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The Current State of the Economy


'most dangerous shock in mature financial markets since the 1930s' ... Canadian policy-makers more complacent. ISSUE: $600 in tax credits vs 1.3M foreclosures? ... – PowerPoint PPT presentation

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Title: The Current State of the Economy

The Current State of the Economy
  • Lars Osberg
  • Economics Department
  • Dalhousie University
  • FLMM
  • Fredericton
  • October 21 2008

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

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

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
  • Residential construction large US job growth
    to 2005
  • Housing prices declining since 2005 - 18 in
  • Asset Price bubbles take long time to unwind
  • Housing wealth underpinned US consumer spending
  • Sub-Prime Mortgage debacle
  • the official line Contained in implications for
    financial markets

Domestic Demand pulled Canada in 2007 GDI gt GDP
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
  • 600 in tax credits vs 1.3M foreclosures?
  • pushing on a string where are the willing
    lenders borrowers _at_ lower interest rates?

Real output declining in USA well before crisis
Expectations of the pre-crisis era -April
  • 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

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

Housing cycle far from over consumer confidence
  • Not yet bottom in USA
  • Consumer gloom pre-crisis
  • Ipsos-Reid RBC

Future Trends?Y C I G (X-M)
  • C Credit crisis Consumption
  • Expectations credit availability wealth
  • 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

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

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
  • Less Automatic stabilization for cycle
  • Expenditure cuts to match declining revenues will
    be counter-productive

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
  • B Japan scenario
  • Long messy Monetary policy ineffectiveness
    if low inflation little fiscal room for US
  • Let the Chinese eat their T Bills how long
    can the USA resist the temptations of inflation ?

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
  • Older Workers work incentives
  • End Mandatory Retirement Increased LF part of
  • Integration into workplaces OAS/GIS/CPP/QPP
  • Immigrant assimilation when jobs are scarce?
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