Thursday, January 22, 2009

Carney has lost it

PM Harper, October 2008:

"Canada is not the United States, the situation is very different. The fundamentals of our economy are strong," he said. "We have a budget surplus. We have an economy that continues to create jobs. We're not experiencing a crisis in our financial system."
Harper also said that Stephane Dion was scaring people. Then in December, Harper starting mentioning that a depression was a possibility (he is right on that front) as his government nearly fell.

Today's G&M:
The government official told reporters that the Harper government would run a $34-billion deficit in the fiscal year beginning April 1 and a $30-billion shortfall the year after.
We then lost about 100K jobs in November and December. We now have huge deficits. We are experiencing a crisis in our financial system. Maybe this would teach Canadian leaders to stop comparing ourselves (in a favorable light) to the rest of the world, especially the US, or stop making ridiculous statements in the face of one of the worst economic situations since the 1930s.


Today's GM re Bank of Canada head Carney:
Even as the central bank said economic output would contract an alarming 4.8 per cent this quarter, Mr. Carney boldly predicted Thursday that Canada's economy will rally to expand 3.8 per cent in 2010... he said the recession that began in the final three months of 2008 will end faster than did the contractions in the early 1990s and 1981-82.

This dude made a prediction on October 23 (after the stock market crashed) that the Canadian economy would GROW in the first half of 2009 (+0.4%) after shrinking by 0.4% in Q4 2008.

What does he say today: Whoops, -2.3% for Q4 2008, -4.8% for Q1, -1.0% for Q2. With that type of disaster, you would think the dude would tone it down a little. Nope, magically, in July, the economy is going to grow 2.0% and immediately stabilize. Then, it will grow by 3.5% in Q4. Oh, and then it gets better: 4.7% in the first half of 2010 and 4.9% in the second half of 2010.

He is entitled to his opinion and he may ultimately be right, but what is he smoking? We are losing maybe 50-100K jobs per month, the economy is expected to have one its worst quarters ever, the housing and commodity markets are imploding and all of a sudden, on July 1st, people will start to spend like its 2007 again.

How will things magically stabilize?:

Monetary policy (pat on the back?), fiscal policy (as Harper goes against everything he and the Reform party ever stood for and goes on a spending frenzy) and consumer spending.

I will need to expand on this in an upcoming post, but if there is one magical bullet that sums up this whole recession, it will be this one stat: the savings rate.

For decades, the Canadian personal savings rate average about 10%. In the past 15 years or so, Canadians decided to stop saving (0%). Why? In a nutshell, they didn't have to. The stock market and real estate market soared. They got richer without saving, so why bother with actual saving money. Just lever up your house and mint money. Jobs and credit were plentiful.

Then in 2008, both markets tanked. People began to feel poorer as their retirement savings and their homes began to lose value quickly. People felt less secure in their jobs. And, rationally, especially in the fall of 2008, people began to spend less. Less spending on cars and gasoline and flat spending on other retail for now (November retail sales were down 2.4%). With layoffs now accelerating (even Microsoft is laying off), expect people to feel even less secure in their jobs (assuming they still have one) and for consumer spending to tank in 2009.

This trend started a little earlier in the US and is a worldwide trend. Since consumers undersaved for about 15 years (at least), to expect them to return to their 2007 spending habits in July of 2009 is insane. Certifiable, I believe. I will expand on all of this later, but to summarize: It will take years for Canadians to get the saving rate to 10% again, especially since all those layoffs prevent savings. Once Canadians get to something around 10% in 2011 or 2013 or whenever, they may not stop there, as they may feel a need to oversave to compensate for 15+ years of undersaving. The savings rate could go to 15% for all I know. All that savings is good in the long run and could help rebuild the banking sector one day, but in the short term, one person's saving is someone's lost income.

So if you are expecting a nice rebound to consumer spending to make this all better, forget it. I can buy some positive contribution to GDP from monetary or fiscal policy, but consumer spending is going to be a big drag for years to come. Ditto for housing and exports (all that saving is going to hurt the China/Indias of the world and any export growth to those countries).

This recession is going to be at least as bad as the early 90s or early 80s and will likely take both of them out. While I can maybe buy some type of positive number for sometime in 2010, 4%+ is la-la land and someone needs to hold Carney accountable for this.


Anonymous said...

I find your theories and analysis incredibly well-reasoned and insightful. Thanks for being a calm voice in the middle of all of this turmoil.

Jen said...

Thank you, Adil.

Very well done. It's nice to have you back and commenting again.