How to Fix

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How to Fix The Canadian Recession

CFA Québec January 22, 2009 Glen Hodgson Senior
Vice-President and Chief Economist hodgson_at_confere
nceboard.ca
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Global Economic Highlights

• The world economy expanded by 2.4 per cent in
  2008 and growth will slow down to a miniscule 0.4
  per cent in 2009, absent policy intervention
• The U.S. financial crisis and recession has
  rippled around the world
• Sustained but slower growth in emerging markets,
  led by China and India, will help blunt the
  impact of a U.S. slowdown

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U.S. Outlook

• U.S. economy is in recession
• Continued sharp decline in home prices
• Consumer spending falls for 5 quarters
• Good news is difficult to findsome key sectors
  will eventually hit bottom decline in energy
  prices helping
• Forecast incorporates our guess of a possible
  Obama stimulus package

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U.S. Existing Home Sales and Prices (millions
SAAR 000)
Source National Assn. of Realtors.
5
Credit Spreads Narrowing (diff. between rates on
3-month Libor and 3-month T-bills)
Source Moodys Economy Inc.
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U.S. Labour Market(Change in U.S. Employment,
000s)
Source Bureau of Economic Analysis.
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U.S. Consumer Confidence(1985100)
Source The Conference Board Inc.
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U.S. Real Consumer Spending Growth(per cent
change, annualized)
Sources BEA CBoC
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Obama Stimulus Package

• 825b over two years - 550b on spending and
  275b for tax cuts
• 58b for energy initiatives including renewable
  energy tax cuts and funding for smart
  electricity grid
• 92b for infrastructure including transportation
  and water projects and repairs to government
  buildings

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Obama Package (cont.)

• 153b for making improvements to education and
  healthcare
• Tax cuts of 500 per individual worker and 1000
  per family and expansion of earned-income tax
  credit to include families with 3 children
• Tax cuts for businesses including bonus
  depreciation for firms investing in new plant and
  equipment
• Increas

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US Federal Deficit(billions)
Sources BEA CBoC
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U.S. Real GDP(per cent change)
Sources BEA CBoC.
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Canadian Outlook

• Canadas economy falls victim to a global
  recession and sharp drop in commodity prices,
  real GDP is forecast to contract by 0.5 per cent
  in 2009
• Fiscal stimulus packages in Canada and the United
  States do not suffice to keep respective
  economies out of recession
• The trade sector will take a huge chunk out of
  growth this year auto sector will be
  particularly hard hit
• Employment will decline this year, as the
  unemployment rate peaks at just over 8 per cent
  at the end of 2009
• A recovery is in store for 2010, with GDP
  rebounding with growth of 3.6

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Raw Materials Price Index (per cent change)
Sources The Conference Board of Canada
Statistics Canada
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Adding up Real GDP Percentage point contribution
to growth
Sources The Conference Board of Canada
Statistics Canada.
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Interest Rates (90-Day T-Bill) Quarterly 199909
U.S.
Canada
Sources The Conference Board of Canada BEA
Statistics Canada.
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The Loonie and the Oil PriceWTI US, US/C
Sources The Conference Board of Canada U.S.
Energy Information Administration Statistics
Canada.
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Exchange Rate 200010U.S. cents per Canadian
dollar
Sources The Conference Board of Canada
Statistics Canada.
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Consumer Price InflationCanada 200009
Sources The Conference Board of Canada
Statistics Canada.
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Employment Growth Canada, 200009
380,000 in 2007
Sources The Conference Board of Canada
Statistics Canada.
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Index of Consumer Confidence, CanadaJan 03Dec
08 (2002 100)

• Source The Conference Board of Canada.

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Index of Consumer Confidence, QuebecJan 03Dec
08 (2002 100)
Source The Conference Board of Canada.
23
Real Consumer Spending Growth Canada 200109
Sources The Conference Board of Canada
Statistics Canada.
24
Composition of Real Business Investment Growth
(200709)
Sources The Conference Board of Canada
Statistics Canada.
25
Housing Starts vs. Demographic Requirements
Canada 200109 (000s)
Household formation
Sources The Conference Board of Canada Canada
Mortgage and Housing Corporation.
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Limits of Monetary Policy

• Rate cuts not being passed on fully by banks as
  they repair their own balance sheets
• Much tighter credit conditions globally
• Time lags before monetary policy becomes fully
  effective
• Risk of liquidity trap no demand for credit at
  any price

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Canadian Fiscal Context Today

• Surpluses and paying down debt have given us the
  room to provide stimulus
• Accept passive fiscal deficits caused by slowing
  revenues and automatic stabilizers
• Passive deficit could be up to 10 billion,
  200910
• The big question active fiscal stimulus, and how
  much?

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Federal and Provincial Govt Balances (Public
Accounts Basis, fiscal year ending, billions)
Sources The Conference Board of Canada
Statistics Canada various government budgets.
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Federal Debt Financing Costs Percentage of GDP
(annual, 19642009)
Sources The Conference Board of Canada
Statistics Canada.
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Principles for Active Fiscal Stimulus

• Inject stimulus of at least 1 per cent of GDP in
  2009 around 13 billion
• Temporary stimulus measures, not structural
  changes
• Move back into fiscal balance as soon as economy
  recovers

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Specific Fiscal Action Proposed

• Infrastructure
• Projects already through the approval process,
  and public capital expenditures (like rail cars)
• Quick spendingnext 6-12 months
• Boost spending on labour market programs
• Improve access to and duration of employment
  insurance for Ontario, B.C., Alberta
• Programs for older displaced workers
• Wage insurance and subsidies for low-skilled
  workers

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Specific Fiscal Action (cont.)

• Support for sectors in need
• US action on autos made intervention inevitable,
  to protect Canadian trade advantage
• Conditions will be key credible medium-term
  business plan for firms, up-side for taxpayers
• Short-term income tax rebate an option, but
• Not directed to sectors or workers most in need
• Significant leakage into imports and savings
• Therefore, target low-income tax payers via
  working income tax benefit and child tax benefit

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Real Government Spending on Goods and Services
Canada (per cent change, 200009)
Sources The Conference Board of Canada
Statistics Canada.
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Real GDP Growth Rate Canada 200109
Sources The Conference Board of Canada
Statistics Canada.
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Conclusion

• Some signs that key U.S. markets are nearing
  bottoma modest recovery in residential
  construction and auto sales is forecast for the
  second half of 2009
• Strengthening raw material prices in 2010 will
  provide a boost to domestic economy
• Recession will lift unemployment rate but labour
  markets will remain tight across many occupations
• Path back to balanced budget will be slow for the
  federal government while provincial governments
  are in a more difficult bind.

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