Canadian economy: the tide is slolwly turning

As most consumers can no longer ignore economic news, we are taking a long, hard and detailed look at the data spewed by the financial press.

OECD cheers, central banks retreat

In its latest report, the organization states that its 30 members prospects are the best in the past two years and that the "worst scenario was averted". The economies will grow 0.7% next year, with Canada 0.7% and US 0.9%, a marked improvement from the previous estimate, but will still shrink 4.1% this year. As the situation improves, central banks start to apply their "exit strategies".

“It looks as if the worst scenario has been avoided and that OECD economies are now nearing the bottom,” Jorgen Elmeskov, acting head of the economics department, wrote in a report released Wednesday. “Even if the subsequent recovery may be slow such an outcome is a major achievement of economic policy.”

“It suggests that there is no longer the need for training wheels on the credit markets,” Charmaine Buskas, a senior economics strategist at TD Securities, said in a note to clients. Still, all help isn't disappearing. The main Bank of Canada lending program aimed at major banks will be kept open until at least until the end of January. “In this context, it is appropriate to focus on the Bank's primary tool for injecting term liquidity into the financial system,” Mr. Harrison said. There is about $29-billion of loans to banks outstanding under the main program. While that's down from $41-billion at the end of 2008, it's a significant figure that shows banks are still relying on the funding.

The World Bank predicted a worldwide contraction of 2.9%, the first since WW2.

The OECD's forecast for Canada next year compares with the Bank of Canada's estimate for growth of 2.5 per cent. The two estimates aren't comparable because the OECD and the Bank of Canada use different methodology in their forecasting. (?!?)

Consumer reaction: China, the new US?

Predictably, the american consumers, who has long carried world's consumption on their shoulders, tightened their purse. (The rest of this section contains direct quotes from the Globe and Mail.)

The savings rate, which was hovering near zero in early 2008, surged to 6.9 per cent, the highest level since December, 1993. (...) Nigel Gault, chief U.S. economist at IHS Global Insight, forecast that consumers would remain cautious going forward but that even dampened increases in spending should be enough to jump-start economic growth. “We do expect spending to creep slowly higher in the second half of the year as the labour market deterioration becomes less severe,” he said in a research note. The U.S. government reported Wednesday that the overall economy, as measured by the gross domestic product, shrank at an annual rate of 5.5 per cent in the January-March quarter, slightly less severe than the 5.7 per cent decline estimated a month ago. However, the 5.5 per cent drop in the first quarter followed a 6.3 per cent decline in the last three months of last year, the worst six-month performance for the GDP in more than a half-century.

In the long term, this relative miserliness isn't such a bad thing. Spending will once again be a function of incomes, rather than assets, and the U.S. economy will be less vulnerable to the kind of credit-fuelled crisis that we're all trying to climb out of. In the immediate term, however, there is little doubt this saving will slow the pace of a global economic recovery. The paradox of thrift, first espoused by John Maynard Keynes, posits that if people save too much in bad times, they could actually become poorer: The lack of consumption begets a falloff in demand, which in turn stalls the economy and results in lost jobs.

"This marks a significant change in the global economy," said Ken Lieberthal, who was the senior director for Asia on the national security council under President Bill Clinton, and is now a professor of business administration at the University of Michigan. "It means the U.S. will no longer provide the level of consumption the rest of the world has become accustomed to, and built their economic models around. I see the potential for very substantial friction going forward."

"It is almost mathematically impossible for China and India - either alone or together - to fill the void that is now being left by the post-bubble American consumer," said Stephen Roach, chairman of Morgan Stanley Asia. He notes that although the United States accounts for about 4.5 per cent of the world's population, it consumes $10-trillion annually. In contrast, China and India are home to 40 per cent of the global population, but account for just $2-trillion in spending.

The world may be looking at China's continuing growth and hoping it can save the global economy as it expands, but Beijing's goals are more immediate. Battered by seven months of falling export sales as demand from North America and Europe vanished - including a 26.4-per-cent plummet in May - the government, concerned about social stability, is trying only to keep its own economy from further collapsing. Saving the West is the last of its concerns. "In the medium term, it's more likely [the Chinese consumer] will replace the Japanese consumer as the engine of Asian growth," said Matthew Crabbe, director of Access Asia, a research consultancy. "As for the global economy, it obviously helps [that Chinese consumers are still buying], but it's not a panacea." Others wonder if the Chinese stimulus program, which effectively creates artificial domestic demand to keep more factories from closing, isn't doing more harm than good. "It's very hard to make the transition from an export-led economy model to a consumption-led economy model. No one before has done it in less than a decade, and much of what China is currently doing may actually slow the needed adjustments," said Michael Pettis, a professor of finance at Beijing University. "The U.S. has stopped being the consumer of last resort, so unless somebody else steps up, there is going to be problem with too much production globally and not enough consumption," he said. "What I'm very worried about is that we're going to see a situation where the Americans aren't buying [the surplus], and the Chinese aren't buying it, either. I'm worried we're going into a very rough decade."

Advisors and Millionaires

Canadian investors are significantly less satisfied with their advisors compared to last year. Only 24% would recommend them vs 32% in 2008 and 10% will switch compared to 6% then. 36% of investors have started using a discount broker and keeping a full-service broker at the same time vs 25% last year.

“This has created a new frugality, a situation in which an investor might call their adviser to get recommendations on portfolio mix and stock selection, but then turn around and place their order online for $9 or $7 per trade rather than spending $250 by trading through an adviser,” said Lubo Li, J.D. Power's senior director.

Obviously, investors lost a lot of money in the market turmoil. According to the World Wealth Report, "the number of people with assets of between $1-million (U.S.) and $30-million fell 14.9 per cent to 8.6 million" and their combined wealth fell "19.5 per cent to $32.8-trillion". The number of those with "more than $30-million in assets dropped 24.6 per cent, and the group's wealth fell 23.9 per cent".

Ileana van der Linde, a principal with Capgemini said: “We've never seen such a decline in all the years we've been doing the report,” she said in an interview with The Associated Press. “This market was really unprecedented.” Those in Latin America fared much better because they favour low-risk investments - Brazil's millionaires lost only 8.4%.

Canada's Own: the Irvings & Reisman

While most businesses were and still are faced with serious problems, it is difficult to learn how they respond and adapt to the new environment. One of Canada's most secretive business empires, Irving Oil, changed its name to Fort Reliance and also opened an office in Toronto. Reisman, who purchased Chapters back in 2001 despite its management opposition, has started to diversify into the digital realm with Shortcovers, its answer to Kindle. Unlike Kindle, the service is available on a multitude of platforms in both Canada and USA.

More info / Sources: gm-investors, gm-oecd, gm-central, gm-million, gm-sock, gm-paradox-us, gm-paradox-china, gm-irvings, gm-shortcovers

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