Recessions Do Eventually End
The economy has shown some signs of health as of late with the recent rally in the stock market and real estate sales in February increasing slightly; however, we are still not out of the woods just yet.
What we experienced in the last few years, especially in the real estate market has come and gone. Don't expect to see the gains we say during our pre-recession period any time soon. We have a long road ahead of us and although our economy should show signs of prosperity in the next six months, expect to see more realistic gains during the post-crisis period.
Today's article is from Benjamin Tal - CIBC's "Weekly Market Insight", which explains the kind of economy that will emerge as we get closer to the end of this economic crisis.
NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS
Recessions do eventually end. And this recession is no exception. While we still have 4-6 bad months, it is time to start thinking about the nature of the recovery, and more importantly the nature of the post crisis economy.
The recent rally in the stock market might be the real thing or simply another head fake. Nobody really knows. But at the minimum, what we got over the past week is a window to the nature of the eventual recovery in the stock market. This recovery will be led by commodities and financials followed by the more cyclical sectors of the market. So take a close look at the market today. If it is not the real thing, it is what the real thing will
look like.
As for the economy, the exact timing and magnitude of the recovery is debatable. The most likely scenario is that we will start getting some positive numbers in the third or fourth quarter of this year, with 2010 likely to be the official recovery year. But what kind of an economy are we going to see emerging as the fog clears?
The following is a short discussion of the main themes that will characterize the post-crisis economy.
* Deleveraging: the days of double digits credit growth are probably over. In the post-crisis economy household credit will rise by 5-7% a year as opposed to the 10-11% that we have seen in the past five years or so.
* Higher savings: the savings rate will rise to 5-6% from virtually zero, reflecting reduced borrowing as well as increased risk aversion. The fact that house prices will not rise very quickly will also add to active savings by Canadians as opposed to the passive savings that was linked to rising home valuations of the past decade or so.
* Lower potential economic growth: the post-crisis recession will not be as robust. The potential growth or the speed limit of the economy will be lower than what we have seen in the past decade since the reduced leveraged activity in the economy and the increased savings will work to limit the growth potential of consumer spending.
* Reduced vulnerability to economic shock: The post-crisis economy might be less robust but it will also be more immune to economic shocks. Reduced leveraged and higher savings will work as a buffer between the economic cycle and the financial health of many households.
* Higher inflation: the Fed and other central banks are now monetizing the situation. Quantitative easing means in many respects printing money. And eventually, with confidence returning to the market, this money will be used—a fact that will lead to some inflation. Higher inflation will be dealt with by higher interest rates. We view current interest rates as nothing more than emergency rates, and thus expect them to be higher in the post-crisis economy.
* Higher commodity prices: adding to the inflationary pressure will be a renewed increase in commodity prices. With global demand rising again in 2010 or 2011, and supply of major commodities being currently reduced (cancellation of future oil projects, reduced plantation by farmers), this demand pressure will be translated directly into higher commodity prices.
* A relaxed housing market: the housing market will return to a balanced position. Housing starts will average 170,000-180,000 units a year—notably below the 200,000+ we have seen in recent years. House prices, following the current correction, will be rising much more moderately, and the atmosphere in the housing market will be much more relaxed.
As always, if you want to talk about your financing options, I’m here to help.
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