Where are we going ? The Macro-Economic Outlook – February 2009 Lars Osberg Economics Department Dalhousie University CUPE Halifax February 17, 2009

Not Just a Financial Crisis ! September 2008  Unprecedented volatility + previously unimaginable policy response “most dangerous shock in mature financial markets since the 1930s” IMF – World Economic Outlook October 2008  Revised downward – November 2009  Revised downward – January 2009  Superimposed on pre-existing down trend Context + shock implies likely future trend

Real output declining in USA well before financial crisis

January 2008 – not yet clear: Passing Breeze or Gathering Storm? “housing starts and the change in housing starts together form the best forward-looking indicator of the cycle”  Leamer (NBER Working Paper No )  Housing construction booms borrow output from future periods  Housing prices declining since % in 07/08?  Asset Price bubbles take long time to unwind (Japan) Housing wealth underpinned US consumer spending boom  Sub-Prime Mortgages + securitization = financial disaster 2008 official line: “Contained in implications for financial markets”

January 2008 view: “Optimism decline accelerates” “U.S. economy has slowed noticeably”  IMF World Economic Outlook, April 2007World Economic Outlook Growth Forecasts - Revised downward ever since

IMF – World Economic Outlook October 2008 “The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. Against an exceptionally uncertain background, global growth projections for 2009 have been marked down … and the outlook is subject to considerable downside risks. … recovery is projected to take hold progressively in 2009, …. likely to be unusually gradual, held back by continued financial market deleveraging.” Outlook revised downwards 3 weeks later!

“Global Economic Slump Challenges Policies” IMF – World Economic Outlook Update Jan. 28, 2009 “The world economy is facing a deep downturn”.  Downward revision of about 1¾ percentage points from the November 2008 WEO Update. “A pernicious feedback loop between the real and financial sectors” “Advanced economies - deepest recession since World War II.” “The uncertainty surrounding the outlook is unusually large.”

US Housing – far from bottom

Future Trends? Y = C + I + G + (X-M) C: Credit crisis & Consumption Expectations + credit availability + wealth effect I: Commodity & house prices down Canadian investment boom driven by resource/energy prices Net Exports (X-M) US income decline + collapse commodity prices  Decline in exchange rate – a lagged & partial offset G – stimulus packages in Canada & USA Size – enough to offset increasing gloom ? Timing – late 2009 before appreciable impacts

Good News: “Whatever it takes” – the new Central Bank mantra BUT - Not just a liquidity/confidence crisis  Chains of real insolvencies need resolution  Disappearing Wealth depresses consumption  “Repricing Risk” + Deleveraging has real effects AND – can one push on a string?  Even if bank reserves become available, willing borrowers + willing lenders needed at micro level PLUS – inflation phobia at Bank of Canada

Bad News: Social safety net shredded during 1990s Cyclical risk in Canada partly downloaded to provinces & families during 1990s  Under 40% of unemployed now get EI  Budget 2009: + 5 weeks benefits – in US, +13 weeks  Social Assistance no longer cost-shared Provinces ill-equipped to absorb (Origins of Rowell-Sirois) Less ‘Automatic’ stabilization Families under far greater stress  50+ cohorts often lose both jobs and savings

Recessions do end – but when? A: Housing cycle: 2006 start + 4 year average => return to trend growth ~ 2010 “Short & sharp”: assumes financial contagion is now contained + global imbalances resolve cleanly + confidence resurgence + “natural” revert B: Japan++ scenario “Long & very messy”: Monetary policy ineffectiveness if low inflation + long-term workouts + protectionism + fiscal stimulus too small & late – if Bank of Canada really expects strong rebound in late 2009, will raise interest rates & strangle recovery in cradle

Implications? “Labour shortages” = yesterday’s news Local shortfalls for specific skills – but for next few years NOT a persuasive general theme or policy frame “Social Protection” – needed NOW EI Benefit Duration & Coverage – back on agenda Links to training & SA systems need re-examination Older Workers: pensions ? work forever? End Mandatory Retirement + Increased LF part of 55+  Already a strong trend + now a new necessity Integration into workplaces & merit assessment? Viability of Defined Benefit pension plans? OAS/GIS/CPP/QPP – crucial for vast majority

Any Good News? Death of Neo-Conservative Ideology  None of this should be happening  Everybody needs government now Benefits of 1990s growth went to top 1% but now that it’s gone: New emphasis on equity in income distribution New realization that workers need collective action to protect their interests

Optimists in Ottawa !! – the budget assumptions of January 2009