Update
Published November 21, 2008
Since completing the last report, BMO’s Senior Economist, Sal Guatieri took questions regarding the economic situation on the Globe and Mail website on Thursday, November 20.
Here are some of the more salient points from that session:
• … deflation and surging inflation are fairly low probability events, given that our central bank is targeting 2 per cent inflation and has all the means to achieve its target.
• The global recession is sapping demand for our exports and commodities. The U.S. economy is in a deep downturn comparable to that of the early 1980s. Our housing market is cooling fast in the face of reduced affordability and plunging consumer confidence. We look for a moderate recession in Canada to last through the first half of 2009, sending the unemployment one percentage point higher to above 7 per cent. A gradual, modest recovery is expected in the second half of next year in response to low interest rates and some pick-up in U.S. demand. But this depends critically on an easing in the global credit crisis, which in turn depends on some stabilization of U.S. house prices.
• Canada will benefit from other countries’ fiscal stimulus packages indirectly, via support for our exports and commodities. A probable large fiscal plan in the U.S. early next year will go some ways to supporting a U.S. economic recovery. A large fiscal package from the Canadian government would provide welcome, direct support to the economy. Given the dire economic situation, voters would forgive the government for running a temporary deficit. The government can borrow at historically low interest rates today. A focus on infrastructure projects would preserve some of the jobs that will be lost in coming months, and boost long-term productivity.
• … infrastructure spending is the way to go to support a recovery. Once blue-chip companies see the light at the end of the economic tunnel, they (and other investors) will buy back their undervalued shares.
Mr. Guatieri also went to explain that a Depression is extremely unlikely given the tools available to economists and the social support that were not in use in the 1930s.
So, those who have lived through the recessions of the 1970s and 1980s will recall governments’ efforts to boost infrastructure spending to kickstart ailing economies. Provincial and federal governments will return to this strategy to keep the coming downturn shallow and as short as possible. Both levels of government should strategically exploit low interest rates and go into deficit if necessary.
Contrary to the statements of some ignorant journalists, government deficits are necessary during troubled economic times, are strong stimuli for boosting economies, and should not be shunned. Any government that fails to spend to boost its economy out of a recession is failing to do its job.
At the start of November, Alberta Finance had regiestered $276 billion in major construction projects planned, underway, or recently completed. $11.9 billion worth of projects are in the Athabasca – Grande Prairie region and $5.7 billion worth are in the Camrose – Drumheller region (including Lloydminster).
No information was provided about timing of the projects, and since the report’s release, some petro-chemical companies have announced postponement of large-scale projects, but we know that the Government of Alberta needs to rebuild much infrastructure that the Klein government allowed to decay. So, Alberta is well-placed to endure the coming downturn without as much pain as elsewhere in Canada, or the world.
Sources:
To download this article with tables and figures, click here
— Michael Hogan