The probabilities lean toward a gradual recovery
L�vis (Qu�bec) June 18, 2009 – The worst of the economic and financial storm seems to be over! It caused a lot of damage as it blew through and we will have to clean up, repair and rebuild before life can get back to normal. It is therefore hard to picture a recovery as lively as what we’ve been used to. That is the conclusion that Desjardins Group’s economists reached in their latest economic forecasts, released today.
�Activity sectors such as finance, real estate, the auto industry and forestry have been slammed. It will take time to put all the pieces back together. Although we will reach bottom in the fall of 2009, we will have to wait until at least the fall of 2010 before production gets back to pre-recession levels and a true expansion phase begins,� stated Mr. Fran�ois Dupuis, Desjardins Group Vice-President and Chief Economist.
Recovery uneven across Canada
Qu�bec, which went into recession at the end of 2008, is doing somewhat better than Ontario and western Canada. It is not very dependent on the auto sector and less focused on raw materials, so the province is holding up better under the deterioration in the global economic situation. The increase in public investment, that began well before the recession did, is also helping Qu�bec to get through this landmark period. �Although the damage is not as bad in Qu�bec as elsewhere, the recession is still fairly severe, as shown by February’s 1.1% drop in the real GDP,� asserted Mr. Yves St-Maurice, Director and Deputy Chief Economist at Desjardins Group.
Although the structural wreckage is not as bad in Canada, the country is still highly dependent on its neighbour to the south. The housing market did not slide as much as its American counterpart, while the banking system had an easier time getting through the liquidity crunch. On the other hand, the plunge by oil prices had substantial negative wealth effects in some regions, exports plummeted and the auto sector’s future is still grim. It is clear that Canada’s economy will recover slowly, at a pace similar to the American economy. Canada’s real GDP will fall 2.6% in 2009 and then climb 1.7% in 2010.
The provinces’ economies will develop unevenly, according to their industrial structure. The western provinces and Newfoundland and Labrador are more affected by blips in energy prices. Alberta, which saw its output contract in 2008 after oil prices dropped, will see its real GDP decline by 2.8% this year and post a rebound of 2.5% in 2010.
Ontario, which is closely tied to the United States and the auto industry, will see production decline 3.4% in 2009, and then come back by just 1.3% in 2010. This contrasts with the results for Qu�bec, which will post a contraction of 1.7% in 2009, followed by growth of 1.4% in 2010. Currently, Qu�bec’s different economic structure is giving it an edge. British Columbia will stand out in 2010 with its real GDP up by 3%, a direct result of staging the 2010 Winter Olympics.
The global recovery must bank on the United States
After enduring a brutal 1.7% plunge in 2009, the world’s economy will post growth of 2.5% in 2010; the IMF considers 3% to indicate a recessionary environment worldwide. The growth forecast for industrialized countries is only 1.1% in 2010; for developing nations, it is 3.9%.
Also according to Desjardins’ economists, the United States will be the trigger for the global recovery. �It is at the heart of the world’s commercial and financial trade and it will take more than one recession to change this fact. It is therefore unlikely that the planet’s economy will emerge from a recession separate from the United States, especially as commercial trade between nations has exploded in the last few decades,� they noted.
The American economy is slowly heading toward a fall recovery, but it will not be dazzling: a real GDP increase of 1.4% for 2010 after a forecast decline of 3% in 2009.
Structural problems should not be underestimated
The markets’ recent euphoria is largely based on the hope of seeing economic growth bounce in the new few months. However, the hope seems just as exaggerated as the pessimism that swept the planet last fall, which called for an inevitable 30s-style depression. �Spikes in the stock market, oil prices, the Canadian dollar and interest rates should not continue; the next few months will be calmer and there is even a chance of a correction this summer,� declared Mr. Dupuis. He believes it will only be toward the fall, when the foundations of the economic recovery have gelled, that markets could see a second surge in optimism, mitigated by the persistent fundamental structural problems in the U.S. and, at certain levels, the global economies.
The crises�mortgage crisis, liquidity crunch and economic crisis�we have been through have left deep wounds. The U.S. and European housing markets have been laid waste and the imbalance remains. The global financial system is in a long period of convalescence and financial institutions’ balance sheets are still contaminated by toxic assets. Simultaneously, losses on loans are mounting, adding to the problems. Automakers are collapsing, not only in the United States, but around the world. It will take time, patience and a lot of sacrifices to rebuild a prosperous auto industry that is more in line with the new sustainable development objectives. Closer to home, the forestry sector and any industry that revolves around it, like lumber and pulp and paper, are in peril.
�In this context, it will be hard for the recovery to be dazzling,� added Mr. St-Maurice. However, enthusiasm will be back at year’s end, driving oil prices to around US$78/barrel, after a potential temporary correction this summer. Prices should hold at this level on average for next year. As a result, the S&P/TSX should show an increase of about 20% for the year, while the S&P500 will be up 8%. Next year, returns will be 11% and 14% respectively. Oil prices will continue to influence the Canadian dollar, which will hold around US$0.90 until the end of the year, reaching parity in the second half of 2010.
Can central banks relax?
�On this point, the answer is clear: No! On the contrary, they must keep up their work�, stated Mr. Dupuis. The international financial system is still very fragile and calls for great vigilance from monetary authorities. In the United States, as the Federal Reserve cannot take any further action on key rates, it will have to continue with and even expand its quantitative policy to encourage the recovery and keep the economy from abruptly falling back. Given the movement by the bond market, the Fed will therefore continue with its program to purchase federal bonds.
The Bank of Canada, for its part, is keeping an eye on how economic indicators are moving before taking non-traditional action which, for now, would be astonishing. �However, the most important thing is to reassure markets that the central banks are prepared to respond to any upheaval promptly,� concluded Desjardins’ economists.
To find out more, consult the Economic and Financial Outlook, Summer 2009, Economic Studies, Desjardins Group at www.desjardins.com.
About Desjardins Group
Desjardins Group is the largest cooperative financial group in Canada, with overall assets of $152 billion, as at December 31, 2008. It comprises a network of caisses, credit unions and business centres in Qu�bec and Ontario, and some twenty subsidiary companies in life and general insurance, securities brokerage, venture capital and asset management, many of which are active across the country. Drawing on the expertise of its 42,000 employees and the commitment of its 6,300 elected officers, Desjardins offers its 5.8 million individual and corporate members and clients a full range of financial products and services. Its physical distribution network is complemented by leading-edge virtual access methods. www.desjardins.com.