The Current State of the Economy

1
The Current State of the Economy

• Lars Osberg
• Economics Department
• Dalhousie University
• FLMM
• Fredericton
• October 21 2008

2
Slowing Economy Financial Crisis Recession

• Long run labour market trends are always trumped
  by immediate realities
• September 2008
• Unprecedented volatility previously
  unimaginable policy response
• most dangerous shock in mature financial markets
  since the 1930s IMF World Economic Outlook
  October 2008
• Superimposed on pre-existing down trend
• Context shock implies likely future trend

3
January 2008 viewOptimism decline accelerates

• U.S. economy has slowed noticeably
• IMF World Economic Outlook, April 2007
• a midcycle pause ?
• early stages of a more protracted downturn?
• Early outlooks - 2007
• Canada Growth GDP 07 08
• IMF 2.5 2.8
• OECD 2.5 3.0
• Revised downward every quarter since

4
January 2008 not yet clearPassing Breeze or
Gathering Storm?

• housing starts and the change in housing starts
  together form the best forward-looking indicator
  of the cycle
• Leamer (NBER Working Paper No. 13428 - 2007)
• Housing construction booms borrow output from
  future periods current overhang of 750,000
  units!!
• Residential construction large US job growth
  to 2005
• Housing prices declining since 2005 - 18 in
  07/08?
• Asset Price bubbles take long time to unwind
  (Japan)
• Housing wealth underpinned US consumer spending
  boom
• Sub-Prime Mortgage debacle
• the official line Contained in implications for
  financial markets

5
Domestic Demand pulled Canada in 2007 GDI gt GDP
6
By January 2008 little did we know! general
expectation was

• US fiscal monetary policy set to MAX
• 1 fiscal stimulus by March?
• - 0.75 in interest rates promise of more
• Canadian policy-makers more complacent
• ISSUE
• 600 in tax credits vs 1.3M foreclosures?
• pushing on a string where are the willing
  lenders borrowers _at_ lower interest rates?

7
Real output declining in USA well before crisis
8
Expectations of the pre-crisis era -April
2008

• After years of strong economic performance
  underpinned by sound monetary and fiscal
  policies, Canadas growth is expected to slow
  this year as the downdraft from the U.S. Economy
  outweighs solid domestic demand supported by
  strong commodity prices.
• IMF Regional Economic Outlook April 2008

9
IMF World Economic Outlook October 2008

• The world economy is now entering a major
  downturn in the face of the most dangerous shock
  in mature financial markets since the 1930s.
  Against an exceptionally uncertain background,
  global growth projections for 2009 have been
  marked down to 3 percent, the slowest pace since
  2002, and the outlook is subject to considerable
  downside risks. The major advanced economies are
  already in or close to recession, and, although a
  recovery is projected to take hold progressively
  in 2009, the pickup is likely to be unusually
  gradual, held back by continued financial market
  deleveraging.

10
Housing cycle far from over consumer confidence
down

• Not yet bottom in USA

• Consumer gloom pre-crisis

• Ipsos-Reid RBC

11
Future Trends?Y C I G (X-M)

• C Credit crisis Consumption
• Expectations credit availability wealth
  effect
• I Commodity house prices down
• investment boom driven by resource/energy prices
• G automatic stabilizers now much weaker than in
  recessions of early 80s and 90s
• Deficit dogma as in 1930s !!
• (X-M) already down US income slump
• Decline in exchange rate a lagged partial
  offset

12
Good News Whatever it takes the new Central
Bank mantra

• Large temporary shocks have real impacts
• Not just a liquidity/confidence crisis
• Chains of real insolvencies still need resolution
• Disappearing Wealth depresses consumption
• Repricing Risk Deleveraging has real effects
• AND can one push on a string?
• Even if bank reserves become available, willing
  borrowers willing lenders needed at micro level

13
Bad News Deficit Dogma lives safety net
shredded in 1990s

• Cyclical risk in Canada partly downloaded to
  provinces families during 1990s
• Under 40 of unemployed now get EI
• SA no longer cost-shared
• Provinces ill-equipped to absorb (Origins of
  Rowell-Sirois)
• Less Automatic stabilization for cycle
• Expenditure cuts to match declining revenues will
  be counter-productive

14
Recessions do end but when?

• A Housing cycle 2006 start 4 year average gt
  return to trend growth 2010
• Short shallow assumes financial contagion is
  now contained oil/commodity prices stay down
  global imbalances resolve cleanly natural
  revert
• B Japan scenario
• Long messy Monetary policy ineffectiveness
  if low inflation little fiscal room for US
  stimulus
• Let the Chinese eat their T Bills how long
  can the USA resist the temptations of inflation ?

15
Implications for Labour Market Ministers ?

• Labour shortages yesterdays news
• Local shortfalls for specific skills but for
  next few years NOT a persuasive general theme or
  policy frame
• (Un)Employment Insurance
• Benefit Duration Coverage back on agenda
• Links to training SA systems need
  re-examination
• Older Workers work incentives
• End Mandatory Retirement Increased LF part of
  55
• Integration into workplaces OAS/GIS/CPP/QPP
• Immigrant assimilation when jobs are scarce?