4 A collapse in the U.S. housing market … U.S. Housing Starts and Months Supply of Existing Homes U.S. S&P/Case-Shiller Home Price Index per cent, year over year thousands, at annual rates level, months supply at current sales rate Housing Starts (left scale) Months supply of existing homes (right scale)
5 … led to losses in U.S. banks and huge write- downs worldwide. U.S. Write-downs and Losses Billions, USD Source: Bloomberg. April 17, 2009 Global Write-downs and Losses Exceed $1 trillion Billions, USD
6 What was initially viewed largely as a problem of liquidity… …became a problem of systemic stability after the fall of Lehman Brothers on September 15.
7 Equity markets contributed to the global financial carnage. Source: Bloomberg. Up to and including April 24, 2009. IMF ’ s Estimates of Financial Sector Potential Writedowns (2007-2010) Billions, USD World Equity Markets % change since January 1, 2007 *Europe includes Euro area and the U.K. Source: IMF’s Global Financial Stability Report, April 2009.
8 Credit spreads increased sharply… Credit Spreads Notes: These spreads are a measure of banks’ funding costs relative to a risk-free rate and are a gauge of financial market stress and banks’ financing pressures. The rate on the overnight-indexed swap (OIS) is used as a proxy for expected overnight rates. LIBOR is the London Interbank Offered Rate. CDOR is the Canadian Dealer Offered Rate. Daily data up to and including April 24, 2009. Source: Bloomberg. basis points
9 Credit growth Source: Bank of Canada. Year-over-year percentage change … and (with a lag) affected credit growth. historical averages: 1992-present
10 Central banks were aggressive and also “creative” in their actions. Capital Injections Troubled Assets Relief Program Direct investments in financial institutions, e.g. Barclays, ING, AIG, Fortis Guaranteeing the liabilities of financial institutions U.S., Ireland, U.K. Nationalization Fannie Mae, Freddie Mac, Icelandic banks Purchase of “ toxic assets ” Public-Private Investment Fund, Asset Protection Scheme (UK) Supporting financial markets Commercial Paper Funding Facility, Term Asset- Backed Securities Loan Facility, Canadian Secured Credit Facility Policy Interest Rates per cent Sources: Bank of Canada, U.S. Federal Reserve, European Central Bank and Bank of England. Global actions to support the financial sector
11 Can we really speak of the financial sector separately from the “real” economy? Economists were soon reminded of the importance of credit to production and employment. Financial markets and the “real” economy?
12 Source: Bank of Canada. Year-over-year percentage change Industrial production in major economies slowed sharply... and then fell off a cliff! Industrial Production
13 We were faced with the first synchronized global recession in over sixty years … World Economic Growth per cent Forecast Actual Note: World real GDP growth on a purchasing-power parity basis. Source: International Monetary Fund World Economic Outlook, April 2009. IMF’s threshold for a global recession
14 … with considerable uncertainty about the global economic outlook. Mean of Private-Sector Forecasts for 2009 Real GDP Growth per cent Source: Blue Chip Economic Indicators - January 2008 to April 2009. Date of forecast per cent
15 The knowledge that recessions triggered by financial stress tend to be longer and deeper … Source: IMF World Economic Outlook, April 2009. Duration and output loss
16 … led to an internationally coordinated response. G-20 Commitments: Restoring global growth by coordinated fiscal actions and a full range of monetary policy instruments. Strengthening the financial system by the introduction of stronger regulation and improvements to international cooperation. IMF recommendation to provide fiscal stimulus of 2 percent of GDP.
18 Canadian banks were less leveraged than banks in other developed countries … Bank Leverage Ratios assets as a multiple of capital Note: Based on data for the big six Canadian banks, seven major banks from the Euro area, six major UK banks and five large U.S. commercial banks. Canadian data are based on the regulatory ratio of assets (including some off-balance sheet items) to adjusted Tier 1 and Tier 2 capital. Leverage for other countries is measured as the ratio of balance sheet assets to shareholders' equity. Sources: Bloomberg; financial statements.
19 Tier 1 Capital Ratio (Tier 1 capital as a percentage of risk-weighted assets) Source: Bloomberg and bank financial statements … and were also more highly capitalized …
20 … but the global credit crisis was still affecting credit markets in Canada. Business Lending Conditions Note: Pricing conditions refer largely to the cost of borrowing, whereas non-pricing conditions refer to access to credit and lending terms. The balance of opinion is calculated as the weighted percentage of respondents reporting tightened credit conditions minus the weighted percentage reporting eased credit conditions. Source: Bank of Canada - Senior Loan Officer Survey. balance of opinion, percentage points Easing Tightening
21 Household balance sheets were in better shape in Canada than in the United States … Net Worth to Personal Disposable Income Sources: Statistics Canada; Department of Finance. ratio Household Debt to Net Worth ratio Source: U.S. Federal Reserve Board, Statistics Canada.
22 … but the decline in consumer confidence still pointed to some likely retrenchment. Consumer Confidence Index, 2002=100 for Canada, 1985=100 for U.S. Sources: The Conference Board of Canada; The Conference Board. *2009Q2 data is preliminary as it includes only April 2009.
23 Canadian public finances were in good shape … Total Government Net Debt to GDP Ratio per cent Federal Net Debt per cent of GDP ActualForecast Sources: Department of Finance; Statistics Canada. Public Accounts basis. Source OECD Economic Outlook (March 2009 update); Department of Finance calculations. National Accounts basis.
24 … but that could not shield Canada from a U.S. recession. U.S. Real Final Domestic Demand and Canadian Real Exports Growth per cent In 2008, 73% of Canadian exports went to the U.S. Sources: Statistics Canada; U.S. Bureau of Economic Analysis.
25 World commodity prices had collapsed … Commodity Prices (in U.S. dollars) index 1997=100 Source: Department of Finance Commodity Price Index. Note: April 2009 includes data up to April 24, 2009. index 1997=100
26 … Canada’s exports had declined sharply … Exports and Imports Levels $ billions, annual rates Exports fall by 10% in Q4; imports fall by 2%
27 Growth Per Capita Real Gross Domestic Income per cent Sources: Statistics Canada; Department of Finance. … real income (GDI) had declined sharply … U.S. up just 7.3% over the same period; over 15% in Canada
28 … and employment losses had already begun. per cent * Calculated using U.S. methodology. Unemployment Rates per cent Employment Rates Sources: Statistics Canada, U.S. Bureau of Labor Statistics.
30 (My) Three Themes: 1.Financial-Market Measures 2.The Dual Need for Fiscal Stimulus 3.The Importance of Fiscal Prudence
31 Theme 1: Ensuring a Sound Financial System The Government had taken some actions in 2008 to strengthen the financial system. Budget 2009 established the Extraordinary Financing Framework, containing several measures.
32 The Extraordinary Financing Framework Insured Mortgage Purchase Program$125 billion New 10-year Canada Mortgage Bond $10 billion Canadian Lenders Assurance Facility- Canadian Life Insurers Facility- Expanded Activities for EDC and BDC $13 billion ABS Facility (by EDC) $12 billion (excluding actions by Bank of Canada)
33 Target for Overnight Interest Rate per cent Canadian monetary policy had already been very aggressive …
34 … but rate reductions had not always been reflected in credit markets … basis points Change in Interest Rates Since September 2007* *As of the week of April 22, 2009. Basis points Policy Rates 1-year mortgage rates 5-year mortgage rates 10-year + corporate bond Canada U.S.
35 … and perhaps would not be sufficient anyway. Consumer ConfidenceBusiness Confidence Index, 2002=100diffusion index (50=no growth) Sources: The Conference Board of Canada, Institute for Supply Management (ISM) non-manufacturing survey. Canada (left) U.S. (right) Index, 2002=100 for Canada, 1985=100 for U.S. Sources: The Conference Board of Canada; The Conference Board. *2009Q2 data is preliminary as it includes only April 2009.
36 1. Dampen the economic slowdown 2. Protect the most vulnerable Canadians Suggested a targeted mix of spending and tax measures Theme 2: A dual need for fiscal stimulus
37 Short-Run Expenditure and Tax Multipliers *Dollar impact on the level of real GDP after 8 quarters of a permanent one dollar increase in fiscal measures. Measures for low-income households include: all EI measures, training for non-EI eligible clients, wage earner protection program, increase to the National Child Benefit and Canada Child Tax Benefit, and enhancement to WITB.
38 1. Provincial, territorial and municipal infrastructure Direct, low-cost loans to municipalities for projects 2. Federal infrastructure 3. First Nations infrastructure 4. “ Knowledge ” infrastructure PSE, CFI, electronic health records, broadband 5. Social housing for low-income Canadians 6. Support for home ownership and renovation New spending combined infrastructure and housing measures …
39 … with a variety of “sectoral” measures. Capital Cost Allowance Computers Manufacturing and processing M&E Tariff relief on machinery and equipment Sectoral adjustment Community Adjustment Fund Support to automotive sector in collaboration with Ontario Support for culture and the arts Clean energy technologies Support to small businesses
40 Income-tax cuts were aimed at low- and middle- income earners. 1. Significant personal income tax relief Increases in basic personal amount 2. Increases to the National Child Benefit and Canada Child Tax Benefit 3. Doubling the tax relief provided by the Working Income Tax Benefit (WITB) Reduction in MTR for very-low-income earners 4. Increase to the Age Credit amount
41 EI benefits strengthened: Expansion of work-sharing Extra five weeks of EI benefits Additional benefits for participants in longer-term training Enhanced availability of training: Additional support for training programs Targeted support for older workers Apprenticeship completion grant introduced EI contribution rates were frozen for 2009 and 2010 Labour-market measures also figured prominently.
42 A $40 billion stimulus package (over 2 years) Tax measures account for $10.1 billion of total stimulus Spending measures represent $29.9 billion of total stimulus
43 The low debt-to-GDP ratio suggested to many that the government could have done much more than it did: Bigger increase to spending Bigger tax reductions or EI improvements Could it? Theme 3: The importance of fiscal prudence
44 Debt-to-GDP Ratio: 68 29 in 14 years (Net) Debt-to-GDP Ratio per cent of GDP Projection Actual
45 Actual and projected budgetary balance per cent of GDP ProjectionActual Budgetary Balance-to-GDP Ratio
46 1. Infrastructure is difficult to scale up 2. Tax cuts and EI changes are difficult to reverse Government struck a balance between what was feasible and what was affordable over the medium term Can policies be scaled up or reversed?
47 … to ensure that G/GDP comes back to current levels in the medium term. … to repay the current deficits once surpluses return. … over the next 10 years to prepare for the coming fiscal challenges caused by demographic change. Fiscal discipline will be necessary …
49 The 2009 budget was designed to: Improve Canadians’ access to credit and restore their confidence in the financial system; Dampen the slowing effects of the global recession; Protect and assist the most vulnerable individuals during these challenging times; Retain Canada’s hard-won fiscal prudence so that we are prepared for future challenges.
50 Measures to accelerate Budget Implementation BIA 2009 received Royal Assent on March 12 th (compared to June 18 th for BIA 2008) Included $7.6 billion in spending authority for a range of measures, many of which would normally be funded through the annual appropriations process Streamlined process for Cabinet and Treasury Board consideration and approval New Central Vote in the Main Estimates allows for the release of Budget 2009 funds between April and June subject to Treasury Board approval Spring Supplementary Estimates expected to be tabled in mid- May with supply obtained early June