The price of some key commodities, such as oil, gold and many minerals, is rising, as are home prices, insurance rates and municipal taxes. But this is being tempered by lower labour costs and declining prices for many goods and services. For these reasons, the consensus among economists is that inflation should remain at only about 2% in 2010. There’s plenty of excess capacity in most economies, says Aron Gampel, deputy chief economist at Scotiabank in Toronto, and it will take time for demand pressures to push prices up across the board.
But not everyone can rest easy. Peter Dungan, an economics professor at the University of Toronto, says companies that use a lot of energy should keep a close eye on oil prices, which have been climbing since early 2009.
There’s no consensus on when inflation will return. Brian Beaulieu, executive director of the Concord, N.H.-based Institute for Trend Research, warns that it could reach 6% in the U.S. by 2012, due to higher commodity and labour costs and the need to service the huge government debts created by stimulus spending. But Pedro Antunes, director of national and provincial forecasts at the Conference Board of Canada in Ottawa, says a stronger loonie will mitigate inflation in Canada.
Canada suffered a net decline of 400,000 jobs in the 12 months ended in October, sending the unemployment rate from 6.2% to 8.6%. Yet demand for skilled workers and trades remains very high, says Aron Gampel, deputy chief economist at Scotiabank in Toronto, and will only grow as more government-funded infrastructure projects start over the next year. Although there’s a bigger pool of workers to dip into, that doesn’t mean coveted computer programmers or other in-demand talent are easy to find.
Employment growth usually lags a recovery, so “we don’t expect a general labour shortage over the next couple of years,” says Terence Yuen, a senior economist at HR consultancy Watson Wyatt Worldwide in Toronto. It will be a different story in the mid-term, as Canada’s traditional working-age population declines. By 2021, 19% of Canadians will be over 65, up sharply from 13% in 2006.
Yuen says the trend toward a labour gap is inevitable but easy to ignore: “This is such a gradual process that most companies don’t even pay attention to it.”
Watson Wyatt forecasts labour shortages of 1 million people as soon as 2016. So, if you have good people, keep them. If you don’t, get them now before it’s too late.
The U.S. is our No. 1 market by a gigantic margin, and economists don’t expect that to change. Yet factors such as the post-9/11 “thickening” of the border and the soaring loonie have reduced the U.S. share of our exports from 82.6% in 2003 to 75.5% in 2008. Over those years, Canadian exports to the U.S. grew by just 0.9% in after-inflation dollars, versus 55.2% to the rest of the world.
Pedro Antunes, director of national and provincial forecasts at the Conference Board of Canada, says Canadian firms should always be looking for new places to export, and Europe and South America are especially promising.
Selling beyond the U.S. isn’t always easy. Antunes says our stronger dollar could make it tougher to sell to China because its currency is pegged to the U.S. greenback. And Aron Gampel, deputy chief economist at Scotiabank in Toronto, cautions that government incentives in some of the fastest-growing countries, such as China, India and Brazil, favour local firms.
The best bet is to target both our biggest and our fastest-growing markets. “Putting all our eggs in one basket has held us back,” says Peter Hall, chief economist at Export Development Canada. “But it would be fatal to take our eye off our key customer.”
The Bank of Canada has promised no significant rate hikes before mid-2010, barring something unexpected. So, if you need to borrow to expand or refinance existing debt, this is likely the best time to do it, says Aron Gampel, deputy chief economist at Scotiabank in Toronto.
Brian Beaulieu, executive director of the Concord, N.H.-based Institute for Trend Research, puts this advice much more urgently: “Now is the time to borrow. If you wait until there’s undeniable proof of the recovery, you’ll be paying higher rates along with everyone else.”
Banks are now making short-term loans to their best customers for as low as 2.25%, although higher if there’s a longer term or greater credit risk. If you line up a fixed-rate term loan while money is this cheap, you’ll be paying it back in deflated dollars once inflation starts to climb sometime after 2010.
But you shouldn’t take on just any debt. Peter Dungan, an economics professor at the University of Toronto, advises ensuring that the term of the loan is as long as you’ll need the money. And don’t borrow more through a line of credit or variable-rate loan than you can quickly pay back.
Apparently, very little in Canada. Retail sales have risen steadily since January. The Consumer Confidence Index from TNS Canadian Facts, which fell late in 2008 to 83.0 in December, roared back to 98.0 in October. (It’s benchmarked at 100.0 for July 2004.) TNS reports that Canadians expect economic and household fortunes to pick up in the next six months, although they’re a bit wary of making major purchases.
“This downturn was hyped to the max. But after a while, you learn the worst isn’t happening,” says Peter Dungan, an economics professor at the University of Toronto. The same sense of relief prevails in emerging economies such as China, India and Brazil.
But not in the U.S., where households are paying down debt and saving more. Pedro Antunes, director of national and provincial forecasts at the Ottawa-based Conference Board of Canada, predicts the U.S. savings rate will hit 5% to 6% in the next year, versus zero before the slump. He expects a similar rate in Canada.
Antunes, like many economists, expects consumer spending to edge back up. He says people whose investments have recovered lately won’t hoard their gains indefinitely, and the rate of big purchases such as autos and homes will slowly return to normal.
Many CEOs remain traumatized by the downturn and are looking for stronger signals of a recovery. Yet one overlooked fact is that fewer firms are going broke than in the past two recessions: bankruptcies are down by 6.4% in the year ended August 31 — to a 30-year low. Perhaps that’s one reason why business confidence has surged to a two-year high, according to the Conference Board of Canada‘s fall survey of mainly larger firms. Most respondents said now is a good time to invest in expansion — suggesting they’re ready to buy.
Similarly, optimism among SMEs is at its highest level since the first quarter of 2007, reports a September survey by the Canadian Federation of Independent Business (CFIB). Even the mood in the battered manufacturing sector is improving, and planned capital investments are rising.
That’s the good news. The bad news is that there’s a long way to go before the economy is cured, says CFIB chief economist Ted Mallett: “The fiscal imbalances created by all levels of government will be a drain on recovery if entrepreneurs think there’ll be a tax hike down the road to pay for them.” Still, most economists figure that if governments show they’re being fiscally responsible, business confidence will only increase in 2010.
If the U.S. heads into another recession in 2010, we’ll probably follow suit. But that’s an unlikely if, say Canadian economists.|
Central banks worldwide have slashed interest rates to near zero. And, especially in Canada, we have yet to see most of the billions committed by governments to jump-start the economy. Once we do, “the dynamics of inventory restocking and business investment should reinforce a sustainable recovery,” says Aron Gampel, deputy chief economist at Scotiabank in Toronto.
Not that we should be complacent. One worry is that the U.S. will pull stimulus spending and tighten monetary policy too soon, and that rising unemployment will lead to credit defaults, says Peter Hall, chief economist at Export Development Canada. Still, so far governments are maintaining heavy stimulus spending. And, Hall says, most U.S. banks have passed stress tests of their ability to absorb defaults at an assumed 10.5% unemployment rate.
Economists point out that business-cycle upturns typically are sustained. And there’s a strong consensus that although we might not see strong growth, the unprecedented stimulus packages should keep us in soft-recovery mode — or stable, at the very least — through 2010.