7 January 2009

In 2009, it's all about the recession

The following article is by Jeffrey Simpson in the 7 January 2008 edition of “globeandmail.com”.

The recession of 2009 will force or induce changes in the work force and government finances, only some of which can reasonably be foreseen….

What about those contemplating retirement? Many have thrown away previous calculations. The money they had counted on in their portfolios or other investment vehicles isn't there. Nor is the value of their house that, for many homeowners, is their principal capital. Worse off are those who fear their company pension plans might not be sufficiently solvent to pay out what had been anticipated.

Where possible, therefore, we might expect a lot of people to delay retirement where they can, or to move into part-time employment after they turn 65. …

How do companies react? If they lay off the younger employees, they are eating their seed corn and forgoing cheaper salaries? If they lay off senior employees, their short-term obligations might be high. How does an economy go forward when newly trained people in financial services, trades and business can't get started at all? How does a company plan for future growth while shrinking itself today?

Product lines are going to change in popularity as incomes stagnate or shrink….

We know that government budgets across Canada (and the industrialized world) will go into deficit in 2009, the only question being by how much. Deficits will remain in 2010, and perhaps for some years thereafter. These will be added in Canada to the national debt that had been declining both in absolute terms and as a share of the national economy.

Lowered debt in the past 10 years put Canadian governments in a stronger position to face the retirement bulge of baby boomers that would have started in 2012/2013. Perhaps as more older people remain in the work force, that bulge of retirees might be pushed slightly back. But the bulge is coming and, with it, more demands on government spending.

Thinking ahead to the bulge should enjoin governments to keep their deficits manageable….

The recession has already brought a fool's paradise about energy….

As prices fall, exploration shrivels. World oil demand was finely poised between supply and demand before the recession. When demand recovers, if supply does not, or cannot, keep pace, prices will rise - perhaps very sharply and quickly.

Internationally, the United States has lost some of its relative economic influence. The U.S. model of capitalism has taken a knock. Even if the United States wished to show leadership... if that leadership requires lots of U.S. money, forget it. The country will remain for some time in hock above its neck.

China will come through this recession in the best shape of any country. The trick will be to give Beijing more clout in international institutions and to engage it on every front, something this Canadian government can't seem to understand.