This economist’s skepticism about the latest economic forecasts is based on four pillars.
By no means are they as magisterial as the seven pillars mentioned in The Book of Proverbs or the book by T. E. Lawrence, but they constitute this economist’s view of the current economy.
First, the financial crisis that brought on this Great Recession is far from over. The International Monetary Fund’s just-released report stated that only about half of the $4-trillion of toxic assets have been taken into account. The rest must be written off sooner or later. That will impair banks’ ability to lend, something essential for continuing economic expansion.
Second, the extent of the global recession is mind boggling. About three-quarters of the world’s economies have been contracting, far more than usually is the case. That suggests that it will be more difficult than heretofore to revive the world’s economy. That will impair foreign trade and, of course, Canada’s export markets.
Third, the ongoing business recession was triggered to a large extent by consumers in the United States. They borrowed heavily on the ever-rising value of their homes and as that reversed and prices fell, that accentuated the heavy debt burdens of consumers south of the border. Consumer spending there reached an unprecedented 71 per cent of Gross Domestic Product, about 5 per cent above the usual norm. It is difficult to see what factors will fill the gap created as consumers retrench. Certainly, in no other country is there much chance that consumers will go on a splurge similar to the one that occurred in the previous decade.
Four, based on that, plus “irrational exuberance,” the supply side of the economy has become unbalanced. Who will buy enough cars to utilize the 18-million-car capacity that exists in the U.S. automobile industry? Housing, too, has become overextended and a cutback in the construction sector is inevitable. In China, capital spending reached an absurd level, as it was contingent on an always-increasing U.S. demand for Chinese exports. Capital spending oriented to that must pull back as export markets clearly cannot maintain their present forward momentum. That will adversely affect the markets for raw materials, such as copper and lumber that are used in capital spending projects.
Furthermore, unlike in previous recessions, there is no backlog of demand. It is all too possible that as the measures that have been enacted to revive the economy expire, the economy at best will stabilize, but more likely, contract. It should be noted also that much of the gains in the economy were the result of inventory restocking.
The four pillars cited above do not augur well for the economy.