Scotiabank Global Economic Report - More of the Same, Only Different

Fred Ketchen: Welcome to the Scotiabank “Find the Money” podcasts. I’m Fred Ketchen, Director of Stock Trading for ScotiaMcLeod. These monthly podcasts call on some of Scotiabank’s most knowledgeable experts to help you make the most of your money. Here we’ll discuss strategies designed to put you in the financial driver’s seat.

In this podcast we’ll be discussing Scotia Economics’ latest Global Outlook report entitled “More of the Same Only Different”. I’m joined by Warren Jestin, Senior Vice President and Chief Economist at Scotiabank. Warren, in your last Global Outlook you focused on the growing green agenda and its implications for the global economy. What emerging economic or financial development is the focus of your latest report?

Warren Jestin: Well we wanted to stress in writing the report that in many ways, the world is unfolding the way it has over the past couple of years; Asia is growing like gangbusters, the U.S. most recently is slowing down, and inflation has gone up a little bit but is still fairly low. But at the same time we had quite a lot of market turbulence during August and that has really put a different spin on the outlook.

Fred: Well recent developments in the U.S. sub-prime mortgage market have clearly shaken investor confidence. In your review, has this significantly raised the downside risks to the U.S. and therefore the global economies?

Warren: The U.S. was already slowing down in the spring and we knew that the housing market was in the midst of fairly substantial correction. What the sub-prime mortgage setback has done is accelerate the decline in the U.S. housing industry, and also made U.S. consumers more cautious. So I think you’re going to see it show up in terms of sales of autos, big ticket items and the like. And as a result fourth quarter, first quarter of next year are probably going to be a whole lot slower because of the turbulence we saw in August.

Now that has “knock-on” effects obviously for other countries… it’s primarily in Europe and Japan, which also have been effected to a lesser extent. Interestingly enough however the setback is very, very clearly defined by the major industrial economies. We’ve had setbacks before in Asia, or in Mexico, Latin America and the like. But the fault line for this particular setback is very, very clearly through the G7 economies, the developed economies. And that’s what makes this a bit different.

Fred: During this when central bankers have been very, very busy people… and have central bank actions to restore confidence in global financial markets, have they been working?

Warren: I think the central banks have moved in a very co-ordinated way to try and calm markets down. But the reality is through August you still had a lot of volatility. Some days there’s a lot of nervousness, big declines. The next day there was a relief rally. There’s only so much central banks can do. I mean once the psychology changes, and it has changed, you end up with a different type of consumer mentality and investor mentality. I think what its done from a central bank point of view has taken away the eagerness to raise interest rates because inflation was just slightly above target in some places.

For example, in Europe the tendency has been to raise interest rates. In the U.S. the betting was the Federal Reserve is going to raise interest rates, The Bank of Canada the same sort of thing. Now I think there’s a different type of environment. You have less concern about inflation because as the economy slows that’s going to take away some of the inflationary thrust. But at the same time, what we have seen through August, the volatility there makes central banks step back and take a closer look at their policy and their policy implications.

So my bet is the moves in the Fed upcoming are probably going to be to lower interest rates. And at The Bank of Canada which looked like it was going to raise interest rates for sure back in the early part of the year, I think they’ll step to the sidelines and they’re just going to wait and see what’s happening to the economy over the fall and early winter.

Fred: Certainly a big change in attitude that we were forecasting from then to now.

Warren: Certainly is. I mean there are certain things that stay the same; we’re still quite confident that over time the Canadian dollar is going to be rising and that the U.S. dollar is going to falling against other currencies. That has to do with problems in the U.S. with respect of their trade and fiscal situation, and also the reality that on a longer term basis the demand for commodities is going to be very strong and that’s good news for Canada.

But even there you’ve seen a bit of a pullback on the Canadian dollar. It wasn’t too long ago when people were talking about it imminently going to par and of course there was a pullback through the second half of August brought it away from that. But give it time I have a feeling as the markets settle down, particularly as the U.S. Federal Reserve lowers interest rates, you may well see that the loony again begins to take flight.

Fred: So a little bit of upward bias to the loony over the next few months, perhaps.

Warren: Over the next few months, perhaps over the next couple of years I think almost for certain.

Fred: With the U.S. economy apparently down-shifting to the slow lane of growth, will other nations be able to pick up the slack and maintain the global economy’s forward momentum, and in particular what are the prospects for Canada, for Europe and for Asia?

Warren: Well if you look at world growth, over the last three years it’s been hovering very close to 5% in terms of output growth. Now we’re slowing, we’re going to fall below that mark and probably through 2008 and maybe even 2009 it’s not going to make that particular growth threshold. The U.S. is a big part of the story. I mean this year you may well see U.S. growth not reach 2%, and it will be the first time in a very long period of time where the U.S. actually under performs Europe and Japan. At the same time you have growth that is growing like gangbusters in places like China and India. I mean China the first half of the year was growing over 11%, India is growing 8% plus.

What’s happening there, well yeah you may well see a slowdown in China to 10%, 10½%, or in India to something on the order of 8%. But let’s put that in perspective, we’re talking about 8 to 10 percent growth or maybe even higher in China, against a pattern throughout the G7 that will likely be somewhere on average around 2% growth. So a slowdown, but it varies a whole lot between the developed world as opposed to these merging powerhouses.

Fred: Well Warren I want to thank you for sharing your valuable insights with us today, you’ve certainly calmed some of my fears. We do hope that this comprehensive view on the economy has been helpful. Join us next time when we’ll discuss how Canadians can get more value for their money with their everyday banking. And for more information please drop by your local Scotiabank branch. We’d love to have the opportunity to talk with you.