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ARCHIVE: INSIDE OUTLOOK



An Unsettled Recovery in Turbulent Times

Glen Hodgson, Senior Vice-President and Chief Economist, Forecasting and Analysis
October 19, 2011

These are turbulent times for the global economy. Confidence was shaken over the summer by problems with European sovereign debt, fears about related bank exposure, and an inadequate policy response from European governments. The American debt ceiling debacle added to the uncertainty and prompted speculation about a second recession, driven by the inability of many governments to manage excessive public debt. Fear rippled outward from street protests in Athens over austerity and through global financial markets, destroying billions of dollars of shareholder value.

Governments are struggling to rebuild investor confidence by bringing their fiscal deficits under control, while not withdrawing fiscal stimulus too rapidly. Despite the shocks to consumer and investor confidence, The Conference Board of Canada still expects global economic growth to continue, albeit moderately. Monetary authorities will hold off on interest rate hikes, even until mid-2013 in the United States. Lower commodity prices in the short term will help shore up weakened consumer demand.

Canada is not immune to global forces. Canadian GDP declined marginally in the second quarter of 2011, largely as a result of the disruption of supply chains caused by the March earthquake and tsunami in Japan. Moreover, a sluggish outlook for the United States is not good news for Canada. U.S. real estate markets remain weighed down by the backlog and sale of distressed properties. A decline in consumer confidence bodes poorly for household spending, although confidence remains well above recession lows.

Canada is not immune to global forces.

However, there are a few positive signs in the U.S. economy. Businesses are currently flush with cash, bank commercial lending activity has finally begun to grow again, and both industrial and export activity have been rising. A recovery in private sector employment and a rebound in confidence would permit modest growth in business investment and household spending. The Conference Board of Canada forecasts U.S. growth of less than 2 per cent. However, it still expects that the U.S. economy will avoid recession, begin adding more jobs (a key factor in rebuilding confidence), and grow by up to 2.5 per cent in 2012.

Despite the challenging external environment, Canada’s domestic economy is on a much stronger footing than that of most other developed countries. Employment has recovered quickly from the recession’s job losses. Profits have rebounded, business investment has surged over the past year and a half, and housing markets are balanced. If Canada were an island, sustained growth would be attainable. But since Canada is deeply integrated into the global trading and financial system, we and other open economies have felt the shocks. As a result, growth has hovered in the 2 per cent range this year.

Looking ahead, the pace of domestic economic activity will rise modestly in 2012 to about 2.5 per cent, but public sector and household debt will constrain growth. Even though financing rates are expected to remain low well into 2012, consumers are already tightening their purse strings. Governments, too, will pull back on spending. Moreover, public infrastructure investment has peaked and will decline sharply in 2012. The unemployment rate will fall only slightly, and businesses will continue to face the need to adapt to a chronically strong currency, tempered by global uncertainty.

In short, we expect Canada’s economy to continue growing—but this is an unsettled recovery in turbulent times.

Glen Hodgson
Glen Hodgson
Senior Vice-President
and Chief Economist,
Forecasting and Analysis

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Canadian Outlook with the Chief Economist: Autumn 2011

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Canadian Outlook Executive Summary: Autumn 2011
The Canadian Month at a Glance: October 2011
U.S. Outlook: Autumn 2011