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A general collapse in commodity prices could derail any incipient recovery in the Canadian economy. I'm not sure what would cause such a collapse, although couple of possibilities come to light. I think the most obvious possibility is if China's recovery stalls for whatever reason, commodities will drop in price.

I agree that the recession may be over technically (I chickened out in my own forecast and put Q3 at about 0%), but I find the 3% growth in 2010 a little harder to stomach.

It seems to me that the BoC is too optimistic about personal consumption expenditures and residential investment leading the economy out of the recession. Isn't it possible that households are going to look to improve balance sheets by cutting consumption and increasing saving, particularly given the wealth effect from decling equity markets and home prices. Moreover, household debt in Canada is something like $1.3 trillion or around $100K per home and the unemployment rate is still increasing.

I would add:

a) inevitable tax increases (or the expectation of tax increases), perhaps particularly in the US, driven by mounting deficits;

b) the next big wave of debt default in the US - commercial real estate;

c) I see the changing composition of demand as inevitable and therefore a crucial aspect of the recovery, although your point that the processes first of determining to what sectors resources should be reallocated and second of reallocation itself will be time-consuming is correct, I'm sure. My concern is that government stimulus, either in the form of fiscal measures or credit allocation by the monetary authorities, will be biased in the form of preserving the status quo, thereby obscuring and slowing the ultimate path of restructuring.

d) Further to your point about the exchange rate, one cannot help but wonder whether over time the dominance of the US dollar as a reserve currency may decline as countries make bilateral arrangements involving other currencies, diversify reserve holdings over time away from US dollars, China potentially begins to move towards convertibility of their currency, high growth countries such as China and India begin to represent significantly larger parts of the world economy, etc. This could show up in the near term in the looney if in fact China is stockpiling commodities as a means of diversifying reserve holdings.

Kosta: I agree that a collapse in commodity prices could be bad for Canada. But what would be the scenario under which global growth (or China's recovery) stalls? The Eurozone banks would be my candidate.

brendon: "Moreover, household debt in Canada is something like $1.3 trillion or around $100K per home and the unemployment rate is still increasing." which must mean there's a $1.3 trillion credit somewhere else in Canada ;). If output stays constant, then income stays constant, regardless of what happens to unemployment. Changes in employment, given output, only change the distribution of income.

a) I saw the inevitable US tax increases as part of the change in the composition of US demand from consumption to net export based. But I expect you could argue that, with the US being large, it would represent a contraction in world fiscal policy.

d) interesting angle. You think that China etc. may be stockpiling commodities rather than US Tbills? That makes me think back to my post about whether real interest rates could ever go very negative. I argued that households would store cans of beans. Maybe it's not households, but China!. But If you want liquid reserves, I'm not sure that commodities would fit the bill. If everyone else were trying to sell reserves at the same time, the price of beans may drop. Households, on the other hand, are born with a short position in cans of beans. They can always eat the beans.

Nick, I'm not so sure the dollar will fall. Nor am I at all sure that the US trade deficit will shrink, at least in the next 50 years. Doesn't it seem likely that Asian trade surpluses will get larger and larger as Asia develops? In that case why wouldn't western countries with high rates of immigration (US, Australia, Spain) run big deficits? (Yes, I know, Canada doesn't fit my theory.)

Generally I think your list a a good one. From what little I know I am more optimistic about Canada than I am regarding the US, but then the grass always looks greener . . .

Scott: I'm not sure either. Higher population growth rate (due to immigration or births) would mean higher investment. Roughly I would guess that a 1% point increase in the population growth rate would increase investment/GDP by about the same 1% point. But I would expect the US savings/GDP rate to increase by more than a couple of percentage points.

But even though immigration and population growth rate are higher in the US than in other countries, I don't expect them to increase. Whereas I do expect the savings rate to increase compared to the past few years.

And if US national savings rises relative to investment, net exports has to increase, which means a real depreciation of the US$.

I would add one more thing that Pr Gordon discussed many times, namely the impact of the long-term structural shift away from manufacturing. All these jobs that are gone and that will not be coming back could keep unemployment high for longer than usual if the labour force is not able to find work in different areas of the economy. If Canada is stuck with high structural unemployment, recovery could be depressed for some time.

I'm curious about the age structure of the newly unemployed in this recession. I'd guess that anyone who is in their 50s and older will never regain meaningful employment and will retire much poorer than they had hoped/planned. I guess that will reduce unemployment eventually.

The reason I worry about Canada experiencing a Japan-style lost decade is that our demographics are starting to look more like Japan's. And that could be bad for the economy for a whole load of reasons: declining productivity; (I'm paid a lot more than I was 20 years ago, but am probably not much more productive - probably less productive); life-cycle trends in spending and saving (older people don't buy as much stuff); tax breaks to over 65s causing a decline in tax revenue; the need to care for, or pay for the care of, less healthy older people, plus to pay for pensions etc., will either create deficits or create a need to increase taxes thus suppressing growth.

My theory: Canada's young for a variety of reasons won't buy into the whole let's-care-for-over 65s-through-our-taxes theory and will opt out. As jg says, manufacturing is going/going/gone. New jobs are in small businesses, who face a high relative cost of complying with taxes etc., and a low relative cost of evasion. Eventually we'll reach a new low tax/low spending equilibrium, but it will be painful getting there. I just hope I get in a few more years sucking at the trough... have to save for the kids!

Nick, Why do you think the US savings rate will increase?

jg: my view is that slow steady structural shifts do not cause unemployment. All that happens is that fewer young workers enter the declining sectors, and they decline as workers retire. So the slow steady decline in manufacturing employment is not a problem. It's the sudden unanticipated structural shifts that cause the problem.

ramster: I don't know about the age-structure of unemployment in this recession. Normally it's the new entrants that get hit hardest. Firms stop hiring before they lay off workers. StatsCan gives separate figures for the under and over 25's, but I don't know if they break it down more finely.

Hi Frances: That's a depressing comment ;). I thought that Canada's demographics weren't as bad as many developed countries. It's not so much immigration (though that may help), as a higher birthrate (don't immigrants have more kids??). I don't see why we should save for our kids inheritances, if they won't support us in our dotage!

Scott: I think private US savings will decline (EDIT: I meant INCREASE) (compared to the last decade, not compared to now) for 3 reasons:
1. It was so abnormally low a few years back.
2. A lot of people ran up debts that they will need to repay (and unlike Canada this did mean an increase in net debt, financed by foreign borrowing).
3. Because a lot of people have been scared by recent events (house prices can fall, you can lose your job, depressions can happen, etc.)

And government savings will rise for much the same reasons (except replace 3 with:
3' governments need to build up a reserve of borrowing capacity for emergencies.

Nothing very deep or novel; just the usual stuff.

China, eg.

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