In a presentation this morning, Sherri Cooper, chief economist of BMO Nesbitt Burns, says she expects the economies of both Canada and the United States to rebound but tempered that prediction by calling her outlook, “cautiously optimistic.”
“There’s no all-clear sign yet,” says Cooper, who said the earliest we can expect a rebound is after the next quarter.
A rebound will come, she said, only after the current excess capacity in the economy burns off. The exorbitant gains of the “new economy” years fuelled over-spending and borrowing that left shelves, companies and warehouses overstocked with manufactured goods, throwing that sector into recession.
That is where the note of caution creeps in. Because this slowdown is the first in the modern era to be led by manufacturing (which makes up 16% of the U.S. economy), it is consumer demand that has kept the company afloat. But with the decline in manufacturing comes a corresponding rise in unemployment. Cooper noted that the average duration of a layoff is lengthening, as the unemployment rate among college graduates is rising. She predicted U.S. unemployment will rise to above 5%.
This comes at the same time the amount of debt households across North America are carrying is at an all time high, personal savings rates are at all time lows and the amount of income dedicated to debt payments is rising.
Delinquency rates are already rising on personal loans and mortgage applications, and new homebuyer traffic is down.
It’s a delicate balance: will deteriorating employment conditions have an effect on consumer spending, crashing the economy before the manufacturing sector shakes itself out? On the plus side, tax rebates in the U.S. and tax cuts in Canada should keep consumers spending. Cooper called the timing of the cuts “serendipitous”.
As well, the overhang in the economy is largely made up of telecommunications equipment, computers and semiconductors, objects that depreciate relatively quickly, which suggests the excess capacity may burn off quicker than did the surplus overhang of commercial real estate in the 80s.
Cooper says there are already glimmers of hope in basic materials, which she says will morph into an upturn in manufacturing and finally, by the end of 2002, a pickup in the technology sector.
Until then, Cooper is predicting at least another 25-basis point cut to interest rates from both the Bank of Canada and the U.S. Federal Reserve Board.
In terms of growth, Cooper is “much less optimistic” than Bank of Canada Governor David Dodge, who yesterday predicated growth of 2.5% to 3% for the rest of the year. Cooper expects overall growth in Canada to 2.2% in 2001, increasing to 2.7% in 2002.