Slow growth ahead
There is now compelling evidence that the U.S. recession ended in August. A financial crisis has been averted and we are now in a post-recession growth phase that should last several years. The key question is how strong will the economy be over the next six to 12 months? It is unlikely that we will see a return to the economic boom times of 2006 and early 2007. Households have been hit hard in many advanced countries and wealth is not restored quickly. Consumers will place a high priority on saving and a low priority on spending for some time and this will limit growth.
Credit conditions improving
Banking crises typically have long-lasting economic effects and this was the most severe financial crisis since the Great Depression. Credit conditions have improved but the non-banking credit system, which had supplied more lending in the U.S. than traditional channels, is still shut down. A lack of credit and credit-worthy borrowers will mean disappointingly slow growth for both employment and income. It may be a long climb before normal conditions are restored in the job market.
Encouraging U.S. housing developments
The news about the U.S. housing market is reassuring and this is reinforcing a more positive homebuyer sentiment in Canada. Pending home sales in the U.S. have turned up and new home sales are showing larger than expected gains. This is having a calming effect on financial markets as the outlook for mortgage-backed securities is improving.
Emergency economic policy moves winding down
Financial conditions have improved enough to allow some of the emergency economic policy moves to begin being withdrawn. The U.S. Federal Reserve Board will be slowing its purchase of mortgage-backed securities and the Bank of Canada announced it will withdraw some of its emergency supports for lending by the end of October. This does not, however, mean an end to low interest rates. Both the Federal Reserve Board and the Bank of Canada have reaffirmed their commitments to keeping rates exceptionally low in the near term. This is conditional on inflation staying low. Given the current level of excess capacity, Canada’s inflation rate is still going down and, in 2010, year-over-year increases in the Consumer Price Index are expected to remain well below the Bank of Canada’s target of 2.0%.
Job creation is the key indicator
The path of the U.S. economy will shape Canada’s economic prospects. Real GDP growth in the U.S. is expected to advance at a 3.0% annual rate in the second half of 2009 and a 2.0% annual rate in 2010, which is well below the longer-term trend. Slow U.S. GDP growth in 2010 means that companies will not begin to actively rehire and Canada is likely to show a similar growth and employment pattern. A jobless recovery will prevent a full restoration of consumer and investor confidence. Top-line corporate revenue will be restrained, cost cutting is likely to continue and capital preservation and balance sheet restoration will remain primary objectives. If unemployment continues to rise throughout 2010, wages will be depressed and the economic revival will be threatened.
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