The Canadian economy is going to get worse before it gets better.
That was the message Peter Hall, vice president and chief economist for Export Development Bank of Canada, who gave to Northern Ontario's business community.
Hall delivered two breakfast talks called Let's Talk Exports. Both were presented by Northern Ontario Business and took place in Sudbury, May 27, and Sault Ste. Marie, May 29.
Hall told his audience that, as if the situation wasn't already bad enough, the worst of the financial crisis has yet to come.
“Growth is so slow around the world that no industry, no region is really exempt from the declines that we're seeing happening,” he said. “It's not a good situation that we face right now and we're not going to get out of it quickly.”
He spoke of the five waves of weakening.
In wave one, a sequence of events unfolded when the housing market imploded in United States starting in 2006. There were way more homes than was needed. In a country where up to a million homes are sold annually the United States was down to less than half a million units.
“Any market that feels this has excessive pain and it is going on everywhere right now.”
In wave two, Hall explained the fallout in United States including subprime numbers had a direct impact on other world markets. Couple that with the lengthy global upswing and it was a recipe for disaster.
A normal rise in economic activity lasts about eight years, but the one the world just experienced lasted for 16 years. Because economic growth is exponential during these periods, the economic downturn is far more severe after 16 years of growth than after eight, so “we are experiencing double the bubble. This is just not happening in one or two economies,” he said.
“Globalization afforded these bubbles to be exported. The excess of activity that built up over the boom years is taking some time to wear off,” said Hall. “We don't believe we're there yet. There is some optimism that's growing right now. We don't believe it has a fundamental reason.”
Much of the workforce has never really experienced or lived through a recession, he said. These events are unprecedented and researchers have to go as far back to the Great Depression to find comparisons.
China says they are growing by 6.8 percent but when one evaluates year-over-year or quarter-over-quarter, it is more like 2.5 per cent in the second half of last year, he said.
The International Monetary Fund states that half of all the toxic assets have been dealt with. Seventy five percent of those assets were declared by American institutions and it remains to be seen what the exposure of the Euro banks will be.
This is when wave three kicks in. How bad is it?
Europe announced it was decoupling from the United States when the it began to show signs of faltering, but in fact Europe is following the same contraction, Hall said. The annualized contraction in Europe fell by more than eight per cent. Japan's annual rates fell by 14.4 per cent last year. In the first quarter of this year Japan it was 15.2 per cent and to think it contributes nine per cent to the GDP.
In wave four is when employment numbers will rise as a result of global contractions.
“Output has slowed so layoffs are happening.”
Canada has not seen so many job losses last year but we will be catching up to United States and Europe.
“It is coming home to Canada.”
Wave five is when banks begin to see default on loans.
“This will be the acid test for survival.”
There will be excesses in the economy that have to be used up and Hall doesn't see us coming out of the woods until the latter part of the 2010.
But is there good news? There is always a silver lining and governments around the world have reacted quickly to introduce stimulus packages.
Canadian banks are very well positioned going into this recession and are able to take advantage of global opportunities when Europe and the United States will have to say no to good business, he said.
“We are better positioned because we are not under the same constraints.”
But it is also important for companies not to give up on large projects including oil sands and development.
Hall encouraged the business audience to invest in emerging markets and infrastructure spending and
“There are always opportunities, even inside of a very stretched global economy. Never give up on the fact that the opportunities are there.”
Northern Ontario is not likely to escape the full effect of the faltering economic climate since it's closely linked with the global economy because it is commodity based.
“It's hard to avoid it. The layoffs follow – the production shutdowns. That's just a natural part of what's going on.”
The EDC isn't predicting a Canadian dollar much higher than the 80-82 cent range during the next two years.
