mr.x
Jan 27, 2008, 8:27 AM
Is B.C.'s economy insulated from a U.S. recession?
Fiona Anderson, Vancouver Sun
Published: Saturday, January 26, 2008
Stock markets plunged, and rebounded, the central bank of the United States made an unprecedented interest rate cut, and the former chair of the U.S. Federal Reserve arrived in town saying there was a 50-per-cent chance of a U.S. recession. Canadian economists are mixed on whether the U.S. is inevitably heading for a recession, or whether one is already upon us. But whether they say yea or nay, economists' views have definitely changed over the past few months, and they have upped their odds that a recession is in the future.
Earlier this week, investors seemed to agree that a recession was imminent, bailing on stocks they held, and causing a 600-point drop in the TSX index on Monday.
The dramatic sell-off came after U.S. President George W. Bush's announcement of a $150-billion fiscal stimulus package aimed at putting more money in consumer pockets.
The U.S. Federal Reserve also added fuel to the fire while trying to douse the flames by instituting a whopping 75-basis-point (or 0.75 percentage point) cut in interest rates. The cut was unprecedented because it was the largest in more than two decades, and the first made outside a scheduled date for rate adjustments since 2001. More cuts are expected later this month.
So if the U.S. does end up in a recession, what does that mean for Canada and B.C.? The Vancouver Sun asked six economists that, and other questions:
- Is the United States heading for a recession?
Scotiabank chief economist Warren Jestin: Last week, the balance seemed to shift toward people who believe there will be a recession.
"[But] our view is still that the U.S. will skirt a recession, and so in a way we're more optimistic."
Exports are still growing in the U.S. and the construction industry, outside housing, is still reasonably solid. But even if the economy doesn't dip into recession territory, it will still feel like it as the next two to three quarters will have the weakest growth the U.S. has seen "in a very, very long time."
Phillips Hager & North chief economist Patricia Croft: The U.S. has been in recession since December. Unemployment numbers continue to increase and the capital markets, which are a good indicator of investor sentiment, point to a recession. The two-year bond rate -- which is an indication of where the market thinks interest rates will be in two years -- has fallen to about two per cent, below the Federal Reserve's most recent rate of 3.5 per cent.
"So the market is telling us that they expect in the next two years that interest rates will decline significantly from where they are today. And the only reason for that would be an environment of economic weakness."
The capital markets are important predictors because "they tend to be very good at pricing in the future. The problem with economists is we wait until we get the data."
CIBC World Markets senior economist Avery Shenfeld: CIBC World Markets sees "slightly better odds that the U.S. avoids an outright recession. ... But it's going to be close."
Sauder School of Business professor James Brander: Technically, the U.S. isn't in a recession yet, but the consensus seems to be that it is slipping into one.
"[But] there's no question the U.S. is in a slowdown."
Credit Union Central of B.C. chief economist Helmut Pastrick: The odds of the U.S. entering into a recession are about 30 to 40 per cent. "I think there are enough positives out there to suggest it will only be a slowdown."
- What has happened in the last few months to make a recession seem more likely?
Brander: The housing market took a hit and mortgage foreclosures shot up in the second half of 2007, prices went down and new construction slowed.
"All those indicators turned quite significantly negative in the second half of 2007. . . . [So] the prognosis has been getting progressively worse in the past six months."
Jestin: The retail numbers from "black Friday" -- the Friday after Thanksgiving, which is one of the biggest shopping days of the year in the U.S. -- showed sales were up. But in December the tone began to change. Bad news from the housing market, and the credit crunch starting cascading out. Then company news was not as good as expected. So it was no longer just the housing market that was on a downswing.
"I really think the tipping point occurred in the first couple of weeks of January, when we saw the enormous volatility last week in the financial markets and the big sell-offs, which reached a crescendo when the U.S. markets were closed on Monday. The thinking in the U.S. has changed materially."
And in case people weren't paying attention, the chairman of the Federal Reserve made a speech that was extraordinarily negative, and then the surprise rate cuts made people think something must be wrong.
Pastrick: What's changed is the problems in the credit market, which have resulted in a substantial amount of uncertainty and higher cost of credit.
The big concern is that the credit squeeze continues and worsens into a real crunch. Right now, the squeeze is limited to short-term paper. But if it expands into the broader financial markets, it could further curtail spending.
- What is the effect on Canada and British Columbia?
Jestin: In Canada, the fundamentals are a lot stronger. People are still talking about capacity constraints, not finding workers to fill positions. The housing market, and household balance sheets, are in better shape.
"So I really do think in Canada we are facing an entirely different prospect."
Some industries will be affected, like the auto sector in Ontario. And in B.C., the lumber industry has already been hurt and "a further decline in U.S. housing would compound those difficulties."
Shenfeld: Canada has never completely avoided the impact of a U.S. recession. But where the recession was mild and the cause was a shock to the U.S. economy, Canada has avoided falling into a recession itself.
For example, in 2001, the U.S. had a recession due to the collapse of the tech sector. But Canada, having a smaller tech sector, suffered only a slowdown.
"The shock this time is the U.S. housing and mortgage market which again is a story that is not being replicated in Canada."
Croft: About one-third of Canada's economy is exports, and 80 per cent of those go to the U.S. So Canada will be affected. But there may be regional differences. "If commodity prices stay strong, that's an important support of western Canada. But if the Canadian dollar stays strong, watch out in central and eastern Canada because of the manufacturing sector."
British Columbia's lumber industry is already reeling, and what will happen to the mining sector is "iffy."
"But the other thing for B.C. is infrastructure spending. That's huge. [And] it's not cyclical. It will withstand any kind of economic downturn. ... And I think that will be a very important source of support for the B.C. economy."
Brander: The economy in Canada has been stronger than that in the U.S.
One cause of recession is high energy prices, and that's good news for Canada, especially B.C. and Alberta. Also, Canadian governments are running surpluses, not deficits, like the U.S. government and the Bank of Canada policies have kept lending in check.
"For Canada, the main negative factor -- and really the only negative factor -- is the U.S. itself."
- What signs would we be looking for that may suggest Canada is headed for a recession?
Warne: The first sign of recession in Canada may be a U.S. recession. Next, look at job growth, housing starts and retail sales. Job growth and housing starts looked pretty poor in Canada in December, but they bounce around a lot from month to month.
"So the first thing not to look at, or to be cautious about, is one-month numbers. You need to see a longer pattern."
Shenfeld: What's critical is that Canada continue to create jobs outside manufacturing, which is being hurt by the slowdown, so that consumer spending doesn't falter.
"As long as Canadian consumers have healthy income growth and continue to spend, the shock to our exports [from a U.S. recession] will not be enough to cause an outright recession here."
Brander: If inventories start building up, housing starts go down, and unemployment grows, those are all signs that Canada could be headed for a recession.
Croft: The key to a recession in Canada is the Canadian consumer. So watch for changes in data that affect consumer behaviour, like the labour market, and the housing market.
- What can be done to stop a recession in the U.S. or in Canada?
Shenfeld: The U.S. Federal Reserve's rate cuts and the Bush stimulus package should stimulate the economy. "But [the government and central bank] will have to throw all the weapons they have available to get the economy growing."
Jestin: The Bush plan "is too vague, it's too late, and it's probably going to be too little to make a material difference."
And the issues causing the U.S. to go into deep problems "are issues that low interest rates alone don't solve."
But in Canada, "through either prescience or extraordinary luck, the federal government put in a stimulative package just at the right time."
Warne: With the GST cut that came into effect at the beginning of the year and the tax cuts announced in October, "Canada is already doing the things that would help prevent a recession."
fionaanderson@png.canwest.com
KATE WARNE
Edward Jones
Why has our view of the possibility of a recession in the U.S. changed?
Six months ago the credit crunch hadn't started yet, so a recession seemed a lot less likely. And the longer the financial industry continues to struggle, and the longer the credit crunch lasts, the more likely a recession is, and the longer it's likely to last.
"Because if banks aren't making loans, that means both businesses and consumers are likely to be spending less."
WARREN JESTIN
Scotiabank
Will B.C. be insulated from a U.S. recession?
"If things got really bad in the U.S. But I cannot see them shutting down port development in Vancouver. It just doesn't happen that way.
"[And] you're not going to call off the Winter Olympics.
"When you start thinking about it in terms of things that are locked in, in terms of momentum, we really do have a fair bit going on."
AVERY SHENFELD
CIBC World Markets
What can be done to prevent a recession in Canada?
Encourage consumers to spend because "spending is good."
"The American economy is not in trouble because they spent too much. They are in trouble because they lent too much to people who shouldn't have received large mortgages."
JAMES BRANDER
Sauder School of Business
If there is a recession, how long will it last?
"It's hard to predict, but my guess is short."
The U.S. government, with its fiscal stimulus package, and the Federal Reserve with its rate cuts, are moving quickly to try to turn the economy around.
So while a recession by definition is two consecutive quarters of negative growth, it probably will last only two quarters.
PATRICIA CROFT
Phillips Hager & North
Will Canada be affected by a recession in the U.S.?
There are two theories on that.
"One is the decoupling thesis, where the U.S. can have a recession and the rest of the world parties on. I've always thought that that was a myth.
"Canada is very closely aligned to the United States. They still are our largest trading partner."
Helmut Pastrick
Credit Union Central
Will B.C. be affected by a recession in the U.S.?
B.C. is already hurting. The U.S. housing market has been in a downslide for two years, and that has affected the lumber industry.
Now what seemed to be a mild housing contraction has gotten much worse, and so too could the damage to B.C.'s forest-products industry. Tourism has also been down in B.C. for about five years, and that could get worse with a U.S. recession.
Fiona Anderson, Vancouver Sun
Published: Saturday, January 26, 2008
Stock markets plunged, and rebounded, the central bank of the United States made an unprecedented interest rate cut, and the former chair of the U.S. Federal Reserve arrived in town saying there was a 50-per-cent chance of a U.S. recession. Canadian economists are mixed on whether the U.S. is inevitably heading for a recession, or whether one is already upon us. But whether they say yea or nay, economists' views have definitely changed over the past few months, and they have upped their odds that a recession is in the future.
Earlier this week, investors seemed to agree that a recession was imminent, bailing on stocks they held, and causing a 600-point drop in the TSX index on Monday.
The dramatic sell-off came after U.S. President George W. Bush's announcement of a $150-billion fiscal stimulus package aimed at putting more money in consumer pockets.
The U.S. Federal Reserve also added fuel to the fire while trying to douse the flames by instituting a whopping 75-basis-point (or 0.75 percentage point) cut in interest rates. The cut was unprecedented because it was the largest in more than two decades, and the first made outside a scheduled date for rate adjustments since 2001. More cuts are expected later this month.
So if the U.S. does end up in a recession, what does that mean for Canada and B.C.? The Vancouver Sun asked six economists that, and other questions:
- Is the United States heading for a recession?
Scotiabank chief economist Warren Jestin: Last week, the balance seemed to shift toward people who believe there will be a recession.
"[But] our view is still that the U.S. will skirt a recession, and so in a way we're more optimistic."
Exports are still growing in the U.S. and the construction industry, outside housing, is still reasonably solid. But even if the economy doesn't dip into recession territory, it will still feel like it as the next two to three quarters will have the weakest growth the U.S. has seen "in a very, very long time."
Phillips Hager & North chief economist Patricia Croft: The U.S. has been in recession since December. Unemployment numbers continue to increase and the capital markets, which are a good indicator of investor sentiment, point to a recession. The two-year bond rate -- which is an indication of where the market thinks interest rates will be in two years -- has fallen to about two per cent, below the Federal Reserve's most recent rate of 3.5 per cent.
"So the market is telling us that they expect in the next two years that interest rates will decline significantly from where they are today. And the only reason for that would be an environment of economic weakness."
The capital markets are important predictors because "they tend to be very good at pricing in the future. The problem with economists is we wait until we get the data."
CIBC World Markets senior economist Avery Shenfeld: CIBC World Markets sees "slightly better odds that the U.S. avoids an outright recession. ... But it's going to be close."
Sauder School of Business professor James Brander: Technically, the U.S. isn't in a recession yet, but the consensus seems to be that it is slipping into one.
"[But] there's no question the U.S. is in a slowdown."
Credit Union Central of B.C. chief economist Helmut Pastrick: The odds of the U.S. entering into a recession are about 30 to 40 per cent. "I think there are enough positives out there to suggest it will only be a slowdown."
- What has happened in the last few months to make a recession seem more likely?
Brander: The housing market took a hit and mortgage foreclosures shot up in the second half of 2007, prices went down and new construction slowed.
"All those indicators turned quite significantly negative in the second half of 2007. . . . [So] the prognosis has been getting progressively worse in the past six months."
Jestin: The retail numbers from "black Friday" -- the Friday after Thanksgiving, which is one of the biggest shopping days of the year in the U.S. -- showed sales were up. But in December the tone began to change. Bad news from the housing market, and the credit crunch starting cascading out. Then company news was not as good as expected. So it was no longer just the housing market that was on a downswing.
"I really think the tipping point occurred in the first couple of weeks of January, when we saw the enormous volatility last week in the financial markets and the big sell-offs, which reached a crescendo when the U.S. markets were closed on Monday. The thinking in the U.S. has changed materially."
And in case people weren't paying attention, the chairman of the Federal Reserve made a speech that was extraordinarily negative, and then the surprise rate cuts made people think something must be wrong.
Pastrick: What's changed is the problems in the credit market, which have resulted in a substantial amount of uncertainty and higher cost of credit.
The big concern is that the credit squeeze continues and worsens into a real crunch. Right now, the squeeze is limited to short-term paper. But if it expands into the broader financial markets, it could further curtail spending.
- What is the effect on Canada and British Columbia?
Jestin: In Canada, the fundamentals are a lot stronger. People are still talking about capacity constraints, not finding workers to fill positions. The housing market, and household balance sheets, are in better shape.
"So I really do think in Canada we are facing an entirely different prospect."
Some industries will be affected, like the auto sector in Ontario. And in B.C., the lumber industry has already been hurt and "a further decline in U.S. housing would compound those difficulties."
Shenfeld: Canada has never completely avoided the impact of a U.S. recession. But where the recession was mild and the cause was a shock to the U.S. economy, Canada has avoided falling into a recession itself.
For example, in 2001, the U.S. had a recession due to the collapse of the tech sector. But Canada, having a smaller tech sector, suffered only a slowdown.
"The shock this time is the U.S. housing and mortgage market which again is a story that is not being replicated in Canada."
Croft: About one-third of Canada's economy is exports, and 80 per cent of those go to the U.S. So Canada will be affected. But there may be regional differences. "If commodity prices stay strong, that's an important support of western Canada. But if the Canadian dollar stays strong, watch out in central and eastern Canada because of the manufacturing sector."
British Columbia's lumber industry is already reeling, and what will happen to the mining sector is "iffy."
"But the other thing for B.C. is infrastructure spending. That's huge. [And] it's not cyclical. It will withstand any kind of economic downturn. ... And I think that will be a very important source of support for the B.C. economy."
Brander: The economy in Canada has been stronger than that in the U.S.
One cause of recession is high energy prices, and that's good news for Canada, especially B.C. and Alberta. Also, Canadian governments are running surpluses, not deficits, like the U.S. government and the Bank of Canada policies have kept lending in check.
"For Canada, the main negative factor -- and really the only negative factor -- is the U.S. itself."
- What signs would we be looking for that may suggest Canada is headed for a recession?
Warne: The first sign of recession in Canada may be a U.S. recession. Next, look at job growth, housing starts and retail sales. Job growth and housing starts looked pretty poor in Canada in December, but they bounce around a lot from month to month.
"So the first thing not to look at, or to be cautious about, is one-month numbers. You need to see a longer pattern."
Shenfeld: What's critical is that Canada continue to create jobs outside manufacturing, which is being hurt by the slowdown, so that consumer spending doesn't falter.
"As long as Canadian consumers have healthy income growth and continue to spend, the shock to our exports [from a U.S. recession] will not be enough to cause an outright recession here."
Brander: If inventories start building up, housing starts go down, and unemployment grows, those are all signs that Canada could be headed for a recession.
Croft: The key to a recession in Canada is the Canadian consumer. So watch for changes in data that affect consumer behaviour, like the labour market, and the housing market.
- What can be done to stop a recession in the U.S. or in Canada?
Shenfeld: The U.S. Federal Reserve's rate cuts and the Bush stimulus package should stimulate the economy. "But [the government and central bank] will have to throw all the weapons they have available to get the economy growing."
Jestin: The Bush plan "is too vague, it's too late, and it's probably going to be too little to make a material difference."
And the issues causing the U.S. to go into deep problems "are issues that low interest rates alone don't solve."
But in Canada, "through either prescience or extraordinary luck, the federal government put in a stimulative package just at the right time."
Warne: With the GST cut that came into effect at the beginning of the year and the tax cuts announced in October, "Canada is already doing the things that would help prevent a recession."
fionaanderson@png.canwest.com
KATE WARNE
Edward Jones
Why has our view of the possibility of a recession in the U.S. changed?
Six months ago the credit crunch hadn't started yet, so a recession seemed a lot less likely. And the longer the financial industry continues to struggle, and the longer the credit crunch lasts, the more likely a recession is, and the longer it's likely to last.
"Because if banks aren't making loans, that means both businesses and consumers are likely to be spending less."
WARREN JESTIN
Scotiabank
Will B.C. be insulated from a U.S. recession?
"If things got really bad in the U.S. But I cannot see them shutting down port development in Vancouver. It just doesn't happen that way.
"[And] you're not going to call off the Winter Olympics.
"When you start thinking about it in terms of things that are locked in, in terms of momentum, we really do have a fair bit going on."
AVERY SHENFELD
CIBC World Markets
What can be done to prevent a recession in Canada?
Encourage consumers to spend because "spending is good."
"The American economy is not in trouble because they spent too much. They are in trouble because they lent too much to people who shouldn't have received large mortgages."
JAMES BRANDER
Sauder School of Business
If there is a recession, how long will it last?
"It's hard to predict, but my guess is short."
The U.S. government, with its fiscal stimulus package, and the Federal Reserve with its rate cuts, are moving quickly to try to turn the economy around.
So while a recession by definition is two consecutive quarters of negative growth, it probably will last only two quarters.
PATRICIA CROFT
Phillips Hager & North
Will Canada be affected by a recession in the U.S.?
There are two theories on that.
"One is the decoupling thesis, where the U.S. can have a recession and the rest of the world parties on. I've always thought that that was a myth.
"Canada is very closely aligned to the United States. They still are our largest trading partner."
Helmut Pastrick
Credit Union Central
Will B.C. be affected by a recession in the U.S.?
B.C. is already hurting. The U.S. housing market has been in a downslide for two years, and that has affected the lumber industry.
Now what seemed to be a mild housing contraction has gotten much worse, and so too could the damage to B.C.'s forest-products industry. Tourism has also been down in B.C. for about five years, and that could get worse with a U.S. recession.
