Fears of double dip being overplayed
Don’t listen to the naysayers, says the Conference Board of Canada, a double-dip isn’t in the cards.
Dire warnings of a return to recession fail to recognize one key factor, the board said: a slow recovery from this recession was expected.
“Historically, economic recoveries from recessions caused by financial crises are characterized by long periods of weak growth and that is exactly what is occurring now,” said Michael Burt, associate director of forecasting and analysis at the board.
“Consumers are deleveraging and banks remain cautious about lending and that is why consumer spending growth remains tepid.”
Job growth in Canada has brought employment past pre-recession peaks and domestic demand is healthy. The major weakness now is exports, and that is a function of the much-deeper recession the U.S. is recovering from, Burt said.
The report is far less sanguine about prospects in the U.S., although it said the world’s biggest economy should muddle through the next several months without slipping back into recession.
But it cautions, “The key cause for concern in this environment of weak growth is that the U.S. economy will have little capacity to absorb shocks.”
One such shock would be a collapse in the dollar resulting from massive amounts of debt piling up on Washington’s balance sheet.
On Tuesday, a former adviser to China’s central bank warned that the U.S. dollar is now “one-step nearer” to a currency crisis as a result. Any appreciation of the greenback is “temporary” and a devaluation of the currency is inevitable as U.S. debt rises, Bloomberg quoted the official as saying.
The recent rise in gold prices has also been largely attributed to investor fears of currency depreciation as governments pump stimulus spending into their recession-weakened economies.
The U.S. dollar has lost 10 per cent of its value since early June as expectations build for more “quantitative easing,” or printing of money, by the U.S. Federal Reserve in the face of weakening economic data.
“There is no denying that the U.S. federal budget deficit is huge,” said Burt. “The U.S. government is currently spending about three dollars for every two it collects. What is more, there is as yet no serious plan to get it under control in the near to medium term.
“While this is certainly of concern, the fact that the U.S. dollar remains the world’s reserve currency and that the U.S. debt burden was not overly large before the financial crisis means that it is not likely that the deficit will be the source of a shock.
“In short, a sovereign debt crisis in the United States is a highly unlikely event and thus will not be the cause of a ‘double-dip’ recession,” Burt said.
Source: The Vancouver Sun