Can the US and European Politicians save the Global Economy?

I had the opportunity this morning to attend the 2011 Economic Outlook presented by the Economic Club of Canada. Some of Canada’s top economists were on the panel. There were a number of key messages that were heard loud and clear from all 5 Economists. Some key MESSAGES that as executives we should contemplate in our strategic thinking of both our organizations and personal wealth management.

Warren Jestin, Chief Economist, Scotiabank suggested that the US economy is stalling and will continue to stall over the next 18 months. The Canadian economy with 2 percent growth won’t be far behind. In the emerging market the story has changed from previous years except with perhaps slower growth – but the key word there is growth. If you’re in the commodities business (oil and metals) this suggests a positive outlook especially for Canada. If we co-relate this to our PEO Session last week with Na Lui on China; China’s government is committed to maintaining the construction era for at least another 3 years – to build you require natural resources. In terms of inflation in North America – don’t expect anything exciting in 2011 and 2012! I gathered from Warren that there is a potential downside in the equity market and the Canadian Dollar will remain close to par. No clear answers of where to put your cash … possible ideas to continue to think about how your organizations can be selling into those emerging markets.

Sherry Cooper, Chief Economist BMO suggested that we are in the 3rd year of a recession and the US housing market continues to be a dominant factor in this. If we think about housing as a massive employer in the US and one of the largest components of household wealth – the puzzle begins to take shape. With households feeling the pinch of declining values, and unemployment being at high levels it becomes virtually impossible for the US consumer to really begin to spend their disposable dollars. Putting some political light on this you begin to understand the dilemma that Obama faces – he is very likely to be a 1 term President. He is constrained by two sides: (i) spending and do we drive the deficit even higher but at least stimulate some growth or (ii) do we hold back with stimulus and let the American people continue to suffer a slow return to growth? Sherry added another interesting piece to the puzzle – the psychological element. How many young people are holding back on purchasing homes at this time with the belief that the market will fall further. Is the media allowing us to fuel this psyche? There has to be an upswing in the consumer psychology for there to be any uptick or momentum out of this recession. Big Alert – we are once again seeing big layoffs in the US (Bank of America)…add that to the above.

Craig Wright, Chief Economist of RBC put it simply – “we’ve experienced a decade of excess now followed by a decade of stress”. Unfortunately that statement almost sounds fair! The debt has moved from the private to the public space. We’ve actually been quite successful at prolonging the problem or pushing it out. Sooner or later there will need to be a restructuring and the real question becomes whether the governments (European and US) have the ability to stop shooting themselves in the foot with their decision making process.

Avery Shenfeld, CIBC World Markets tried to address the question of where should we be putting our money. Unfortunately he didn’t really leave me with the confidence that the answer is before my eyes. Short term interest rates are going nowhere for the next couple of years, long term yields on bonds aren’t great and the equity market is in turmoil. The opportunities in Canada – maybe REITS….more likely cash until the dust settles. I must add unfortunately that is my opinion, but it also appears to be the consensus of many organizations and households as the stockpile the cash.

Derek Burleton, VP and Deputy Chief Economist at TD seemed to summarize it all above. In fact this is one of the few times I’ve seen 5 Economist’s agree on so many points. 1) The overall risk to the economy is the Political Risk. We’ve run out of opportunities for the Federal Reserve to bail anyone out here. There are too many structural issues we currently face as we’ve been spending our future generation’s dollars; (2) there is a risk of a short term pause and we are one shock away from a technical recession. Essentially if you really listen to all the Economists…we don’t need the technicality we are in a recession in the US; (3) Europe has an engine that has faltered. The status quo is not working and something needs to be done. The politicians need to be brave enough to begin a restructuring without destroying the global economy; (4) the emerging market will continue to grow but at a slower pace over the next few years. Canada should outperform the US with the continued global demand of Natural Resources.

On September 20th we will have David Rosenberg, Chief Economist and Strategist, Gluskin Sheff & Associates present to our senior executives and their guests. David is one of the Top Economists in the country – it’s a session you won’t want to miss. If you’d like to be part of that session please call Jenny Nicholson @ 416-637-0299 ext. 202 or register at http://peo.net/events.html .

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