Leading economist addresses TTA, provides insight into global issues
November 15, 2011
TORONTO, Ont. -- Despite a steady stream of apocalyptic media reports on the economy, the US is actually experiencing a manufacturing renaissance, wages are holding steady and Canadians have horded away an unprecedented amount of cash.
TORONTO, Ont. — Despite a steady stream of apocalyptic media reports on the economy, the US is actually experiencing a manufacturing renaissance, wages are holding steady and Canadians have horded away an unprecedented amount of cash.
Those were some of the surprising revelations shared by Benjamin Tal, managing director and deputy chief economist with CIBC World Markets when addressing the Toronto Trucking Association this afternoon.
While Tal admitted there is still much uncertainty surrounding the North American and global economies, he suggested the economy today is nothing like it was in the months leading up to the ‘Great Recession’ of 2008.
“It’s very tempting to compare the situation (today) to 2008; very tempting but wrong,” Tal said. “In 2008, we had a situation in which the financial market meltdown led to the recession. Today, we are talking about recessionary fears leading to difficulties in the market. It’s a big difference.”
Tal doesn’t expect the North American economy to plunge back into recession, and he said when you look at the numbers, there are reasons for optimism. For one, US manufacturing has posted 25 consecutive months of growth thanks to consumers in emerging economies who are now hungry for quality, brand name American goods.
“I’m talking about the Y Generation in China, 200 million young Chinese people who have never experienced poverty in their lives. Their propensity to consume is higher than the average American teenager and what they want is not junk; the junk they send to us. What they want is quality products and brand names,” Tal said. “For the first time, American and Canadian manufacturers can compete in this space because the competition is not on price, it’s based on quality and brand name and that’s why we see this renaissance of US exports.”
Tal said American exports to emerging markets are increasing by 22% a year and stealing market share from Germany, which used to dominate the export market to emerging markets.
“Years from now when the fog clears, we will see American and Canadian manufacturing sectors that are smaller, leaner but much more dynamic and more profitable…that’s the future,” Tal suggested.
So if US manufacturing is on the rise, why is the country seemingly unable to improve is dismal unemployment rate? Tal said most of the expansion seen from US manufacturers has been driven by capital spending rather than job creation.
He also said two-thirds of all jobs lost in the recession were from the construction and manufacturing sectors and those displaced workers don’t have the skill sets required to transition to office work where there remains a demand for workers.
“I see a significant skill mismatch between what is needed and what is available,” he noted, adding “the bargaining power of the existing labour force in the US is surprisingly high.”
Tal pointed to a ‘Real Hourly Wage Index’ that showed wages remained steady for those who kept their jobs, marking the first ever recession in which wages didn’t decrease.
On the US housing front, Tal isn’t expecting to see a recovery for at least another year. He said there are 12.5 million US homes in a negative equity position and owners will continue to walk away from their mortgages. Having recently compared the US housing market today to where it stood 12 months ago, Tal said “nothing has changed.”
The US consumer also has a role to play in an economic recovery, and for the most part they are sitting on their wallets, Tal said.
“We used to joke about American consumers; when they’re happy they spend and when they’re depressed they spend even more,” Tal joked. “This American consumer is deleveraging like never before.” Tal said American consumers are saving more than they’re spending, which may prolong the economic recovery but will put the average consumer on steadier ground and better able to weather the next recession. However, thrifty consumers are throwing a monkey wrench into the plans of American bankers trying to kickstart their economy by tempting consumers with low-interest loans. And Tal explained while the Federal Reserve is making plenty of money available to banks to lend, banks are looking at the default rates and saying ‘no thanks.’ As a result, Federal Reserve balances are exceedingly high and there’s very little money changing hands, meaning the Obama Administration is unable to use monetary policy to drive consumer spending.
Tal said further stimulus spending in the US may provide a temporary boost, but it’s not a long-term answer to the nation’s economic woes. A true recovery will have to be driven by the private sector, Tal suggested.
Looking at Europe, an equally troubled part of the world, Tal said Greece will default on its debt but the repercussions of Italy going broke would be far more serious. Therefore, he expects Italy will be bailed out by the European Central Bank as it buys up Italian bonds to prevent it from defaulting.
China’s growth is slowing as well, but it’s a controlled slowdown, Tal said. He said China is buckling down to control inflation. But while China has the ability to effectively manage its economy, Tal said there could be trouble on the horizon. The debt-to-GDP ratio in China is reportedly a reasonable 20%, however when you include the money local governments borrowed to fund infrastructure projects (China’s own stimulus spending), it’s a startling 75%. Some provinces in China, Tal revealed, have a debt-to-GDP ratio that’s higher than Greece’s. While China can manipulate its own economy to provide a soft landing, even a soft landing will hurt the commodities markets, Tal said. Expect to see copper, oil and gold prices soften as China sorts out its own mess.
Here at home, Tal said “life is good.” Canada is outperforming much of the world. However, while the economic data is encouraging, Tal said there are still concerns lying under the surface. For instance, 40% of Canadian economic growth over the past 20 years was generated through government spending.
“You don’t need to be an economist to predict that the government will not be a major force of economic growth,” Tal warned. “In fact, it may be a negative force, so we have to replace it.”
Private business spending accounts for only 12% of the Canadian economy with the consumer making up the remaining 50% or so. But Tal said Canadian consumers are also buckling down. In fact, Tal said Canadians are sitting on an unprecedented amount of cash, about $135 billion which is just sitting on the sidelines.
“This is conservative money that’s not looking for adventure,” Tal said.
Despite having unprecedented savings, Canadians still have a debt-to-income ratio that hovers around 149%. In the US it was at about 150% when the housing collapse occurred. But Tal isn’t expecting a collapse on this side of the border. He said the two pre-conditions that could trigger a US-type housing collapse – skyrocketing interest rates and a sub-prime mortgage scenario – do not, or will not exist here.
Less than 5% of Canadians fall into a risky category with a debt service ratio of more than 40% and an equity position of less than 20%; in the US a third of homeowners fell into this category.
“My guess is the housing market in Canada over the next two to three years will stagnate,” Tal predicted. He also suggested the Bank of Canada will not repeat past mistakes and hike interest rates amid such economic uncertainty, as it did in the early 90s, sparking a housing crisis.
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