Last week brought another massive plunge on world stock markets, followed by yet another government bailout of a troubled bank—this time a US$300-billion lifeline from the U.S. Federal Reserve to Citigroup. The S&P/TSX Composite index has now dropped by 44 per cent since June, wiping out more than four years of market gains, and marking the sharpest decline for Canadian stocks on record. Millions are wondering and worrying about job security, the value of their homes and what’s happening to their dreams of retirement.
With North Americans now embarking on the biggest shopping season of the year, the economy is at a critical point, and Maclean’s assembled five of Canada’s brightest financial minds to answer some of the most pressing questions in the air:
• Patricia Croft, chief economist at RBC Global Asset Management
• Don Drummond, chief economist with TD Bank Financial Group
• David Rosenberg, chief North American economist at Merrill Lynch
• Avery Shenfeld, managing director and senior economist with CIBC World Markets
• George Vasic, equity strategist and chief economist at UBS Securities Canada.
Due to scheduling conflicts, Maclean’s interviewed each participant separately. This is an edited transcript of their comments.
Maclean’s: How would you describe what has happened on the stock markets over the past three months?
Vasic: Other than to say it’s been traumatic? I’d say, we’ve certainly seen a historic plunge in markets on the back of a potential financial system collapse that was inconceivable in the minds of virtually all investors.
Croft: It’s been absolutely incredible. This is the worst bear market in stocks since the Great Depression. In some ways it feels like a vortex. You get swept up in it every day.
Drummond: We’ve gone from a period in which the general expectation is that the U.S. economy, despite increasing signs of trouble, was going to go on growing rapidly forever, to a feeling now that it’s just falling endlessly and has not reached a bottom.
Shenfeld: [The markets have] seen the typical selling you’d expect to see in a recession, coupled with a broader wave of forced selling by fund managers who’ve seen redemptions or have had to pay back loans. This sell-off has been much larger than what one would have expected from an ordinary recession and even worse than what we’ve seen in past financial crises.
M: We heard Stephen Harper sound a pretty grim tone at the APEC meetings over the weekend. What should we take from his comments?
Vasic: He’s preparing us for the fact that the surplus is going to turn into a deficit. Canada has more fiscal firepower at its disposal than you’d see in the U.S. or Europe or anywhere. The real question is whether we want to deploy it or not. If I were Mr. Harper I wouldn’t be very aggressive on using it. The history of all these fiscal initiatives [like massive increases in government spending] is that a) they come too late, and b) they’re hard to get off once the economy recovers. That’s how our fiscal problems got started in years past.
Croft: I think it’s very refreshing that Harper has finally used the R-word [recession]. That’s usually verboten for a politician or a central banker. But it’s all about managing expectations. There is no magic bullet for Canada. We are unfortunately going to suffer much the same fate as every other major economy around the world. We have a very stable financial system, which will hold us in good stead, but we are a very open economy and a very small economy. Our major trade partner is in a very deep recession, and I don’t think we’ve even really begun to feel the impact of that decline.
M: How bad is this likely to get for the Canadian economy?
Drummond: I would have expected a more profound impact than we’ve seen so far. One of the first places you’d expect it to slow as soon as we began seeing economic uncertainty would be car sales, and so far car sales have continued to increase in Canada, albeit modestly. We’re even still creating jobs in Canada. That’s a bit of a puzzle. But I still think we will see worse economic outcomes in Canada than we’ve seen so far. Not as deep as in the U.S., but it will get worse before it gets better.
Rosenberg: Now we are entering into the eye of the hurricane: the intense consumer leg of this recession. The U.S. consumer now accounts for over 70 per cent of U.S. GDP and almost 20 per cent of global GDP, and that’s why as soon as the U.S. consumer started to give it up in late summer, that’s when oil prices started to peel off. This is the most broadly based U.S. recession in post-World War II history, and it has gone global. In the U.S. we have already lost 1.2 million jobs, and we probably have at least another three million to go. In our forecasts, the unemployment rate peaks between 8.5 and nine per cent in the opening months of 2010.
In Canada, whatever happens in the States inevitably migrates north of the border. Anybody who was around in the early 1990s knows what that’s about. Canada’s vulnerability is that corporate profits are reliant on commodities—that’s strike number one. Strike two is that Canada is disproportionately exposed to the auto sector. Strike three is that the principal buyers of Canadian products are U.S. consumers. On the other hand, Canada [benefits] from the fact that the banks aren’t nearly as under-capitalized as they are in the U.S. And although house prices are deflating, they’re not nearly as bad as in the U.S. Third point—the Canadian government, having started this with a balanced budget, has more room to ease fiscal policy than the U.S. So Canada has three strikes, but it also has three balls.
Vasic: Well, it’s going to get worse from here. We’ve really just recently fallen into the teeth of the economic slowdown. The thing that stands out is just how little Canadian employment has been affected so far. We know that capital spending cuts are coming [from major companies], we know that in central Canada there will be a lot more adjustments to come in the manufacturing sector, so the employment picture is going to deteriorate quite significantly in the next six to nine months. But we’re coming off an employment situation that is very close to the best we’ve seen in 30 years, and that’s worth remembering. If our unemployment rate goes [from around six per cent now] to 7.5 per cent, which we think it will, it’s not a good thing. But for most of the past 30 years, we were above that anyway.
Croft: In the U.S. I think the unemployment rate is going to at least 8.5 per cent, and in Canada I think we’re going up to 7.5 per cent. If you look at construction employment, it’s at a record high in Canada at a time when residential real estate is cooling precipitously. Those jobs are at risk. I have to believe there are more job losses in manufacturing, too. And the auto sector—wow . . . that’s a significant concern.
Pingback: Top Posts « WordPress.com
Pingback: Macleans.ca - 500,000 U.S. Job Losses