The good, the bad and the economy

2/6/2013

There’s nothing like waking up early in the morning to hear an economist give a lecture. Especially when you know the economy is shaky at best; on the edge of a precipice at worst.

But, in case you missed it, Benjamin Tal’s speech Wednesday at a Food and Consumer Products of Canada breakfast in Mississauga, Ont., was well worth it.

Tal is the deputy chief economist at CIBC World Markets. You’ve probably seen him on TV. He’s funny, smart and makes double-credit default swaps sounds fun. He also doesn’t pull his punches.

Take the first line out of his mouth yesterday: “The last few years have been crazy; the next two years will be crazier.”

Tal was referring to the current state of affairs, both globally and at home. In his speech, he touched on the big three engines of the global economy–China, Europe and the United States–and how they might fare over the next few years. Then he talked about what’s in store for Canada.

I’ll get to Canada in a minute, but in a nutshell, Tal believes the Chinese economy is slowing down but that it appears to be in for a soft landing (which is good) rather than a hard recession (which is bad).  The Eurozone, meanwhile, is in recession and will remain so.

A lot of people I speak with are convinced the United States is going to stay an economic mess for years. But Tal disagrees. He sees early signs of a recovery in America: housing starts are up, home prices are rising, and lumber shipments–a key signal of construction activity–are increasing.

But the biggest reason America is on the rebound is consumers. They’re back! “For the first time, there are people willing to buy,” he said.

During the last five years, Tal noted, Americans have been busy reducing their personal debt. Americans have eliminated $1.8 trillion worth of debt since the recession started. “It’s the mother of all deleveraging” he quipped.

Now, after years of thrift, Americans are getting hungry to spend again. And many can afford it. The average American’s debt-to-income ratio is about 140, down from 165 at the start of the 2008 recession.

But here’s the problem: Canadians' debt loads are going the wrong way. We used to have a debt-to-income ratio of about 140, but now it’s closer to 165. So basically Americans have gotten as thin financially as we used to be, and we've grown as fat as they once were.

Canadian consumers, Tal said, “are exhausted.” They are worried about debt and the fragile state of their home prices. “This is not a consumer who wants to party,” he concluded. No wonder that when you strip out automotive activity, retail sales are probably in decline.

Grocers already have some experience with consumer fatigue. In fact, ever since the recession hit, shoppers have been buying more on promotion and visiting discount stores more often. Tal’s analysis of the situation suggests that won't change soon. What’s new is that Canadians will no longer be so quick to splurge on a vacation or that giant flat screen.

But Tal doesn’t see Canada experiencing a gigantic collapse similar to what the U.S. went through starting in 2008. His reason: Though house prices in Canada will come down, our housing boom wasn't fueled by questionable lending practices, which is what drove the U.S. into a freefall.

Still, he said, 2013 is going to be a tough year. But by 2014, we may see improvements. Well, at least there was some good news for getting up early.

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