WEALTH Matters — FALL 2009

The recession has ended?

By the end of August 2009, the economic data for the second quarter of 2009 had been released. It seems economic contraction was much smaller in Q2 than had been expected. The graph shows the recent past and outlook for the future according to Globe and Mail. This forecast contends that the June to September quarter will see a return to economic growth, but at a slow 1.3% rate. Even the stronger growth forecast for Q4 won’t be enough to produce an overall gain for 2009 due to the large contraction of the first half of the year. Another forecast shows the third quarter still showing a marginal contraction with growth not returning until the 4th quarter.

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THE RECESSION HAS ENDED?

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While it is encouraging to see signs of growth returning, the recession has taken its toll.  There is much idle capacity in the system, but it will take time to return people and productive capacity to work. While the unemployment rate may no longer grow, the rate is likely to remain high.

Some note that the massive and coordinated stimulus measures from governments around the world have supported the economy, and we would be in much worse shape if these had not occurred. This begs the question about what will happen once these run out.

Economists expect central banks around the world will likely keep monetary conditions very accommodative by maintaining current record low interest rates. The outlook for inflation is low since there is much idle productive capacity to bring back online before inflation pressures build, so there is also no pressure for lenders to require higher interest rates.

It appears likely that the recovery will be a gradual U-shape rather than a rapid V-shaped curve.

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