 | | Mario Lefebvre
Director
Centre for Municipal Studies |
The economic recovery is underway. Well underway. And the economic recovery train is travelling this country at a speed VIA Rail Canada must envy. From coast to coast, housing markets are recovering, consumer spending is on the rise, the manufacturing sector is finally seeing better days and even employment is trending upward. And the latter is a particularly good news since employment is the last ingredient to enter the economic recovery casserole. During a recovery, firms first work their employees overtime, waiting to be convinced that the recovery is here to stay. Once they feel confident about the economic rebound, firms begin to hire people again. And Canada has reached that stage a while ago, a sign that the recovery has tremendous momentum.
But now pessimists are looking for signs, signs that could lead us to believe that this recovery will not last for very long. From debt-troubled Greece, to the high value of the Canadian dollar, to soon rising interest rates, to the ballooning US deficits, to the introduction of the Harmonized Sales Tax (HST) in Ontario and British Colombia, to the end of the fiscal stimulus in Canada and around the world starting next year, and the list goes on and on. While Canada is not immune to any of these developments, none of those are going to derail the recovery. Sure, these events have to be viewed as risks to the forecast, but none will take this country into a double-dip.
To knock Canada’s recovery off its feet, one would need quite a blow, as Canada has created a total of over 300,000 net new jobs since August 2009. Job creation has in fact been positive in eight of the ten months comprised between August 2009 and May 2010. This is huge in sustaining the current economic recovery. That kind of job creation will provide a substantial boost to personal disposable income, supporting, in turn, growth in consumer spending. One also has to keep in mind that in several of Canada’s large urban centres in 2009, personal disposable income grew while consumer spending declined. This is a rare phenomenon. True, it could be argued that the Canadian consumer increased its debt level to a point where consumption had to take a breather last year. But this can’t be the whole story.
Canada’s recession last year was made worse by a collapsing level of consumer confidence. Across the land, consumer confidence plunged, as people got nervous from hearing the word “recession” in every broadcast news report or from reading it out of every newspaper headlines. People reacted by keeping their wallets in their pockets. But this was last year. Consumer confidence has been picking up for some time now, leading me to believe that some of the consumption that did not take place last year for confidence reasons, will take place this year and next. Combined with the recent rise in employment and disposable income, I am tempted to argue that consumer spending activity is on relatively solid footing over both this year and next. The Conference Board does not expect consumer spending growth to break records in 2010 and 2011, but it will grow at a pace that will flirt with about 3 per cent each year.
True, a rise in interest rates is on the way. But please, let’s put this in perspective. A rise in interest rates over the past two decades has nothing to do with the increases in interest rates recorded in the late 1970s or early 1980s. The expected rise in interest rates will lift the Bank of Canada rate by about 325 basis points over the next year-and-a-half or so. And this does not imply that mortgage rates are going to rise by the same amount. In fact, the rise in the 5-year mortgage rate is anticipated to be about 125 basis points over the same time period. While I will not argue that this will not have any impact at all on the demand for housing, the negative impact should be fairly muted. I have yet to hear to this day anyone telling me: “Mario, I was going to buy myself a house, but since the mortgage rate went from 5.5 per cent to 6.75 per cent, I will not do it.” The rise in rates might influence the type of house people will buy, but not the decision of buying or not.
It is undeniable that the pace of economic growth will not remain at the 6 per cent annualized rate recorded in the first quarter of 2010. It is also undeniable that the Canadian economy will be facing new turbulence along the way over the next couple of years. But please, for now, can’t we just be content with celebrating the recovery? Remember that last year, almost at the same time, we were afraid that a depression was about to hit. Enjoy summer because unlike Canada’s economic recovery, summer in Canada truly does not last very long. I will talk to you again in the fall.