February 2009

FRED:  Welcome to the Scotiabank Podcast. I’m Fred Ketchen, Director of Stock Trading for ScotiaMcLeod. These regular podcasts call on some of Scotiabank’s most knowledgeable experts to help you make the most of what you have. Here we’ll discuss strategies designed to put you in the financial driver’s seat.

In today’s episode, I’m joined by Scotiabank’s Chief Economist, Warren Jestin. Warren is going to us through a number of topics related to the future state of the Canadian economy, including the effects of the economic downturn in the U.S., commodity prices, and measures taken to help stimulate the economy.

Warren, in a previous episode, you helped listeners better understand what happened in 2008. Do you think economic and financial market conditions are going to get worse before they get better?

WARREN:  Well, if you are looking outside of Canada, it’s very clear that the U.S. housing market setback is far from over. Huge inventories, there’s big layoffs occurring right now. Income is being strained and I suspect that you’re going to see the worst part of the U.S. setback as being the first half of this year. When we go beyond that into the fall of 2009 and into early 2010, we’re probably going to see a bit of recovery but it’s going to be slow by past standards because the “borrow to buy” driver for consumer spending in the U.S. is broken. Effectively, consumers have to earn the money and save the money before they can spend it now; and that’s a big slowdown on that economy and the consumer is not going to be the principal driver anymore. Also, in Europe and in Japan economic conditions continue to deteriorate even in fast growing countries such as China and in India and the like; you’re finding a deceleration of economic activity that is very, very rapid. So globally, 2009 will be a year of either recession in the major developed countries, or a period of much slower growth in the emerging markets. That feeds back into Canada. The good news is that we have a number of cushions in Canada that means that our setback will be less than in the U.S. The strength in the financial sector, the strength in household balance sheets, the strength in our government balance sheets; the ability for them to step up and stimulate without massively borrowing. Even though we will be in deficits, I think, is something that will help cushion us. The reality is 2009, is going to be a year of economic decline not recovery. We’re going to see a bit stronger growth as we go into the second half of the year and certainly a better recovery in 2010. But for the first half of this year, the first nine months, I think you’re going to see a period that is fairly challenging for Canada and certainly for the rest of the global economy.

FRED:  In 2008, we saw the spread of the U.S. economic downturn and the financial difficulties to the global market-place. Should we expect more of the same in 2009?

WARREN:  I think the financial markets will be very volatile and how that relates to the investors is, it creates caution. Equity markets have started to 2009 on a better footing but as we go through the year we may well see more events that cause concern. Sudden events that we hadn’t expected and we’ve seen a number of those over the last year with respect to financial institutions and investments in the U.S. So, the first half of this year is very prone to that sort of unexpected outcome, a lot of volatility. In the bond markets and the like, interest rates have come down so extraordinarily over the last year or so, that they’re very clearly is a risk that longer-term yields will back up and that is a concern for bond investors. On the exchange rates, we have seen three years now where the Canadian dollar has moved from high to low more than 10¢. This is a massive move, and something that we have not seen previously in our lives. Are we going to see the same this year? Well, currently the dollar has moved in a range just above 80¢, I wouldn’t be surprised if we see at least a 10¢ move high to low in the Canadian dollar this year; touching into the mid-high 70’s and probably as high as the mid, slightly above 85¢ sometime in the year.

FRED:  Commodity prices fell sharply across virtually all segments last year 2008, which greatly impacted Canadian equity markets. Can we expect to see any rebound this year 2009?

WARREN:  I think commodity markets have fallen too far, too fast. We’ve still got growth in the global economy. It’s no longer five percent growth; it’s down to probably 1½ percent growth. But the word growth is the important side of that particular statement; and so, you may well find that oil which has been extraordinary weak as we entered 2009 is likely to be a more stable commodity than in the past. Industrial metals, I have a feeling, are going to be fairly weak but there are some bright spots. I mean, we’ve seen things like potash, uranium, hold up and I think a lot of the price adjustments in commodities are now behind us. However, the thing that drives commodity prices is demand; and through much of this year, demand is going to be very soft. When are we going to get into a much stronger footing on commodity prices? Again, we need the recovery, and the recovery is something that we will be talking about in the fall and the winter, not in the winter of this year and the spring.  
                   
FRED:   In 2008, Warren, governments and central banks undertook various measures to help stabilize credit markets and stimulate the global economy. Will we see further government and central bank intervention to ease the current financial crunch and stimulate the economy in 2009? 

WARREN:   I think, undoubtedly, globally we’re going to see a massive effort to resuscitate the economy. President Obama has already indicated that he is going to be bringing and try to pass an enormous stimulus package to help the U.S. economy; and interest rates have been brought down in the U.S. by the U.S. central bank to levels, at least in short-term interest rates that border on zero. We have not seen this in our lives. So, the amount of stimulus in that economy is truly extraordinary. In Canada because we’re better situated in terms of our financial markets and economy, the amount of stimulus has not been that great. To date, lower interest rates and more spending by governments done in better ways, I think, than in the U.S. But on a go-forward basis, I would say that both, the federal government and the provinces are going to become much more aggressive. I hope that when they’re spending the money, it’s on things that improve productivity longer term; skills training, infrastructural investment and if there are changes to taxes, there are changes to taxes that ultimately make us more competitive. We do not want to follow the U.S. example last year; which was in May, June and July sending every American a check, when those checks were not repeated in September, October, and November, the stimulus to the economy evaporated and the U.S. relapsed into a major economic decline.

FRED:  Always the eternal optimist, I’m looking for a silver lining in the clouds, is there good news anywhere?

WARREN:  Oh, I think there’s a lot of good news and a lot of opportunities as well. I think, as we go through this economic setback, there’s going to be a lot of restructuring in industry. Certainly equity valuations have come down dramatically. The issue is to find those opportunities, those investments that have staying power. You’re investing in something that has longer term potential, and if I were looking at companies and specific or industries specifically, those that have a global reach, those that will long-term benefit from a re-ignition of global economic growth. I think the commodity markets are going to be one of the areas that ultimately do benefit from that. And, in the manufacturing sector, our manufacturing sector isn’t going to disappear. In fact, we have many globally competitive industries and what’s going to happen this year and probably next year is a re-tuning of those industries with a focus away from the U.S. and towards emerging opportunity in other countries. I must say, I mean Scotiabank, is a perfect example of this. We are Canada’s most international bank and we’ve been looking for opportunities globally for some time. I think, that is the strategy, the winning strategy that will drive business growth as we go forward beyond 2009.

FRED:  Well thank you Warren, for sharing your insights into the economy and what to expect in 2009. Fortunately, for me you’ve made me feel a little bit more confident, and we hope that this discussion has helped you, our listeners better understand and prepare for the year ahead.

Thank you for joining us. I’m Fred Ketchen. For more information, please visit your local Scotiabank or Scotia McLeod branch. We’ll help you make the most of what you have.