On a day when the Canadian stock market plunges by more than 450 points and the Dow Jones Industrial Average tumbles by 200, it’s a tough sell to suggest that we need to start planning for the economic recovery. And yet, there was Joaquín Almunia, economic and monetary affairs commissioner for the European Union, urging all OECD countries to start preparing exit strategies for this downturn before it’s too late. “We cannot afford to get out of this recession creating big imbalances that will be the origin of the next crisis,” Almunia said.
No doubt he’s right. Over the past year, governments have pumped unprecedented mountains of stimulus into the global economy. Major banks and corporations have been bailed out, propped up and nationalized. Interest rates have been slashed to nothing. That may have averted the worst-case meltdown scenario, but it presents a lot of daunting questions as the world begins to pull out of this tailspin. Trillions of dollars in cheap money is currently sloshing through the economy. Will the system be able to soak up all that excess capital before it triggers runaway inflation? Now that governments have committed themselves to massive deficit spending over the next few years, can lawmakers find the political courage to rebalance their budgets in time to avert a massive distortion of the debt markets?
These are all critically important questions, but for now they remain on the back burner because the recovery is still in doubt. The World Bank is now projecting the global economy will shrink by 2.9 per cent this year, and there are plenty of worrying signs pointing to a summer swoon on the stock markets. For instance, the daily volume of trading has fallen off sharply since March. That suggests that while major investors haven’t been aggressively selling stocks (yet), they’re not exactly leaping at the chance to buy at current prices either.
But that’s the trouble with monetary and fiscal policy decisions of this magnitude. The crisis that swept the global economy over the past year was unprecedented. So were the actions taken to contain it. Managing the recovery will be just as perilous, requiring foresight and international co-operation. But how and when? If you wait until the recovery is under way before you begin to take your foot off the gas pedal, then it’s too late. Move too soon, and this fledgling comeback will collapse. Almunia’s warnings are serious. So is the fragility of the global economy. Nobody ever said this would be easy.
GRAPH OF THE WEEK:Canada’s deficit balloons
According to this Scotia Economics graph, Canada is about to run its biggest deficit ever in 2010, in terms of
absolute dollars, amounting to some $50 billion. But when you look at our deficit as a percentage of our GDP, we’ve still got a way to go before things get as bad as they were in the early 1990s.
THE GOOD NEWS
Leading the way
The Conference Board’s index of leading indicators is perhaps the broadest of all measures on the health of the economy, and it climbed another 1.2 per cent in May (its second consecutive gain). Seven of the 10 stats tracked in the index improved in May, particularly stock prices, consumer confidence and long-term interest rates. The past two months have seen the strongest rise in the index since early 2001.
Feeling frisky
Confidence continues to rise around the world. Moody’s weekly global confidence index shows that optimism has been steadily improving since late March. And while businesses still don’t plan to do much hiring or investment, a consensus is building that late this year, the economy will look a lot healthier.
Net relief
In case you hadn’t noticed, this hasn’t been such a hot year for your finances. StatsCan reports that household net worth fell by $72 billion in the first quarter, thanks to drops in stock prices and real estate values. But that was a lot better than the second half of 2008, when net worth plunged by $438 billion—another stat that’s still getting worse, but more slowly.
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