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					                 How to Fix
           The Canadian Recession
                             CFA Québec
                           January 22, 2009

                             Glen Hodgson
               Senior Vice-President and Chief Economist
                     hodgson@conferenceboard.ca


www.conferenceboard.ca
 Global Economic Highlights
   •   The world economy expanded by 2.4 per cent in
       2008 and growth will slow down to a miniscule 0.4
       per cent in 2009, absent policy intervention
   •   The U.S. financial crisis and recession has rippled
       around the world
   •   Sustained but slower growth in emerging
       markets, led by China and India, will help blunt
       the impact of a U.S. slowdown



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                         U.S. Outlook
      •   U.S. economy is in recession
      •   Continued sharp decline in home prices
      •   Consumer spending falls for 5 quarters
      •   Good news is difficult to find—some key
          sectors will eventually hit bottom; decline in
          energy prices helping
      • Forecast incorporates our ―guess‖ of a
          possible Obama stimulus package


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 U.S. Existing Home Sales and Prices
                     (millions SAAR; $’000)
  8.0                                                                230
             Sales    avg. price
  7.5                                                                220
  7.0                                                                210
  6.5                                                                200
  6.0                                                                190
  5.5                                                                180
  5.0                                                                170
  4.5                                                                160
  4.0                                                                150




                                     Source: National Assn. of Realtors.


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                 Credit Spreads Narrowing
       (diff. between rates on 3-month Libor and 3-month T-bills)
5.00
4.60
4.20
3.80
3.40
3.00
2.60
2.20
1.80
1.40
1.00
 'o 7




         3
 'o 6
        2

's 8




'd 9
'o 0



 'o 3
      29
's 2

's 8

's 4
      30




'd 5

'd 9
      29
'n 4

'n 0

'n 4

'n 0
      26
     ep

     ep




     ct




     ec
       1




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      1



      2
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      1

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  'd
  's

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 'd
                                               Source: Moody’s Economy Inc.

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      U.S. Labour Market
(Change in U.S. Employment, 000s)

 200
 100
   0
-100
-200
-300
-400
-500
-600
                                  ov




                                                                             ov
     7




                                          8
                         l




                                                               l
         ar




                                              ar
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                             Se




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         M




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                                  N




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              M




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                                      'Ja




                                                  Source: Bureau of Economic Analysis.

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        U.S. Consumer Confidence
                          (1985=100)
120
110
100
 90
 80
 70
 60
 50
 40
 30
 'ja c
    dev




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                                       Source: The Conference Board Inc.


 www.conferenceboard.ca
U.S. Real Consumer Spending Growth
                  (per cent change, annualized)
 5.0
 4.0
 3.0
 2.0
 1.0
 0.0
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
     1
     2
     3
     4
     1
     2
     3
     4
     1
     2
     3
     4
     1
     2
     3
     4
     1
  '06
  '06
  '06
  '06
  '07
  '07
  '07
  '07
  '08
  '08
  '08
  '08
  '09
  '09
  '09
  '09
  '10
                                                  Sources: BEA; CBoC

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           Obama Stimulus Package
 • $825b over two years - $550b on spending
    and $275b for tax cuts

 • $58b for energy initiatives including
    renewable energy tax cuts and funding for
    ―smart electricity grid‖

 • $92b for infrastructure including transportation
    and water projects and repairs to government
    buildings

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              Obama Package (cont.)
 • $153b for making improvements to education
   and healthcare
 • Tax cuts of $500 per individual worker and
   $1000 per family and expansion of earned-
   income tax credit to include families with 3
   children
 • Tax cuts for businesses including bonus
   depreciation for firms investing in new plant
   and equipment


 • Increas
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                    US Federal Deficit
                             ($billions)
  200
  100
    0
 -100
 -200
 -300
 -400
 -500
 -600
 -700
 -800
 -900
-1000
-1100
        2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
                                                         Sources: BEA; CBoC


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                         U.S. Real GDP
                         (per cent change)
    5

    4

    3

    2

    1

    0

   -1
        '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
                                                   Sources: BEA; CBoC.

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                 Canadian Outlook
• Canada’s economy falls victim to a global recession and
  sharp drop in commodity prices, real GDP is forecast to
  contract by 0.5 per cent in 2009
• Fiscal stimulus packages in Canada and the United States
  do not suffice to keep respective economies out of recession
• The trade sector will take a huge chunk out of growth this
  year; auto sector will be particularly hard hit
• Employment will decline this year, as the unemployment rate
  peaks at just over 8 per cent at the end of 2009
• A recovery is in store for 2010, with GDP rebounding with
  growth of 3.6


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           Raw Materials Price Index
                               (per cent change)
 20
 15
 10
  5
  0
 -5
-10
-15
-20
-25
          01       02      03         04         05         06          07        08e        09f
                                Sources: The Conference Board of Canada; Statistics Canada


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                  Adding up Real GDP
        Percentage point contribution to growth
                Domestic economy          Export               Import
 6.00
 5.00
 4.00
 3.00
 2.00
 1.00
 0.00
-1.00
-2.00
-3.00
-4.00
         2004        2005          2006         2007              2008f             2009f

                                      Sources: The Conference Board of Canada; Statistics Canada.


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             Interest Rates (90-Day T-Bill)
                         Quarterly 1999–09

    8
    7
    6
                                                         U.S.
    5
    4
                             Canada
    3
    2
    1
    0
        99    0   1      2    3       4       5      6       7       8     09f     10f
                               Sources: The Conference Board of Canada; BEA; Statistics Canada.

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          The Loonie and the Oil Price
                                WTI $US, $US/$C
           1.05                                                                                 140

           1.00
                                                                                                120
                             Dollar (left)         Oil Price (right)
           0.95

           0.90                                                                                 100

           0.85
                                                                                                80
           0.80
                                                                                                60
           0.75

           0.70                                                                                 40
           0.65
                                                                                                20
           0.60

           0.55                                                                                 0
                  99    00     01    02      03   04   05     06    07    08    09     10
Sources: The Conference Board of Canada; U.S. Energy Information Administration; Statistics Canada.


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          Exchange Rate 2000–10
           U.S. cents per Canadian dollar
 104
 100
  96
  92
  88
  84
  80
  76
  72
  68
  64
  60



                         Sources: The Conference Board of Canada; Statistics Canada.


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       Consumer Price Inflation
                     Canada 2000–09
 3.0

 2.5

 2.0

 1.5

 1.0

 0.5

 0.0
        00     01        02   03        04        05        06       07        08       09

                                   Sources: The Conference Board of Canada; Statistics Canada.

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             Employment Growth
                         Canada, 2000–09
 2.8
                                                        380,000 in 2007
 2.4
 2.0
 1.6
 1.2
 0.8
 0.4
 0.0
-0.4
-0.8
        00     01        02   03      04       05       06        07       08       09
                              Sources: The Conference Board of Canada; Statistics Canada.


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Index of Consumer Confidence, Canada
              Jan 03–Dec 08 (2002 =100)

 105
 100
  95
  90
  85
  80
  75
  70
  65




                              Source: The Conference Board of Canada.


 www.conferenceboard.ca
Index of Consumer Confidence, Quebec
                Jan 03–Dec 08 (2002 =100)
 110
 105
 100
  95
  90
  85
  80
  75
  70
  65
                 l




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                                Source: The Conference Board of Canada.


 www.conferenceboard.ca
      Real Consumer Spending Growth
              Canada 2001–09
5

4

3

2

1

0
    2001    2002     2003   2004    2005       2006       2007        08f        09f

                              Sources: The Conference Board of Canada; Statistics Canada.

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      Composition of Real Business
       Investment Growth (2007–09)
                     2007                2008                2009
 8
 6
 4
 2
 0
-2
-4
-6
         Machinery &                 Non-Res'd                   Total Business
          Equipment                 Construction                  Investment


                         Sources: The Conference Board of Canada; Statistics Canada.

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        Housing Starts vs. Demographic
      Requirements Canada 2001–09 (000s)

       Household formation
240

220

200

180

160

140
        1       2          3          4         5          6         7         08f       09f

                    Sources: The Conference Board of Canada; Canada Mortgage and Housing Corporation.


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           Limits of Monetary Policy
 • Rate cuts not being passed on fully by banks
    as they repair their own balance sheets

 • Much tighter credit conditions globally


 • Time lags before monetary policy becomes
    fully effective

 • Risk of liquidity trap – no demand for credit at
    any price

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       Canadian Fiscal Context Today
• Surpluses and paying down debt have given us the
  room to provide stimulus

• Accept passive fiscal deficits caused by slowing
  revenues and automatic stabilizers

• Passive deficit could be up to $10 billion, 2009–10


• The big question: active fiscal stimulus, and how
  much?
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Federal and Provincial Gov’t Balances
(Public Accounts Basis, fiscal year ending, $billions)
                                  Provinces              Federal
 35
 30
 25
 20
 15
 10
  5
  0
 -5
-10
-15
-20
       99      0      1       2       3       4      5       6       7     08f     09f     10f


         Sources: The Conference Board of Canada; Statistics Canada; various government budgets.

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      Federal Debt Financing Costs:
     Percentage of GDP (annual, 1964–2009)
7

6

5

4

3

2

1
 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

                         Sources: The Conference Board of Canada; Statistics Canada.


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 Principles for Active Fiscal Stimulus

• Inject stimulus of at least 1 per cent of GDP in
  2009 – around $13 billion

• Temporary stimulus measures, not structural
  changes

• Move back into fiscal balance as soon as
  economy recovers



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    Specific Fiscal Action Proposed
 • Infrastructure
    – Projects already through the approval process,
      and public capital expenditures (like rail cars)
    – Quick spending—next 6-12 months


 • Boost spending on labour market programs
   – Improve access to and duration of employment
     insurance for Ontario, B.C., Alberta
   – Programs for older displaced workers
   – Wage insurance and subsidies for low-skilled
     workers

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 Specific Fiscal Action … (cont.)
 • Support for sectors in need
   – US action on autos made intervention inevitable, to
     protect Canadian trade advantage
   – Conditions will be key —credible medium-term
     business plan for firms, up-side for taxpayers

 • Short-term income tax rebate an option, but:
   – Not directed to sectors or workers most in need
   – Significant leakage into imports and savings
   – Therefore, target low-income tax payers via
     working income tax benefit and child tax benefit

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      Real Government Spending on
       Goods and Services Canada
                  (per cent change, 2000–09)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
      00     01     02   03   04      05       06       07       08        09


                              Sources: The Conference Board of Canada; Statistics Canada.

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                 Real GDP Growth Rate
                           Canada 2001–09
 4.0
 3.5
 3.0
 2.5
 2.0
 1.5
 1.0
 0.5
 0.0
-0.5
-1.0
       01      02     03   04     05        06        07       08f       09f       10f
                                Sources: The Conference Board of Canada; Statistics Canada.


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                         Conclusion
  • Some signs that key U.S. markets are nearing
    bottom—a modest recovery in residential
    construction and auto sales is forecast for the
    second half of 2009
  • Strengthening raw material prices in 2010 will
    provide a boost to domestic economy
  • Recession will lift unemployment rate but labour
    markets will remain tight across many occupations
  • Path back to balanced budget will be slow for the
    federal government while provincial governments
    are in a more difficult bind.


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