Economic Uncertainty Ahead
The world economy is set for another devastating global financial crisis next year, and a top banker has warned that the markets are unprepared.
Based on key indicators that have predicted previous recessions, the US will face a downturn next year. Worryingly, central bankers in major developed countries appear to have used almost all of the tools at their disposal in a desperate bid to try to kick-start growth. Moreover, markets could be in for a nasty shock if a recession were to hit, as they are not pricing in a downturn. If the world’s largest economy runs into trouble, the rest of the globe would be dragged down as well — specifically for Canada due to our close economic ties with the US.
However, Canada runs counter to many global trends in many ways. For example, Canada did not encounter the serious fallout that was experienced by many countries globally during the financial crisis of 2008. But as a member of the Group of 7, we do have our own impact for the global economy. Making our economy healthy and strong to avoid the fallout definitely have a positive impact globally, as countries are all connected during a global crisis.
However, currently, a number of factors put Canada at risk of a global financial crisis. Our household debt now exceeds our nominal gross product, meaning that our consumers are likely to pull back their spending, which would worsen the situation. Additionally, Canada’s housing sector is over-leveraged and business investment has been declining for the past two years. We are even further imperiled by the gap between Canada’s first-quarter credit-to-GDP ratio (which is the highest in industrialized countries), and its long term trend. Meanwhile, Canada’s current account has a deficit equal to three per cent of its economy, and making up this deficit would require foreign capital inflows equal to four per cent of Canada’s economy.
Put this all together, and this time we might not be spared the serious fallout that was avoided in 2008. Now, our federal government should be much more careful about its spending. Back in 2008, Stephen Harper’s government initiated stimulus spending amid the Great Recession, which did help to lift Canada’s economy out of the recession, but also elevated Canadians’ household debt, which now poses a downside risk to financial stability. Stimulus spending today should be used to build infrastructure, boost the private sector, and boost productivity, such as economic growth generated per hours worked and capital invested, in order to make our economy stronger and minimize the potential damage of the crisis, thus bring a positive impact to the global economy.
