TORONTO – With the latest economic turmoil in the stock and currency markets raising the prospects of another global recession, here’s a closer look at the causes of the crisis and its potential impacts on Canada and the world.
Q: Why has the world sunk close to its second recession in just over two years?
A. Fears of a crippling government debt crisis in Europe and the United States, coupled with signs the powerhouse Chinese economy is slowing, have rattled financial and currency markets. Investors, traders and money managers around the world fear another recession is looming and governments do not have the financial capacity to stop it because they are so deep in debt.
Q: Why are the markets so jittery about the debt crisis in Greece?
If Greece were to default on its debts, it would be what is now being openly described as Europe’s “Lehman Brothers moment” – a reference to the big New York investment bank whose sudden collapse in 2008 from massive debts triggered the Wall Street financial crisis that sparked a global recession that lasted well into 2009.
Q: What would be the fallout from a Greek default?
A: A big chunk of the country’s debt is held by German, French and other banks. A default could lead to massive losses at those financial institutions and squeeze their ability to provide mortgages and loans to consumers, credit to companies and other money needed for the economy.
Q: Why has confidence in political leaders slipped?
A: Leaders in Greece face mounting resistance from workers to major cuts in public-sector jobs, pensions and tax increases needed to balance the books. Austerity measures haven’t gone far enough so far and the country has relied on new loans to pay off past debts. Until significant, politically risky spending cuts are made by governments across Europe to deal with their debts, the crisis will continue.
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Q: The outlook appeared far rosier just a few months ago. Why have things changed so suddenly?
A: Consumer confidence has dipped for months, but the plunge in stock markets in July and August – triggered by the European debt impasse and the U.S. political crisis over extending that country’s debt ceiling – produced a crisis of confidence in political leaders around the world. At the same time, the U.S. housing market and general American economy remain stagnant and show little signs of life.
Q: What has been the impact of the latest economic turmoil on Canada”
A: Consumer confidence has weakened, corporations are becoming more cautious and growth in the Canadian economy has slowed. The loss of hundreds of billions of dollars in stock values has eroded the value of Canadians’ investments in their mutual funds and pension plans and undermined the so-called “Wealth Effect” that underpins consumer spending.
A weak U.S. economy has also cut demand for Canadian exports of everything from cars and auto parts to energy, newsprint, lumber and machinery. Many companies, from sawmills to fertilizer producers, have turned to China to sell their products.
Q:What lies ahead for the Canadian economy?
A: The unemployment rate is expected to rise above the current 7.3 per cent rate, growth will weaken and government deficits will likely rise because of slower growth. Some analysts predict the TSX, Canada’s key stock market, could fall another 25 per cent or so until things stabilize. The federal government will be hard pressed to meet its plan to balance the books by 2014, so further federal spending restraint may be coming as the economy slows.
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Q:Can the private sector help boost the economy?
A: In the United States, companies are making good profits and are well financed but are not hiring or expanding because they see weak markets for their goods as consumers tighten their wallets and pay off their debts. In Canada, expansion has come from the resources sector – mining, oil and gas, grains and other commodities – but that could slow as commodity prices fall globally. Manufacturing remains under pressure so jobs growth in industrial Canada could be weak for a while until demand improves.
Q: Where does the United States fit into the picture?
A: The U.S. economy, the world’s biggest, is treading water, with weak consumer spending, a battered housing market and huge trade deficits with China and other countries. Looming down the road are budget cuts that could costs hundreds of thousands if not millions of jobs as Washington restrains spending on everything from the military to social services and health care to cope with an accumulated debt of more than $14 trillion. Such cuts will continue to depress consumer sentiment.
Q:What role does China play in preventing another recession?
A: China’s role in powering world growth has been significant and the world’s No. 2 economy’s seemingly insatiable need for metals, oil and gas, food and other raw materials has lifted commodity prices for years. That benefited Canada greatly, especially energy-producing provinces like Alberta, Saskatchewan and Newfoundland, and mining provinces like B.C., Ontario and Quebec.
Now that signs point to a slowing down of China’s export economy, commodity prices have dropped for everything from copper and nickel to crude oil. That will affect everything from energy royalties in Alberta, mining royalties in Quebec, the prospect for massive new energy megaprojects in western Canada.
Q:What is the chance of a second recession – the so-called “double-dip”?
A: It was one in 10 just a few months ago, but many economists say it’s one in three now. The last double-dip recession – one recession followed by a short recovery and then another downturn – happened in the early 1980s and before that during the Great Depression of the 1930s.
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