The world according to Craig Alexander
TD Banking Group chief economist Craig Alexander spoke to a room full of Edmonton business people on Thursday about his forecast for 2012. What did he have to say?
by Max Fawcett
TD Banking Group chief economist Craig Alexander gave new life to the notion of economics as the “dismal science” yesterday. Speaking to a packed room of Edmonton business people at the Chamber of Commerce’s 2012 economic address, Alexander didn’t pull any punches in describing the risks that threatened the global economy.
Alexander touched on the problems in Europe, ones that he described as “chickens coming home to roost.” The implementation of a monetary union without any harmonization of fiscal policies was bound to end badly, and he doesn’t think much of Greece’s ability to meet the obligations being imposed by the “troikia” – the International Monetary Fund, the European Union and the European Central Bank – in exchange for billions in bailout dollars. Meanwhile, the best way out of the situation for Greece – a rapid devaluation of its currency that would produce a spike in its exports and allow it to impose stiff austerity measures without killing off economic growth – isn’t available. As a result, he said it’s a question of when, not if, Greece defaults. That default will lead the EU into a fiscal union, Alexander said, whether they like it or not.
Things aren’t much better in the United States, where the pace of that country’s economic recovery continues to worry Alexander. He thinks that comparisons to Japan’s so-called “lost decade” are starting to look more and more prescient, and puts the odds of the U.S. economy falling back into recession at 40 per cent, noting that all the quantitative easing and twisting in the world won’t do anything to address the problems in the housing market that are at the root of the country’s economic problems. In a normal housing market there is roughly four months supply of inventory, but right now the United States housing market has more than 18 months of inventory if you include the millions of foreclosed homes. Alexander estimates that it will take five years to resolve this glut of supply.
The problem, he said, is that the United States has fallen into a liquidity trap, a situation in which monetary policy is unable to stimulate lending and borrowing no matter how loose it becomes. The good news, Alexander said, is that while Japan was saddled with bad demographics – an old population and low levels of immigration – the United States doesn’t face that particular challenge. As a result, he thinks growth at 2 to 2.5 per cent for the next few years – roughly the same as the overall growth in the population – will be achievable. Still, structural unemployment will remain, and markets will continue to be volatile.
That said, things may not be quite as bad in the United States as some people are now starting to believe. The slowdown earlier this year was caused largely by freak events like the earthquake/tsunami-related disruption of the supply chain in Japan, bad weather in the United States and unrest in the Middle East, and those are all no longer a factor. TD’s own estimates track Q3 GDP growth at 2.1 per cent – hardly robust, but not a recession either. Ironically, though, the recent volatility in stock markets and renewed talk of a possible double-dip recession may end up creating the very recession that people are worried about. “Recessions are largely psychologically driven,” Alexander said.