Economic analysis


A weekly scorecard on the state of the economy in North America and beyond

EconowatchOn 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.



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.


World Bank bombshell
Perhaps it shouldn’t have been a big surprise, but the latest World Bank outlook managed to startle the world of finance nonetheless. The bank estimates that the economies of the world will shrink this year and post only small growth in 2010, down from very strong growth in 2007 and 2008. The bank warned that this is likely the beginning of an “era of lower growth.” That dark outlook was enough to spark a massive sell-off on world stock markets Monday, with the S&P/TSX dropping 453 points.

Retail retreat
Canada’s nascent retail recovery stalled in April, with sales declining 0.8 per cent. The weakness was particularly evident in “big ticket” items like cars, electronics and furniture. Even with prices for durable goods at 20-year lows, consumers were opting to buy only the basics and necessities amid continued job losses.

Feeling exhausted
The impact of the recession is showing up clearly in the number of Americans relying on social services to get by. A new analysis by the Wall Street Journal shows the number of people on state welfare programs is up sharply this year. And while the ranks collecting jobless benefits have thinned, that’s not really a sign of people finding work. The so-called “exhaustion rate” (the percentage of people who use up all of their benefits without finding a job) has hit an all-time high of 49.17 per cent.



  • Kodak has finally taken the Kodachrome away. It was the first commercially popular colour film, and became an iconic brand thanks in part to a 1973 Paul Simon song praising its “nice, bright colours.” But Kodak said that it would stop selling the famous film, which barely registered any sales in the age of digital cameras.
  • The freedom of hitting the open road is a luxury few can afford nowadays. Winnebago Industries Inc. said that it lost money for the fourth straight quarter. RV sales are down almost 50 per cent from last year. Not only are fewer people willing to buy high-end RVs, which can go for as much as $300,000, but the cost of fuelling these behemoths has made staying home an increasingly smart option.
  • DVD sales were once a gold mine for the motion picture industry, helping turn big-budget films into money-makers. But this summer, DVD sales are sinking fast, and it could spell big trouble for this season’s blockbusters, like the sixth instalment of the Harry Potter franchise. As the Los Angeles Times reports, each Harry Potter sequel has sold far fewer DVDs than the one before it. And after six films, fans may finally be getting all Pottered-out.
  • Jack Welch became famous for the management techniques he preached as CEO of General Electric in the 1980s and 1990s. Now, he’s running his own cost-cutting M.B.A. program, the Jack Welch Institute. It will be taught almost exclusively online, and will cost just $20,000 compared to the $100,000 fees of major M.B.A. programs. Welch is recruiting faculty, but won’t be teaching.

Economists are divided: are we headed for a period of Japanese-style deflation, or Zimbabwe-style inflation? Inflationists fear the trillions of dollars pumped into the economy by central banks will send prices soaring, while the deflation crowd points to May’s consumer price index of just 0.1 per cent in Canada, and -1.3 per cent in the U.S., to say prices are falling and pose a serious threat to any economic recovery.

Thomas Hoenig“We have put an enormous amount of liquidity into the system. If it is allowed to remain indefinitely, and we keep a very low [interest] rate for an extended period of time, then we do risk an inflationary outbreak.”—Kansas City Federal Reserve Bank president Thomas Hoenig

“At every level of the economy and every level of society, the demand for cash is unprecedented. If the Fed didn’t meet that demand for cash, we’d have a destabilizing deflation on our hands.” —David A. Rosenberg, chief economist and strategist, Gluskin Sheff & Associates

“If you take a little thing called energy out, inflation is still relatively high.” —Douglas Porter, Bank of Montreal economist

“I think we’re going to wind up with an anemic decade.”—Brian Fabbri, chief U.S. economist, BNP Paribas

Nouriel Roubini“[The] more challenging scenario of anemic recovery undermines hopes for a V-shaped recovery, as low growth and deflationary pressures constrain earnings and profit margins. The increase in some asset prices may, moreover, lead to a W-shaped, double-dip recession. In particular, thanks to massive liquidity, energy prices are now rising too high too soon.”—Nouriel Roubini, professor of economics, New York University Stern School of Business


Thursday, June 25: Statistics Canada will report the level of employment earnings and hours for the month of April.

Friday, June 26: The University of Michigan will release its Consumer Sentiment Survey. Analysts expect only modest growth.

Wednesday, July 1: AutoData Corp. will report U.S. auto sales for the month of June. Sales may be up slightly, but likely will remain extremely weak, and well below levels seen in recent years.

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