Relax, economy on the mend
It was just a few months ago that Greece was expected to default, taking Italy and other European nations down with it in a domino effect.
The U.S. was forecast to enter a second, or “double-dip,” recession. Canadian economists slashed their rosy economic forecasts accordingly, some predicting recession for Canada, too. And a China in economic retreat could no longer be counted on to pull the rest of the world out of its malaise.
We are still captive to a conventional wisdom that has the skies falling. Mark Carney, governor of the Bank of Canada and chief steward of a remarkable Canadian economic recovery, declared late last month that the U.S. economy will never recover to its pre-great Recession state.
Yet none of these worst-case scenarios jibe with reality.
After two years of European economic crisis, not one of the 27 European Union (EU) membernations has defaulted. Last rites have been pronounced on Greece’s membership in the eurozone common currency union more times than I can recall over the past 18 months, often by European finance ministers and other experts worldwide.
Greece accounts for a mere 2 per cent or so of the European economy. Even if Athens reneges — and you have to wonder about that prospect given how strenuously European leaders have worked to prevent that outcome — the warned-of cascading defaults by Italy, Portugal, Spain and so on are becoming an ever remoter possibility.
If anything, 18 emergency summits by European heads of government in just two years to deal with the debt crisis have strengthened the EU and the nascent 17-member eurozone. Shortcomings in the eurozone, unforeseen at its birth in 1999, are being remedied with the creation of new financial-assistance structures to assure stability.
If the EU is a sinking ship, why have Croatians just voted by a whopping 66 per cent to join it? Why are Poland and Iceland clamouring to join the eurozone? Despite being rejected as the first Muslim EU member, the strategically important Turkey, bridge between Europe and Asia, still craves EU membership.
As for North America, the U.S. and Canada are not heading back into recession. Quite the opposite.
With the occasional weekly aberration, U.S. jobless claims have been in decline for months. The U.S. unemployment rate is forecast to drop to 7.5 per cent by year end, a vast improvement over its 10.1 per cent peak during the worst of the post-2008 credit markets meltdown.
Remarkably, given that the bursting of U.S. housing bubble was the chief cause of the Great Recession, America is quite possibly looking at a shortage of housing. Last year, one heard repeatedly that the U.S. housing market is dead for at least the next decade. But with a current annual construction rate of just 500,000 homes against about 1 million new household formations, demand is outpacing supply. “It’s like an anti-bubble,” says one U.S. forecaster.
Tight-fisted U.S. banks are still sitting on an estimated $2 trillion in capital they refuse to lend, for fear of a second meltdown. American industry has another $2 trillion in idle funds it won’t invest in expansion and rehiring for the same reason.
Consider that with a mere $789 million stimulus in 2009, U.S. President Barack Obama was able to turn an economy plunging by 6.9 per cent into GDP growth of the same amount within a year. Which means those $4 trillion in idle funds will be an enormous jolt to U.S. job creation when finally unleashed.
“I think a positive (U.S.) economic spiral will take hold in 2012,” says Travis Hoium, financial services analyst at Motley Fool, the leading U.S. business website. “Strong corporate balance sheets, relatively low taxes, and years of underinvestment will be the fuel that drives the employment recovery.” (My emphasis.)
Two-thirds of top Canadian business executives, according to a recent CICA/RBC Business Monitor report, expect their companies to post revenue gains in 2012. And 42 per cent anticipate they will be increasing their workforce, against just 16 per cent who expect to reduce payrolls.
So what’s behind the conventional wisdom that economic malaise is our global fate for years to come?
Economies run on confidence. And the sledgehammer blow to the global economy just four years ago will continue to numb optimism for some time. Worries about a Chinese economic eclipse of North America and Europe derive from our being caught unawares by the dynamic innovation of a postwar Japan. Never mind that China itself is now losing jobs to even lower-wage Asian nations, and suffers riots by unemployed factory workers every day.
China’s recent pullback in growth is deliberate, an astute bid to prevent the overheating that the crashed the U.S. and European economies. And for all the rapid economic progress in China and India, each still has huge populations of destitute people — about 600 million and 400 million, respectively. Regarding North America’s widening gap between rich and poor, “If inequality is a sign of decline, then China is more in decline than the United States,” says Michael Beckley, research fellow at the Harvard Kennedy School of Government.
Problems we have. The U.S. has drastically reduced household debt, the root cause of the 2008 meltdown, but Europe has not.
“For all their moralizing about the evils of borrowing, the Europeans aren’t making any progress against excessive (household) debt — whereas we are,” notes Nobel laureate economist Paul Krugman. High interest rates maintained by Europe’s central bank — which takes its direction from debtaverse Berlin — has prevented the real salvation of GDP growth to get underway. Canada, the U.S. and Britain, meanwhile, have scrapped stimulus programs that proved their worth, reverting prematurely to an obsession with balancing the books. Yet economic conditions worldwide are on the mend. The global financial media fixated last year on a debt-ceiling fiasco in Washington whose import was nil. And they still imagine the Europeans who invented modern banking won’t navigate the admittedly complex diplomatic byways required to bring 27 nations into rough alignment on a humane approach to debt reduction — knowing, as Europeans do, that the alternative is economic calamity for all. It’s easy to say that human nature is to blame for alarmism. But it is. Herd sentiment has always had us swinging from the extremes of euphoria to panic. In between is the place where serene contemplation tells us the world is getting back to unfolding as it should. We might want to pay that place a visit. dolive@thestar.ca