lift unemployment rate but labour
    markets will remain tight across many occupations
  • Path back to balanced budget will be slow for the
    federal government while provincial governments
    are in a more difficult bind.

36
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