Transcript Title

Global Economy in Crisis
Opportunities for recessionary times
CIM-MES Private Briefing
National Club, Toronto
February 18, 2009
Peter Hall
Vice-President and Chief Economist
EDC Economics
How the bubble grew
• Protracted economic cycle
• Strong global economic performance, 2004-07
• Surge of global liquidity
• Rise of new, significant global consumers
• Global inflation, stagflation
• Speculation
2
Incentive to speculate
• Producers

Security of supply

Appreciating asset
• Financial markets: asset class

Shield against USD movements

Store of value
• The rest of us

Gains difficult to resist
3
When speculation unwinds…
• Producers

Can live off existing stocks

Credit conditions tighten? Liquidate inventories
• Financial markets

Asset class no longer against USD (flight to quality)

No inflation, no need for hedge in metals
• The rest of us

…run like the wind
4
Key questions
How bad is it?
How long will it last?
Policy: an adequate antidote?
How will it affect Canada?
What are the opportunities?
5
US economy: first to go down
6
(% change q/q, annualized)
5
4
3
2
1
0
-1
-2
-3
-4
-5
06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4
Source: Bureau of Economic Analysis.
6
Fast reversal in Euroland
6
(% change q/q, annualized)
“DECOUPLING”
4
2
0
-2
-4
-6
06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4
Source: Eurostat.
7
Japan takes a big beating
6
(% change q/q, annualized)
4
2
0
-2
-4
-6
-8
-10
-12
-14
06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4
Source: Economic Planning Agency, Japan.
8
Emerging market vulnerability
• BRIC countries decelerating
• Clue: fast policy reversals
• Export dependence (imported excesses?)
• Fast growth: domestic excesses?
• Financial turmoil puts investment at risk
• Consumers: not there yet
9
China’s great deceleration
(GDP growth, year-to-year, %)
14
10
8
6
4
2
Source: IMF, EDC Economics.
2008
2007
2006
2005
0
2004
(% Change y/y)
12
10
China’s great deceleration
(Implied quarterly GDP growth, annualized, %)
18
16
12
10
8
6
4
2
Source: IMF, EDC Economics.
2008
2007
2006
2005
0
2004
(% Change y/y)
14
11
Global GDP Forecast by country – Winter 2009
Market
Share
2007
2008
2009
US
21.3
2.2
1.1
-1.5
Canada
1.9
2.7
0.6
-0.8
Mexico
2.1
3.3
1.9
-0.6
Europe
20.8
3.1
1.1
-0.8
Japan
6.6
2.1
0.3
-1.3
Asia-Pacific
23.7
9.0
7.2
5.1
E. Europe/C. Asia
8.4
7.3
5.0
1.3
South America
5.6
6.4
5.6
2.6
MENA
4.7
5.6
6.0
4.3
Industrial
55.7
2.7
1.1
-1.0
Developing
44.3
7.9
6.3
4.1
Total World
100.0
4.9
3.4
1.1
12
2 more waves to come
PAST/IN PROGRESS
WAVE 1
US HOUSING
MARKET
WAVE 2
FINANCIAL
SECTOR
PRESENT
WAVE 3
SLOWER
DEMAND
FUTURE
WAVE 4
EMPLOYMENT
IMPACT
WAVE 5
2ND ROUND
13
FINANCIAL
Unemployment: a long way to go?
7
(Unemployment rates,
trough-to-peak increase)
6
5
Mid-70s
1981-82
1990-91
2001
Present
4
3
2
1
0
United States
Source: Economic Planning Agency, Japan.
Canada
United Kingdom
14
Key policy actions
Financial sector
recapitalization
Stimulative monetary
policy
Huge fiscal stimulus
15
Interest rate cuts, last 10 weeks and total
Last 10
weeks (bp)
Level (%)
Total
easing (bp)
Bank of Canada
125
1.00
350
Federal Reserve
75
0.25
400
ECB
125
2.00
225
Bank of England
200
1.00
475
Riksbank
275
1.00
325
RBA
275
3.25
400
RBNZ
300
3.50
475
16
Announced fiscal stimulus packages that include
elements of infrastructure spending
US $B
Key focus
Years
Israel
5.5
K
2009
UK
30.0
T, G, K
2009
Korea
32.0
K
2009-10
Germany
64.2
K, F
2009-10
Russia
260.0
K, F, G
2009-10
China
568.0
K, T
2008-10
700.0?
T, G, K
2009-10?
US
K: Infrastructure; T: Tax relief; G: New public spending; F: Financial sector aid
17
Source: IMF, EDC Economics.
2009(f)
2008(e)
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
(% Change y/y)
Global economy: in deep recession
6
5
4
3
2
1
0
18
Global outlook: summary
• Slowdown is global, not a quick rebound
• Monetary easing: almost done
• Further substantial fiscal stimulus expected
• USD will strengthen gradually
• Commodity prices not likely to weaken further
• Competition is fierce
19
Key impact: deflation?
• Oil, food prices will dampen CPI
• Definition: declines in prices of a broad class of
goods and services
• The mathematics of consumer price indexes

Current experience

Where we’ll be in 6 months
• Risk: could we import it from the US?
• Psychology of deflation
• Difficult to overcome
20
What will happen to the CPI?
4.0
All-items index,
3 scenarios
3.0
July 2009
2.0
1.0
0.0
2% scenario
1.2% scenario
0.8% scenario
-1.0
-2.0
2007
Source: Bloomberg.
2008
2009
21
Key impact: the loonie
Value of the dollar
=
Oil & gas prices
+
Non-energy commodity prices
+
Interest rate spreads
+
US dollar movements*
22
The dollar’s landing zone
(Canadian dollar in U.S. cents)
110
105
100
95
90
85
80
75
70
65
60
90
92
94
96
Source: Bank of Canada, EDC Economics.
98
00
02
04
06
08
23
Fall 2008
Spring 2008
Fall 2007
Spring 2007
Fall 2006
Spring 2006
Fall 2005
Spring 2005
Fall 2004
Spring 2004
Fall 2003
Spring 2003
Fall 2002
Spring 2002
Fall 2001
Spring 2001
Fall 2000
Spring 2000
Key impact: Trade Confidence
(EDCs Trade Confidence Index - mean=72.8)
90
85
80
75
70
65
60
24
International Trade Opportunities will…
Fall 2008
33%
Spring 2008
37%
28%
Fall 2007
49%
26%
Spring 2007
38%
45%
30%
Spring 2006
Spring 2005
32%
Fall 2004
30%
Spring 2004
32%
28%
Spring 2003
27%
Fall 2002
17%
39%
33%
49%
35%
Fall 2003
22%
53%
28%
Fall 2005
23%
36%
34%
Fall 2006
31%
56%
26%
60%
10%
8%
54%
17%
53%
21%
56%
20%
get better
7%
4%
55%
41%
0%
12%
44%
37%
Spring 2002
19%
30%
40%
50%
% of Respondents
stay the same
60%
70%
80%
90%
100%
get worse
25
Impact on Canadian Exports
Canadian Export Forecast
Share
2007
2008(e)
2009(f)
Goods sector
86.2
2.1
5.7
-13.3
Goods, ex-energy
67.0
1.0
-6.0
-6.9
Goods, ex-auto, ex-energy
52.5
3.0
0.0
-7.9
Service sector
13.8
0.1
-0.6
0.5
Total
100.0
1.8
4.9
-11.5
Total volumes, goods
100.0
1.0
-6.0
-5.1
26
Opportunities
Reduced input costs
Lower dollar
…but not too low!
Emerging markets
Infrastructure
27
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