1. The Current State of the Economy Lars Osberg Economics Department Dalhousie University FLMM Fredericton October 21 2008

2. Slowing Economy + Financial Crisis = Recession Long run labour market trends are always trumped by immediate realities September 2008  Unprecedented volatility + previously unimaginable policy response “most dangerous shock in mature financial markets since the 1930s” IMF – World Economic Outlook October 2008  Superimposed on pre-existing down trend Context + shock implies likely future trend

3. January 2008 view: “Optimism decline accelerates” “U.S. economy has slowed noticeably”  IMF World Economic Outlook, April 2007World Economic Outlook  a “midcycle pause” ?  early stages of a more protracted downturn? Early outlooks - 2007 CanadaGrowth GDP 0708  IMF2.52.8  OECD 2.5 3.0 Revised downward every quarter since

4. January 2008 – not yet clear: Passing Breeze or Gathering Storm? “housing starts and the change in housing starts together form the best forward-looking indicator of the cycle”  Leamer (NBER Working Paper No. 13428 - 2007)  Housing construction booms borrow output from future periods – current overhang of 750,000 units!! Residential construction – large % US job growth to 2005  Housing prices declining since 2005 - 18% in 07/08?  Asset Price bubbles take long time to unwind (Japan) Housing wealth underpinned US consumer spending boom  Sub-Prime Mortgage debacle the official line: “Contained in implications for financial markets”

5. Domestic Demand pulled Canada in 2007: GDI > GDP

6. By January 2008 – little did we know! – general expectation was: US fiscal & monetary policy set to MAX  + 1% fiscal stimulus by March?  - 0.75% in interest rates + promise of more  Canadian policy-makers more complacent ISSUE:  $600 in tax credits vs 1.3M foreclosures?  “pushing on a string” – where are the willing lenders & borrowers @ lower interest rates?

7. Real output declining in USA well before crisis

8. “After years of strong economic performance underpinned by sound monetary and fiscal policies, Canada’s growth is expected to slow this year as the downdraft from the U.S. Economy outweighs solid domestic demand supported by strong commodity prices.”  IMF Regional Economic Outlook April 2008 Expectations of the pre-crisis era -April 2008

9. IMF – World Economic Outlook October 2008 “The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. Against an exceptionally uncertain background, global growth projections for 2009 have been marked down to 3 percent, the slowest pace since 2002, and the outlook is subject to considerable downside risks. The major advanced economies are already in or close to recession, and, although a recovery is projected to take hold progressively in 2009, the pickup is likely to be unusually gradual, held back by continued financial market deleveraging.”

10. Housing cycle far from over + consumer confidence down Not yet bottom in USAConsumer gloom pre-crisis Ipsos-Reid RBC

11. Future Trends? Y = C + I + G + (X-M) C: Credit crisis & Consumption  Expectations + credit availability + wealth effect I: Commodity & house prices down  investment boom driven by resource/energy prices G: automatic stabilizers now much weaker than in recessions of early 80s and 90s  + Deficit dogma – as in 1930s !! (X-M) – already down + US income slump  Decline in exchange rate – a lagged & partial offset

12. Good News: “Whatever it takes” – the new Central Bank mantra Large “temporary” shocks have real impacts Not just a liquidity/confidence crisis  Chains of real insolvencies still need resolution  Disappearing Wealth depresses consumption  “Repricing Risk” + Deleveraging has real effects AND – can one push on a string?  Even if bank reserves become available, willing borrowers + willing lenders needed at micro level

13. Bad News: Deficit Dogma lives + safety net shredded in 1990s Cyclical risk in Canada partly downloaded to provinces & families during 1990s  Under 40% of unemployed now get EI  SA no longer cost-shared Provinces ill-equipped to absorb (Origins of Rowell-Sirois) Less ‘Automatic’ stabilization for cycle Expenditure cuts to match declining revenues will be counter-productive

14. Recessions do end – but when? A: Housing cycle: 2006 start + 4 year average => return to trend growth ~ 2010 “Short & shallow”: assumes financial contagion is now contained + oil/commodity prices stay down + global imbalances resolve cleanly + “natural” revert B: Japan+ scenario “Long & messy”: Monetary policy ineffectiveness if low inflation + little fiscal room for US stimulus  “Let the Chinese eat their T Bills” – how long can the USA resist the temptations of inflation ?

15. Implications for Labour Market Ministers ? “Labour shortages” = yesterday’s news Local shortfalls for specific skills – but for next few years NOT a persuasive general theme or policy frame (Un)Employment Insurance Benefit Duration & Coverage – back on agenda Links to training & SA systems need re-examination Older Workers & ‘work incentives’ End Mandatory Retirement + Increased LF part of 55+ Integration into workplaces & OAS/GIS/CPP/QPP Immigrant assimilation when jobs are scarce?