North American & International Economic Highlights

The current recession will be characterized by de-leveraging by households and corporations. Household credit will be little changed in the course of the coming 12 months, and for the first time in many years the very important debt-to-income ratio will stop rising.

The most notable softening will be seen in the mortgage market. After rising by 12-13% in 2008, look for mortgage outstanding to rise by only 2-3% in 2009. On average, house prices will fall by roughly 10% in 2009 versus the average value in 2008.

Yes, we are in a recession. But like previous recessions this one will also end, and the sun will shine again. Meantime we have to try to understand the nature of this recession and see how we can position ourselves to take advantage of the opportunities presented by the current situation and prepare ourselves for the eventual recovery.

One of the derivatives of the recession is that the savings rate will rise. Households are reducing reliance on debt (which is negative savings), and lower consumer confidence is leading to increase in precautionary savings. Overall, we expect the savings rate to rise to 5% in the coming year. This is a significant increase. And the money will have to go somewhere. In this context the timing of the introduction of the Tax-Free Savings Account (TFSA) is ideal since it provides Canadian with a tax efficient way to park these precautionary savings.

Given the expectations that the economy will start showing some pulse in the second half of the year, and the fact that equity markets tend to lead the economy, there is a growing sense that the coming few months will see a rally in the stock market (some say it is going to be a bear market rally), a fact that might lead to some renew inflow into mutual funds.

In the near-term the bond market might also provide some opportunities. After all, we will have to wait for some further narrowing in spreads and lower rates before we see a notable improvement in the stock market. So in the short-term, the government bond market and potentially the corporate bond market can lead to nice returns.

An addition to the unprecedented efforts by central banks, global governments in general, and in North America in particular, are engaged in a massive fiscal stimulus which will include a combination of tax cuts but more importantly, infrastructure spending. Given that every one billion dollar of infrastructure spending in Canada works to lift the overall economy by close to 0.15% and create no less than 11,500 new jobs, such programs will not only work towards closing the Canada's $120 billion infrastructure gap, but also in providing a badly necessary lift to a recessionary economy. And at the back of this discussion, US and Canadian infrastructure stocks have been rallying recently—in anticipation for a new injection of public money.

Benjamin Tal
Senior Economist – CIBC