Survey of Forecasters
The Conference Board of Canada has released their 2011 survey of economic forecasters (subscription required) in which they surveyed economists about the growth prospects for the Canadian economy in 2011.
The average analyst estimate for final 2011 GDP growth is 2.5%. This represents a 26% adjustment from analyst expectations earlier in 2010 when they forecast 2011 growth in the 3.4% range.
While 2.4% is much closer to the anemic growth I’ve been forecasting, it’s still double what I’ve predicted for 2011. The major difference between the forecasts is that I see a significant reduction in consumer spending at some point in the near future as home price growth turns negative and HELOC growth is choked off.
No one knows the future…..self certainly included. However, the one thing I strongly believe that most economic forecasts miss is the amazing tendency of people to think as a collective. Sentiment ebbs and flows. Today there is an overwhelming sentiment within our society that debt levels are normal and ‘safe’ and that housing is a smart investment at any price. One must understand the economic expansion of the past decade within the context of an unparalleled and unsustainable expansion in consumer debt levels.
This has been coupled with a mentality that values immediate gratification at the expense of saving. None of it is sustainable. The growth in consumer debt as a percentage of personal disposable income certainly bears this out, as does the current savings rate. The important questions are what will be the economic impacts of this inevitable mean reversion, what might trigger it, and when? The nature of mass psychology suggests that a sudden and wholesale repudiation of debt is certainly possible….I’d argue it is likely. Trends that have strayed markedly from their long-term mean over the course of years or decades have a strange tendency to revert back to that trend line in a relatively rapid manner, catching many off guard.
The housing market will absolutely be the key determinant of which prediction more closely aligns with reality one year hence.
For more on this topic, check out “How did we get here?”
From stimulus to restraint
That is the title of an interesting report released today by BMO. It nicely supports my assertion that restraint (austerity) will be the dominant theme of many provincial budgets and certainly federal budgets over the next few years. If you aren’t yet convinced, consider the following chart, adapted from data in the BMO report.
By the end of 2011, we will have amassed nearly $160 billion in provincial and federal budget shortfalls in just over two years. And keep in mind that this is during a period of continued credit expansion at the consumer level. Should the credit bubble burst, expect tax revenues to decline, leading to more acute budget issues going forward.
As it is, we have racked up nearly $5000 of debt for every man, woman, and child in Canada since 2009. It now needs to be repaid, which is why I’m certain the next few years will see higher taxes and less services from the government (including trimming the public sector).
China’s empty malls
Yesterday I noted that China’s need to rein in inflation/excess credit and Europe’s debt crisis are the top two global macro stories to be watching this year. For more anecdotal insight into some of the structural issues with China’s miraculous GDP growth (which is 60% construction), consider this video courtesy of Bloomberg.